The Mind - Money relationship

SCENE 1: You are in a shop and about to purchase a bottle of newly launched shampoo. The cost of shampoo is Rs 150.00. You are just about to take the bottle to the cash counter when you bump into your neighbour. She informs you that shopkeeper in next building is offering Rs 25.00 discount on same pack of shampoo. What are the chances that you will go to next shop and save Rs 25.00?

SCENE 2: Your family has been thinking of changing the television. Your television is ten years old and has been giving trouble for sometime. This time family has set aside a budget of Rs 1.50 lakh. Family has been saving for it. All members of family are excited. Inquires about various brands, features have been made. Few stores have been visited. Finally D-day arrives. Entire family goes to store. Once again discussions are made with shopkeeper about warranty, after sales service etc. Family is about to complete the deal. Once again your neighbour lands up.  She tells you that shopkeeper round the corner has same product with all the features and is offering Rs 350.00 discount. What are the chances that you will go to other shop?

Most of us in first instance will go to another shop to save Rs 25.00 on bottle of shampoo but we will not go to another shop for saving Rs 350.00 on television.

Most of us will argue that Rs 25.00 on Rs 150.00 is larger percentage compared to Rs 350.00 on Rs 1.50 lakh. While this may sound convincing argument, in realty it is money in our pocket that should count.

SCENE 3: You had invested in a stock about a week ago. Your thought process was to stay invested for several years. You paid a price of Rs 425.00 per share. There are several individuals who had recommended this scrip. In fact even on one of the television channel discussions about this scrip were made. Within one week of your purchase price of the scrip fell to Rs 265.00. What are the chances that you will feel bad?

Many of us will feel bad. More, so if it is newly added scrip to our portfolio. At this juncture we will not even consider what percentage of our portfolio is in this scrip.

Ideally at this point in time we should calculate numerator/denominator i.e. fall in value of scrip compared to our total wealth. Also if we wanted to stay invested for several years then a week should not matter.

If we consider all three scenes discussed above and use logic in all three situations our decision does not seem valid.

Our brain responds either intuitively or analytically.

If we are driving a car and suddenly a motorcyclist rushes from the side we should react intuitively and apply break. However if we are to pass by high traffic area during peak time we must analyze our route. If we wait to analyze the situation before applying break in first instances, we will certainly bang with motorcyclist. On the other hand if we just venture on to road journey during peak time based on intuition we will get stuck in traffic. While both intuition and analytical ability is important in all walks of life, our brain must be trained to use one over other based on situation.

Brain of a driver who has been trained in structured manner reacts in more efficient manner compared to someone who has learned driving haphazardly. Similarly when it comes to decisions about our expenses, investments, borrowing etc we should train our mind. End of the day no one reacts to money rationally, everyone reacts to money emotionally.

-Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com