Friday, July 11, 2008

A Dollar is a Dollar - Except When it Isn't

I grew up in a family that had to be pretty careful with money. I remember in early elementary school when school lunches were 23 cents, my two brothers and I each brought home our two pennies and deposited them in a jar which was earmarked for our first trip to a restaurant. We finally had our first restaurant meal as a family when I was about twelve years old ... at a local restaurant's "2 for 1 night." Actually, we didn't quite make it as a family. My older brother was so nervous about eating at a restaurant that he developed an upset stomach at the last minute and had to stay home.

Then I married Melanie, the "Platinum wife," whose money experience was, let's just say, the opposite of mine. Although her family was not wealthy by any means, her Dad always showered her and her siblings with pretty much whatever they asked for. This made for an, um, "interesting" first few years of marriage for us.

Yet despite our differences, there is one thing, financially, that we have in common in our approach to money. We both are quite frugal about some things, and quite the opposite in others, and I've noticed that this is true of a lot of people. When I briefly taught a class that included a smattering of economics, I remember teaching that some types of goods and services are very sensitive to changes in price (this is called "elasticity" of demand) whereas some commodities are quite "inelastic." (Unfortunately, the example we used for inelastic demand was gasoline, because people tend to view it as a necessity and would "shrug and pay" whatever the price was. This is still pretty true, although I think we've reached the point where SOME elasticity has begun to kick in... but I digress.)

There are even some goods and services where the normal price/demand relationship flips over and demand may increase as the price goes up. If I remember correctly, these are called "Veblen goods," and mostly include luxury and gift items and services. For example, if you want to buy someone a $20 gift, and you find the perfect item for $10, you might be reluctant to buy it. And what would be the fun of buying a $50,000 car or $10,000 watch if any Tom, Dick, or Mary could afford one?

And so it seems, as Melanie and I have realized, that a dollar isn't really worth a dollar. Subconsciously, we view some dollars as very cheap and others as very dear. Why, for example, will we spend two hours online to save $20 on an airplane ticket and then fight for the right to pick up a $100 check in a restaurant. In my own daily life, my "portfolio," and those of my clients, can rise or fall by the thousands from hour to hour, but after work, I'm still just as likely to stand in an aisle at the supermarket and think, "Gee, I can save 30 cents if I buy the economy size." Are "grocery dollars" that much more valuable than "restaurant dollars"?

I'd like to tell you that I've found a logical solution to these inconsistencies, but I really haven't. In some cases, they're relatively harmless, but in others, they can result in very real budget shortfalls. But I think I have a little better balance ever since I became aware of my own inconsistencies. But I'm curious. Does anybody else out there have any insight into this phenomenon? Or better yet, solutions? - Bob

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