We all get these ideas in our head about what something “should” cost. We’ve got a particular notion about how much a meal at a Teriyaki joint should be, how much gas should cost, how much a candy bar is worth.
And you’ve probably noticed that you get, well, almost offended when the price for something is too high. “They want that much for gas? Screw them!” I mean, if someone is asking five dollars for a candy bar, you’re going to get pissed. Even if you were never going to buy the candy bar anyway. Even if you’re a diabetic who can’t eat the candy bar–it won’t matter. You’ve still got an idea in your head of what it’s “worth”.
But here’s the thing. Even a five dollar candy bar isn’t going to affect your life that much. On the other hand, paying too much for a car or a house really will affect your life. But see, you don’t go shopping for cars or houses that much. So you might not have such a fixed idea of what a house or a car “should” cost.
Let alone the repairs on a house or a car.
And here’s where our reliance on thinking about what things “should” cost can really get us into trouble. When we think about spending money on something we don’t normally shop for (and this would include pretty much any major expenditure) we don’t have a firm reference point for how much things “should” cost. And that causes us to spend a whole lot more than we should on precisely those things where it actually matters that we don’t spend too much.
Here’s another way of looking at it.
Our brains sometimes think of things as percentages, when we should be thinking in actual dollars. And very often we think of dollars when we really need to be thinking in percentages.
This is why, as a financial adviser, when I talk about risk I never let people just think in terms of percentage loss. I ask them to think about losing a particular dollar amount. People may think that a 10% loss won’t hurt them much. But if they have a million dollar portfolio, that’s $100,000. The actual dollar amount is what matters.
On the other hand, no one went bankrupt because they spent 400% too much on a candy bar. But spend 40% too much on a house, and you aren’t going to make it.