How to strategically evoke cognitive dissonance

22 Comments

If you complain about Wall Street’s fat-cat greed, can you tell me what fees you’re paying on your investment funds?

If you complain about taxes, which tax-advantaged accounts do you use?

If you think that other people “waste” money on $200 jeans, $400 shoes, or $600 phones, what would you say if I told you that with a 10-minute review of your spending and a 20-minute phone call, I could show you how 20% of your discretionary spending is “wasting” money”?

Food for thought.


Learn psychology. Check out hundreds of psychology links I’ve personally annotated in my psychology bookmarks. Also, if you start thinking you know everything about psychology, read this.

What’s the best $20 you’ve ever spent? I partnered with my friends at AARP’s new website, Lifetuner, to launch a contest about this very question: “What’s the best $20 you’ve ever spent?” The winner gets an iPad. I’m the judge, so make it good. Here’s the link (ends November 3rd): What’s the best $20 you’ve ever spent?

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22 Comments

 
  1. 1. Roth IRA at 0.29% through Vanguard for a 2055 Target Date Retirement Fund. My 401k fees are about 0.8%, but I have a lot less control over those.

    2. Maxed out 401k. Student loan interest deduction. We take very deduction possible due to my husband’s freelance business.

    I have a completely irrational mental block against buying a Kindle because it’s “too expensive.” They’re $140 now, and I easily can spend that on clothes in a month, but I can’t bring myself to buy a Kindle. And I read 3-4 books a week, so it’s not like the thing wouldn’t get tons of use. And I have arthritis in my hands and reading dead tree books is clearly causing joint problems for me.

  2. This isn’t so relevant for me– I have used Vanguard mutual funds for the last 8 years, which have some of the lowest fees in the industry. I have maxed out my Roth IRAs every year since I started working in high school. I’m sure I waste money here and there but I save or invest about 50% of my take home pay, while about 35-40% goes to rent.

  3. 1. I invest my money in passive index ETFs only, the fee for the account is 0,- EUR, the transaction fee is 5 EUR plus stock exchange fee (spread). I don’t use any Roth IRS/401k-like accounts (I live in Europe) because they don’t allow withdrawal of my money before I hit 67, and I’d like to retire at least 20 years earlier (I’m 35). By withdrawal I don’t mean I want to spend everything at once, but maybe I’d like to restructure my portfolio.

    2. I’m tax refund master – I do the yearly tax computation even for my friends (for free but I don’t plan freelancing in this area :))
    However recently I optimized my conscious spending plan (thanks Ramit) to this extend that I can’t deduct almost anything (over here you have to spend over 920 EUR in year on deductible things, otherwise you just deduct 920 EUR without producing any bills to the tax authorities). But I’m better off not spending, than spending and getting 30% back.

    3. My spending follows my conscious spending plan, so I really don’t regret what I buy (even my sailing course). And I mercilessly cut/optimize expenses in areas considered not important.
    About other peoples’ money – hey, that’s their money, not mine, so it’s not my cup of tea. Someone has to buy overpriced cars and feed the employees of Porsche, otherwise they get unemployed and they would cost the tax payers money. Someone has to pay VAT, otherwise the gov’t runs out of money. I’m just glad that someone else feeds the fat cats.

  4. I highly recommend anyone check out Ramit’s bookmarks on Delicious. I have found so much value in them, that I actually have them in my RSS feed.

  5. I am not sure people who commented got the point of this post. I think Ramit was trying to give a few examples of how someone can challenge a person who is parroting a belief they have but probably do not know why they have it and haven’t fully explored.

  6. 20% of your discretionary spending is “wasting” money”?

    Ramit nailed it. It might be difficult but buy things only when you need it not when you want it. I friend of mine wrote a very good post on this.
    http://hariis.blogspot.com/search/label/mind%20wants%20needs

  7. Cognitive Dissonance can be thought of as representing our innate drive for consistency, or rather the distance between what we believe and how we act.

    I always think of the smoking doctor or the fat dietitian.

