$5 or 50% off: How We are Tricked by Percentages When it Comes to our Spending

There has been a certain problem that had been bothering me for a while, and, by “a while”, I mean a few years. This problem was introduced to me in a Vsauce (yeah, I know) video that I watched probably in 7th grade (which, unfortunately, I can’t seem to find), but I think it has a lot to do with how humans understand and interact with money. The premise is, if you are looking for a spatula and all the spatulas you find are $10 and you are offered 50% off a $10 spatula, you would be happy and likely buy the spatula. After all, you just saved $5. However, if you were in the market for a house, and the real estate agent agent generously offered you $5 off, you would probably laugh, and those $5 won’t be even taken into consideration. It seems to make sense, while $5 is 50% of the price of a spatula, it is incredibly tiny when compared to the price of a house. But, as Vsauce pointed out, that’s not really rational. You see, those $5 could still buy 5 Carl’s Jr. value meal cheeseburgers or 27 packets of Top Ramen, and it’s not relevant whether those $5 were saved from the spatula or the house. In short, money isn’t geometric, it’s linear, the same amount of money can buy the same product, no matter how much money you have otherwise (excluding factors like inflation which is rarely cause by one person who has accumulated a giant amount of wealth, with the exception of maybe Mansa Musa). Vsauce pointed out that, evolutionarily, it made sense to measure things geometrically, not linearly because, it’s much more important if there are 1 or 2 tigers about to attack you, an increase of 50%, than 100 or 101, 1%. As Anya said in her earlier blogpost “Marginalism: 1+1 is (marginally) greater than 100+1”, which directly inspired this post, we focus on the percent increase rather than the amount increase when we determine the utility something brings us. Again, this makes sense in a lot of situations, with many products for example. Upgrading your bed from a twin to full, an area increase of about 8 ft but of 40% is much more enjoyable than from a queen to a a king, an area increase of 9 ft but of only 30%. With money however, that is not really the case, as it’s better to have $5 added to your fortune of $1000 than $2 to your fortune of $4 because, no matter how you slice it, those $5 will buy more than $2, even if they are a smaller percent increase. Likewise, saving, or keeping, $5 on a spatula or house will still have you keep $5 more than you would have had if the item was not discounted and that $5 can be used for the same goods. In the same way, saving 60% on a $30 dollar shirt seems like a great deal, after all, it is 60% less than it should have been, but shirt that is 15% to begin with won’t even catch our eye. A high quality sock that is $5, $2 more expensive than an average one, has a opportunity cost of $2 or 40%. If we look at the opportunity cost as a percent, the 40% may not seem worth the better quality, after, all, it is just a sock. However, when you consider that the opportunity cost is only $2, or just over the price of guacamole at Chipotle (sorry, it’s the only example I could think of), and those socks will keep your feet significantly warmer and won’t get holes after wearing them twice, they begins to seem worth it. Our brains can trick us that the opportunity cost is larger or smaller than it really is by focusing on percentages and ratios, which served us well in the past and may still be useful in some situations, instead of amounts. As a rule of thumb, just remember that $1 = $1 and every dollar saved is equal to any other dollar saved, just as one dollar spent is equal to any other dollar spent, irrespective of the percent of the overall price.