Vanguard recently highlighted portions of a book written by Connecticut College Psychology Professor Stuart Vyse titled, “Going Broke: Why Americans Can’t Hold on to Their Money*” which attempts to provide evidence through experiments as to why, why Americans are Broke.
As long as this isn’t your first visit to a personal finance blog, or you have never picked up the WSJ or even your local paper (sans the New York Post lol) the results are likely not to shock you.
The results, however, do quantify in a scientific and mathematically way (or at least I am told since I only read the recap of the experiments and not the book) what most have always assumed. The Four Studies:
You Spend More With Credit Cards than Cash
The author highlights a study at MIT where students were given the chance to bid on basketball tickets. Those who had to pay cash paid less than those who were allowed to put it on a credit card.
Bonuses Get Spent, Rebates Get Saved
Two groups of Harvard Students were given $50 some were told it was a tuition rebate, others were told it was bonus income,
A week later the students were asked what they did with the money. Those who were told the money was a “tuition rebate” had spent $7 of the $50, on average. But those who were told it was “bonus income” had spent $31, on average.
Failing to Realize Money Saved is Money Saved
This experiment at Stanford gave students the opportunity to save $5 by driving out of their way. One item’s cost was $15 and the other’s item cost $125, so they were marked down to $10 and $120, respectively.
The study found that students were more likely to drive to a place to save the money on the item marked down 33%.
Paying for Perceived Decor
This study asked Cornell students what amount they would pay for the same beer from (a) a posh nice hotel and (b) a grocery store. Not surprisingly they were willing to pay more from the posh hotel.
Evan’s Take on These Studies
I think the studies/book shows us that personal finance is taught, and is often not innate even from the brightest minds in the Country.
The one that stuck with me was the rebate/income because I am fully aware that I do it, and yet I try to stop myself. In an effort to stop myself from spending it, I wrote a post about the windfall and saving it in my ING account.
Do you make any of these mistakes? What do you do to stop yourself?
*Denotes an affiliate link