Grocery Shopping on Wall Street
Wall Street Traders and extreme couponers are alike because of their skill at valuing money on an absolute basis. Most people struggle with this and tend to evaluate things relatively based on reference points.
Great traders move past the relative framework in their decision making process. For example, there is an 80% chance the market will go up but if it goes down it will go down substantially. When confronted with this scenario a great trader will bet on it going down because on an absolute basis there is more money to be made from a falling market then a rising one. They distinguish themselves by being able to identify opportunities like this and endure frequent small loses in search of infrequent big gains.
Extreme Couponers are the same way in the sense they don’t focus on what the percentage off is. They search for the highest value coupons in absolute terms to maximize the dollar savings of their trip to the grocery store. They are not evaluating what the percent of savings is versus the normal price for the items they are purchasing.
This is where people often get tripped up. Viewing discounts in percentage terms versus dollar terms. Why? The perception of obtaining a substantial discount is a pleasurable event. For most people the pleasure stems from the size of the discount relative to its normal price not how many dollars are being saved.
So if we discover something is 50% off in another location across town we are more apt to go across town than if a discount is 10% for an item with a much higher price. The magnitude of the discount should not drive our thinking though. It should be the amount of dollars we can save. Saving 10% on a $100 item is better than saving 50% on a $15 item. Or take an infrequent large purchase like cars. Oftentimes we won’t drive across town to save “only” 5%. On an absolute basis 5% is a lot though because of the size of the purchase. A $1000 if the sticker price of the car is $20,000.
Tricks of the Trade
Ever walked into a store with a specific intent to purchase one item and ended up walking out with five. Let me guess you saw tons of offers structured like the one below.
Retailers understand our tendency is to focus on saving $9 and the fact the item is on “sale”. When the reality is acquiring the item costs $39. And before you know it you’re walking out of the store with a full shopping cart after having been forced to walk through the entire store to get to the one item you needed in the back.
Savvy merchants also understand how to trigger shifts to a relative mindset by offering different options. So the decision becomes which one should I choose versus should I make this purchase.
This is why you see super premium offerings at stores like Williams Sonoma. Williams Sonoma knows the market for a $9,000 grill is small. When you see a grill priced at $9,000 though, the one next to it that’s $900 doesn’t seem so expensive. This is why Williams Sonoma makes the $9,000 grill. To drive purchases of the $900 grill that is probably not much better than a grill you could pick up at other stores for $300 or $400.
This is also why bars and restaurants offer items in threes. To drive sales away from the lowest priced item to a more profitable option in the middle. By offering a premium beer for $8, $9, or $10 they can drive you towards a middle priced option in the $4, $5, or $6 range. Versus their lowest priced options in the $2 – $3 range.
Another trick non-profits often employ is the pennies per day strategy. So your local NPR station says sponsor us for $1 a day, then contrast the cost relative to another low priced item you would frequently purchase like a cup of coffee. Definitely works better than saying sponsor us for $365 per year.
Why You Don’t Want to be Well Endowed
There are practical advantages to valuing things absolutely as well. Valuing things relatively can lead to emotional attachments to items resulting in sub-optimal decisions. A phenomenon known as the endowment effect, subscribing more value to the things we happen to own.
To be clear I don’t mean circumstances were an emotional attachment is warranted because the item has understandable sentimental value like a quilt from your Grandma. I mean situations like the one Richard Thaler observed while an economics student at the University of Rochester.
Thaler observed that one of his professors who was a wine lover would rarely part with bottles of wine he purchased. The professor purchased bottles of wine at auctions never paying more than $35 a bottle. The professor would never part with a bottle unless he got at least $100 for it though. Even if he was getting good deals at these auctions the bottles were almost certainly not worth more than $50. And he should have been willing to part with the average bottle for any price above this.
The professor had become personally attached to the bottles and was allowing this attachment to impede his decision making. When the professor was in a position to sell a bottle of wine at a price above $50 he needed to be more willing to make these sales.
My favorite part of the story is as a professor of economics he was teaching Thaler that rational people don’t approach decision making this way.
Building an Absolute Mind Set
Approaching decisions like a trader is a good starting point for building an absolute mindset. When confronted with a purchasing decision evaluate how much you want a particular item instead of something else. As opposed to focusing on how heavily it is discounted or its relatively attractive price versus another similar item.
It also helps to practice detaching yourself psychologically from items absent a reason for genuine emotion. Instead of feeling possessive try to view the things you own as stores of value. And if for whatever reason you are made an offer valuing an item for more than its value to you. Do not feel hesitant to get rid of it.
He's published three books. Most recently The World After Covid 19: Coexisting with the Novel Coronavirus.
His musings can be found at stevenlmiller.me. Subscribe to The Pompatus Times for updates.
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