$PSYC: How Much Stock Do You Put In Psychology?

DJ
Posted by | May 2, 2012

The Psychology of Money

We know that emotions are, often subconsciously, heavily weighed in financial decision-making. The fact that behavioral economics is an actual course of study proves this fact, although I doubt it needs vetting. I think it also becomes quite apparent to professionals who are steeped in money-talk–like financial advisors–how money is situated in the American psyche. I’m not sure if it’s a solely American custom, but there is definitely not a whole lot of transparency, between family, friends, and professionals, in regards to money. When you were a kid, did you know how much money your parents made? Do you know how much money your friends make, without having to guess? In your opinion, is this lack of money-talk, which I think we can all agree is important, changing?

An interesting post by Fast Company sparked my interest in this area. The post brought up a study that proves people spend more at restaurants when there was no dollar sign in front of the price, as opposed to including the dollar sign or the word “dollars.” It’s a similar principle to the 99-cent rule, where our faulty brains associate the price $4.99 closer with 4 than 5, when mathematically, rationally we know this isn’t the case. I’m wondering how you, financial advisors, weigh these psychological effects into your practice. How much stock do you put into this money-psychology stuff when you are talking with your clients? How are you pricing your services, not compensation-model-wise, but in a dollars-and-cents way?

Putting Money-Psych To Work

Another case that the article brought up was the trend towards $5 as a new benchmark price-point. The trend was set by two comedians, Aziz Ansari and Louis CK, who released their stand-up specials online for $5 flat, with much success. They likened this to Steve Jobs’ “saving” the music industry with his 99-cents-per-song price point. The underlying theme here, is that there is, for one reason or another, a certain benchmark price that does not trigger the “pain of paying” response, and right now, the Lincoln might be that price. The study found this true with the dollar-sign example at the restaurant I mentioned earlier.

Before I get off-topic, here’s a poignant quote from the Fast Company piece:

This idea relates to buying trends: The more us consumers see products–whether comedy or couscous–on sale for $5, the more comfortable we become parting with that amount.

As an advisor, do you make your clients aware of this kind of cognitive bias? Are you, yourself, affected by it? And, now that you’re aware of it, how might you use it to better your business?

Here’s an idea: Gather a small batch of potential clients, say 20. Mail them a note with your information on it and a simple tip, like: “Here’s a few bucks, buy a couple coffees and talk with your wife about your finances. Then talk to me if you have any questions.” Interesting idea, right?

DJ

DJ

DJ is a freelance writer, hopeful photographer, and social media has-been. He writes to financial advisors about lifehacks, science, technology, business and marketing for Blueleaf, a software that helps create dramatically simpler, more scalable financial advisory businesses. You can find DJ across the web (about.me/djswitz) or you can just follow him on Twitter (@djswitz)!

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