The Placebo Effect

The placebo effect is a psychological phenomena where the subject is given something that is inert, but they believe it is something that will help them. Since the subject believes it will help them, their bodies/minds can sometimes produce the results that they think they should be receiving.

Can the placebo effect translate to personal finance? If I think that something is going to happen will it be more likely to happen?


thinking rich
Hmmmm.....
Well, let's see... You could make the case that retail therapy makes people feel better because they think that buying stuff will make them feel better. But I think that a lot of people might tell you that retail therapy will backfire and later it will bite you on the ass for wasting your money on things you don't really need.

If something sells at an auction for more than what was expected is it worth more just because someone paid that much? How does bottled water get classified then, many brands of bottled water cost much more than you would pay for tap water but some of them are the same thing.

"The price of anything is the amount of life you exchange for it." - Henry David Thoreau

The Price Placebo Effect

Luckily for us there is something called the price placebo effect where the more you pay for something the more you enjoy it, even if it is low quality.

So even if you paid $90 for a $15 bottle of wine, you will enjoy it more since you think it's worth more! At least there's a positive spin on the Winner's Curse.

Is there a placebo savings effect?

If the placebo effect can work on our spending, then what can it do to our savings?

There have been numerous studies done on how writing down your goals and sharing them with friends/family will help you succeed. Some of them say you that your chance of success will go from 50% to 75% because of this. Others say that you will be 33% more likely to succeed. None of what I could find provided any empirical evidence on this, they merely only boasted results. It's hard to gauge this anyways, did everyone have the same goal? Was anyone's goal to be the first man on the sun?

first man on the sun

Unfortunately, personal finances don't really have a control group, or if there is, I don't really know what that would be. The only thing that we can really compare against is what we think things are worth.

Are you spending your life the way that you want? Or is your life full of placebos?

4 comments:

  1. Interesting post. I think that sharing with others (blogging) and writing down goals definitely helps. I set my goals at the beginning of the year, and have to address them (share) with everyone at the end. So, it does help keep me on track, and I know I can't slack off too much, otherwise I'll have disappointing results to report at the end of the year... and that's no fun!

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    1. I have never really had goals that I wrote down each year to hold myself accountable for. I probably will start doing that more often now that I'm writing consistently for a blog. So far the only goal that I have written down is for completing the Yakezie challenge. I actually know that if I hadn't written about it I would not be holding myself accountable for writing as consistently. I guess I don't want to tell people I'm doing something and not be able to keep up my end of the bargain.

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  2. The trick to goals is making them achievable and having (what we call) measurable goals. For example, saying "I want to save money" could mean anything and doesn't give the person a real goal. Now saying, "I want to save 4% of my paycheck every month" is just one step. To be successful there needs to be a plan of action such as, "I will spend 10% less on going out every month, bring my lunch to work, and get rid of everything but basic cable" Now the person has not only a measurable goal, but specific ways in order to obtain that goal. This type of behavior (writing down measurable goals with specific tasks) has been empirically validated in the therapeutic world.

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    1. You're right about making measurable goals. if you throw out general statements about "wanting to lose weight" or "I want to save more" it's probably less likely to happen than if you put a specific measurable goal on it.

      I actually wrote about this around new years when I saw a million generic posts about things that people could do to improve themselves but many were lacking the measurable goal part of the equation.

      http://www.work-to-not-work.com/2013/12/how-we-bait-and-switch-ourselves.html

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