    The Duning-Kruger effect is our erroneous perception of skill. It sounds to me alot like the Lake Wobegon effect. As you probably know in Lake Wobegon, Minnesota “all the women are strong, all the men are good looking, and all the children are above average”

    The point is that “Waste” and “Value” are in themselves assignments of value. No one can tell me that I am wasting my time, life or money as it is simply a value judgment. I think we get into trouble when we have “values collisions”. For example, my perceived need to live frugally is battling my perceived need for a Lexus. Both columns have good points and bad points, the winner in that battle will ultimately create some cognitive dissonance.

    -WR

  8. This post is intended to shame the complainer, but does that actually get people to actually make changes in their lives?

    • I don’t blame them. Changing behavior is not easy. But if you able to do that you are class apart from others.
      Also, if you provide them with the consequences they might at-least rethink.

  9. Where is the strategy here? Most people seem to do this pretty well without my “help”.

  10. Cutting out wasteful spending is usually a starting point for people who are trying to turn their financial lives around. Let’s say someone actually does stop spending their hard earned dollars on expensive fashion accessories. After that what is the first thing they should do with their recovered finances? Get out of debt? Invest? Or what?

  11. @ Marc Avante

    Correct! 1. Get out of debt 2. invest. Not the other way around.

  12. Dan Arielly has a great book called Predictably Irrational that deals with this sort of cognitive dissonance. It was a worthwhile read to me since he deals with both the effect itself and then extrapolates from the effect to its impact on our day to day lives and how to avoid it. For example, our tendency to anchor on a price or to judge worth in relative rather than absolute terms. Absolutely fascinating read.

  13. 1. Get out of debt
    2. Build an emergency fund with least 6 months of your expenses
    3. Invest.

  14. When I met my husband, he was in what I call a financial rut. He had $0 in savings and spent his entire check every week, but not on bills. He lived with his folks so he paid no rent, but spent tons of money on going out drinking and partying. Keep in mind, he was 32 years old when I met him! If he was 18, I might have been more understanding. At that time I would listen to the Dave Ramsey show on A.M radio while driving to school. When it came about that he was coming to our city I dragged my darling to his live show. I spent $20 bucks on books that changed our lives. We were able to get on the same page. We’re not “there” yet, but we are working towards it. Now he invests in works 401(k), we’ve saved enough to purchase our first home, obviously we got married, and now we’re paying down past debts and saving/planning for our future.

  15. I think this is a good challenge, especially considering how we all do have a different perspective when it comes to our own discretionary spending but are quick to judge someone else’s. Regardless, you still can’t convince me $200 jeans are worth it.

  16. Love it. Complaining will get you no where (though venting can relieve a bit of stress). Look inward and protect yourself rather than hoping that someone else will.

  17. i would say… “when can i sign up for my 20 minute phone call?”

  18. I immediately stop judging others for their spending once I realized they could do the same right back. I’ve been happier ever since.

  19. the wife spends insurmountable amounts on designer purses and jewelry, and my blood boils when i see the gucci and louis vuitton stores jam packed, but then she doesn’t understand why i spent a boat load on cars. not right to judge – as priorities are very individualistic

  20. @Kimberly. Thanks so much for that post! Honestly I’ve been worrying about my boyfriend and I when we get married because the way we handle money is pretty different. My parents have always struggled so I’ve been working since I was younger and I’ve been studying stocks and investing and all that since I was 10! However the bf definitely hasn’t “had” to work, he just wants to (sometimes.) And hasn’t had to worry about money much. But thank you because now I know that it is possible to come from different sides to the important middle ground!

  21. I don’t believe complaint is in itself a vice. If complaint is followed by discourse and action, these are the hallmarks of public dissent. That’s still a freedom. To label a class of people not in the echelons of financial power as “complainers” is quintessentially classist; it’s disregard in its purist form.

    If I had lost my life savings because a group of reckless, allegedly intelligent members of the finance world had too much leverage and created excessively complex products, I’d be complaining too!