Wednesday, July 30, 2008

Lacking a Sense of Scale Can Hurt Financially

The sensitivity range of our senses is quite amazing. We can hear a whisper, and a scream that is a million times louder doesn’t overwhelm us. The scream may not seem a million times louder, but that is the magic of our sense of hearing. This sensitivity range works well for hearing, but in financial matters, it can get us in trouble.

If we hear a sequence of sounds with each sound ten times louder than the previous one, we perceive the volume as growing in equal size steps. It’s hard to believe that the energy in the last sound is about nine times more than the total energy in all the other sounds combined.

When it comes to spending, we can sometimes see similar things happening. “I haven’t bought any coffee or donuts for a week now; so, I’ll treat myself to a new iPod.” If you don’t have a good sense of scale, saving small amounts several times may seem to balance with one large purchase. But the savings on coffee and donuts may be only $20, and the iPod may cost $200.

Another way we can lose our sense of scale is in the context of a larger purchase. When you lift a 50-pound weight, you won’t notice if it is an ounce heavier than normal. In the same way, when you are negotiating the price of a $30,000 car, spending an extra $500 on rust-proofing may not seem like a big deal. But it’s a mistake to let the larger figure throw you off.

There are many ways that others can fool you into overpaying for add-ons. And there are even more ways that you can fool yourself into overspending.


  1. Interesting post. I hadn't thought of sound in that way.

    I find I have a similar issue in reverse. I tend to focus on small price differences on inexpensive items. I'll spend a lot of time seeking out a $2.50 bag of Doritos rather than paying $3.35.

    I will never miss that $0.85, but I have saving so ingrained, that I can't kick the habit.

  2. Gene: Your habit isn't all bad. If you make a large number of small purchases, the cumulative savings can add up. Many people get themselves into financial trouble with constant spending on small things.

  3. Hi Michael. Thanks for the response. You're right, little things can get out of hand. Reminds me of the concepts of money consciousness vs poverty consciousness, and of the "Latte Factor".

    I read an interesting anecdote about Warren Buffett. He was on a golf weekend with several friends and one proposed that they put up $100 each and if anyone got a hole-in-one, they would take the pot. Buffett refused to ante. When he was cajoled, he simply stated that he didn't like the odds, and that even though the stakes weren't high, he had a policy of not loosening his standards on the small stuff in case it spread to the larger stuff.

  4. Gene: That's an interesting story about Buffett. I've definitely been guilty of accepting bad odds for low stakes games because I wanted to be social. I guess that is yet another difference between Buffett and me.