The Revealing Art of Spending Money – Part 2

Please Read Part -1 here 

5.The Trivial and critical decisions

Historian Cyril Parkinson coined a trivial law  called Parkinson’s Law of Triviality. It goes: “The amount of attention a problem gets is the inverse of its importance.” Sounds idiotic , no ?

Parkinson explains this law with the example of a  fictional finance committee with three tasks: approval of a $10 million nuclear reactor, $400 for an employee bike shed, and $20 for employee refreshments in the break room.

The committee approves the $10 million nuclear reactor instantly , because the number is too big to contextualize, alternatives are too daunting to consider, and most importantly no one on the committee is an expert in nuclear power.

The bike shed gets a lot more  more debate. Committee members argue whether a bike rack would suffice and whether a shed should be wood or aluminium, because they have some experience working with those materials at home.

Employee refreshments take up two-thirds of the debate, because everyone has a strong opinion on what’s the best coffee, the best cookies, the best chips, etc.

Many households operate similarly. We focus on the trivial questions rather than the important and critical ones. Author Ramit Sethi illustrated this best with the example of debating whether a $3 Latte is worth the money vs spending time on $30000 decision on your future – which college do you go to .

6.The Trickle down Effect  : Most of current Economic policies work on the pivot of Trickle down effect .  The trickle down effect postulates that any prosperity or spending at the highest levels percolates down and leads to prosperity and spending at all levels .Let me take a minute to give a quick primer – Suppose government spends Rs 1crore on a Road project. The contractor gets to pocket Rs 50 lakh – since his income has gone up – he spends on a new Mercedes- which in turn increases demand for Mercs- increasing employment and income of those working in the Merc factory – who buy more of food and soap and more stuff which in turn increases demand for these and so forth .Hence eventually the 1crore spent by the government trickles down and has a multiplier impact more than 1crore. This  has been challenged although but the concept is both empirically and intuitively validated

Economist Joseph Stiglitz said: “Trickle-down economics may be a chimera but trickle-down behaviorism is very real.”

There is no such thing as an objective level of wealth. Everything is relative to something else. People look around and see what their friends and their favorite influencers are driving , which brand of fashion are they adopting and which restaurants are they patronizing before deciding where to eat .

If you want to know what  impoverished /lower-income groups will aspire to spend their money on in the future, look at what higher-income groups exclusively do today.

Air travel was  once the exclusive playground of the rich. Then it trickled down.

Same with stock markets – earlier it was the playground of crorepatis – now a large section of the populations owns stocks in some form.(directly or through mutual funds)

Same with two-car households,  granite countertops, four-burner stoves, and international vacations.

 Morgan Housel says “Part of the reason these products spread to the masses is that they got cheaper. But the reason they got cheaper is because there was so much demand from the masses – hungered by their aspirations

People like to mimic others, especially those who appear to be living better lives. Always been like that, always will be.”

7. Spending as a symbol of how hard you have worked and how stressed they are

Someone who works 100 hours a week and hates their job may have an urge to spend frivolously in an attempt to compensate for the misery of how their paycheck was earned.

Nobody burns a hole in their pocket faster than an investment banker  (no disrespect meant – just using these as examples ) receiving their annual bonus. After 12 months of Excel modeling until 3am, you have an urge to prove to yourself that it was worth it, offsetting what you sacrificed.

Often those who enjoy their work are the ones who are can delay gratification and spend consciously. The pay might be equally good or worse , but the urge to compensate for your hard work with heavy spending isn’t there.

Spending money to make you happy is hard if you’re already happy.

8.Social Signaling  aspect of money

Any  spending  can have one of the  two purposes: To bring some sort of utility or satisfy a need, and to signal something to other people.

Cars, clothes, jewelry, obviously fit into that category. Now thanks to social media- travel vacations do too (think Instagram pics of that Bali vacation)

Psychologist Jonathan Haidt says people don’t communicate on social media; they perform for one another. Spending money is somewhat similar.

The thing to recognize is that spending money “on yourself” is often done with the intent of influencing what other people think.

 Housel challenges that with 3 penetrating questions – “ Whose opinion are you trying to influence, why, and are those people even paying attention?”

Mostly when you try to impress others by driving a Lamborghini wanting others to envy you- they instead imagine themselves driving that car and how cool that would be – without sparing a thought for you.

9. Spending without purpose- confusing price with value

Quoting Housel again “A lot of people have no idea what kind of spending will make them happy. What should you buy? Where should you travel? How much should you save? There is no single answer to these questions because everyone’s different. People default to what society tells them – whatever is most expensive will bring the most joy. But that’s not how it works”

My husband who left his steady corporate career to start his own firm was advised that he should carry a Mac Book Pro , the latest IPad and the latest iPhone to create a certain image . He was told that his worth and success will be judged by what he carries .  Lo and behold, despite my misgivings, we spent a small fortune in acquiring the above . He has never been the tech or brand enthusiast-and has stayed with humble android phones ( which he didn’t change for years embarrassing everyone around him ) and office laptops. Very soon  he struggled like a dinosaur with his shiny new Apple toys . He was travelling to Seoul and lost his passport . He had to apply online for the Emergency Certificate to travel back – but his fancy new iphone and ipad just won’t let him fill the form due their own security constraints .  So far, the pricey  Apple posessions were more a pain than a source of joy for him .The price doesn’t equal value and different people have different preferences ( very unlike my husband- I do like to change my phones and laptops – and adapt like a duck to water ,to new devices-personally and professionally). On different preferences- I like backpacking trips – my husband cant compromise with 5 star luxury;  I love travelling by train; my husband loves the business class. I love my ipad- my husband wishes he had his Nokia.

 Quoting Ramit Sethi – “Frugality, quite simply, is about choosing the things you love enough to spend extravagantly on—and then cutting costs mercilessly on the things you don’t love.” 

To summarize -Someone who can buy anything he covets  can no longer derive any joy from money . Isn’t that counterintuitive.  For the rest of us our spending reveals a lot about our personality , our past and our beliefs.  We often spend to somehow find happiness and to impress others but that’s not how the world works .

‘Nobody is as impressed with your possessions as you are’ – Morgan Housel. Spend mindfully and on what YOU ENJOY.  Let money be your slave and not vice versa .

Sources : Morgan Housel- The Psychology of Money , Collab Fund  archives

Photo-Deposit photos