4 Ways Your Brain Tricks You Into Losing Money

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Flickr/Mei Burgin

Our brains are capable of great things — unfortunately, they’re also capable of some mental tricks that can lose us serious money.

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The good news? Once you’re aware of these biases, it’s easier to not fall into their traps.

Here are four money-losing brain tricks you should watch out for.

1. Your brain treats the same amount of money differently in different situations.

Which of these will save you more money — a coupon for $25 off a $50 clothing purchase, or a voucher for $25 off a $2,000 couch?

They both save you the exact same amount of money — $25. But according to financial journalist Gary Belsky and Cornell University psychology professor Thomas Gilovich, who co-wrote “Why Smart People Make Big Money Mistakes,” studies show that thanks to “mental accounting,” our brains have a tendency to treat dollars differently depending on the size of a transaction or amount of money in question.

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That means against the bigger amount of $2,000, we think of $25 as less important. One way to help fight this is to put the amount of context. Instead of thinking of it as $25 off $2,000, ask yourself: What could you buy with an extra $25? Or think about your hourly rate at work: How much time is $25 worth? By assigning a specific item or amount of time to the money, you can better understand the real value of that $25.

2. Your brain ignores the 99 cents.

Thanks to the “left digit effect,“ our brains put more emphasis on the numbers on the left side of a price than the right side of a price. That means when retailers make a price $19.99, our brains think that price is much better than $20 — even though it’s just one cent away. One way to check whether that 0.99 price is really a good deal or not is to use your smartphone when shopping and compare prices of the same product at other stores.

3. Your brain treats credit differently from cash.

Because we aren’t parting with money immediately when we pay with a card, it’s easier for us to justify spending more — our brains feel like that money is an issue for the future, not today. Rewards cards make things even more difficult — not only do we not have to part with the “real” money until the future, but we’re also earning points, miles or cash back, so it’s easy to justify spending more.

This card versus cash psychology can manifest in unexpected ways. For example, according to a 2013 study in the journal Obesity, kids who pay for school lunches with credit or debit cards make less healthy food choices (opting more for desserts than fruits and vegetables) compared to those who pay with cash. The scientists behind the study believe the same “I’ll deal with it in the future” mentality (but related to health consequences) is happening here.

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The solution? Never use your credit card to justify buying things you wouldn’t normally. When you’re going shopping, make a list and stick to it. You can also withdraw cash and vow to spend no more than that amount.

4. Your brain equates price with quality.

Your brain will often think it’s a better deal to spend more money on something because you must be getting higher quality with the higher price. And spending more money to get a higher-quality item isn’t necessarily a bad thing. For example, if you could spend $100 to get a high-quality pair of shoes that will last for 10 years, or you could spend $40 to get a pair of shoes that would only last for one year, the $100 shoes are a better deal.

But this can also work against you. For example, Uri Gneezy, a professor of economics and strategy at the University of California-San Diego, conducted a pricing experiment at a winery. On different days he priced what was previously a $10 bottle of wine at $20 or $40. The result? The winery sold 50 percent more bottles of the wine when it was priced at $20 than at $10. Why? Because, Gneezy suspects, the winery patrons equated cost with quality.

Do your research before shopping, and read reviews from other shoppers — do they believe the item you’re thinking of purchasing is good quality and worth its price? And listen to your gut (sometimes literally). If you’re tasting a wine at a winery and feel like the amount of enjoyment it gives you equals the price, buy it — no online research required.

Read the original article on U.S. News & World Report. Copyright 2014. Follow U.S. News & World Report on Twitter.
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