24 July 2013

Are we Experts on Money?

Since we all deal with money daily, we could say that each of us is an expert on money.

But is it really so? Do we excel at dealing with what economists call the blood of an economy?

Despite our tremendous familiarity with money, we tend to not be fully rational and accurate when we deal with it. Here is one of the most often encountered effects on the psychology of money.

We make different judgments when it comes to gaining and respectively losing money. For example, Claude is a small scale entrepreneur who has a bit of bad luck because one of his clients paid with a bad check and disappeared after receiving the goods. The sum owed and not paid isn’t huge, say about 220 Euros, but Claude is really annoyed and rightfully so. 

What do you think Claude will do? In essence he has two major options: one is to fight to the end and recover the amount owed while the other is to simply acknowledge a loss, go on with his business and to work hard to get some more clients so that he will be able to cover his loss.

What do you think he will do?

Claude is human and very likely he will devote many hours of work and some money to recover his debt.

But is this the smartest thing to do?

Not necessarily! The time and effort invested in the attempt to recover the lost 220 Euros could be used to achieve more gains (in the form of sales) and they could amount to more than 220 Euros, maybe even 300 Euros…

In essence, Claude is willing to put in a lot of effort in avoiding a loss of 220 Euros, but not so willing to put in the same effort to achieve a gain of 300 Euros…

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