On Saturday morning, two days before Hurricane Sandy hit the Washington, DC area, I went to Home Depot. Just in case, I asked if there were any generators left. In the vast floor space where generators used to be, there were 2 remaining – and lots of people trying to think through a costly decision under serious pressure.
Stress makes us unable to think straight, especially about money. The only escape is to cool down, and get away from the stress.
Home Depot’s remaining generators were 10,000 Watt beasts going for almost $1000 apiece. For normal use, smaller generators cost $300-$400. Rightfully anxious people were milling about, trying to weigh the risks of being without power during the storm versus against losing $1000.
Hurricane Sandy was deadly, and we on the Eastern Seaboard are going to be recovering from for it for a long time. But, for most of people (myself included) who were tempted to spend almost $1000 for a generator, we’d have made a costly mistake. For most Americans, spending that much money on short notice is big deal – our budgets are so tight that we couldn’t come up with $2000 for an emergency on 30 days notice. But, a little while later, I went back to look – the generators were gone. Home Depot could have doubled the price and still sold them. Here’s why:
- Losses loom larger than gains – we’ll often work much harder to save something we already have, than we’d work to get it in the first place. I.e., we’ll spend more time and $ to protect the food in the frig than it would cost to go buy the same food from the store.
- In stressful situations, the threat of loss is even more powerful. We become more willing to take very significant risks in the name of protecting the things (and certainly, the people) we care about.
The first point – we’re usually willing to accept much greater cost to avoid losing something – is a central tenet of Prospect Theory in Psychology, and has been subject to countless studies. Time and time again, researchers have found that the prospect of losing something is immensely powerful – about twice as motivating as the prospect of gaining the same thing. When I went to Home Depot (and to Walmart, and when I called the local Costco branches…), I was motivated by the thought of losing the tools in my garage, where it tends to flood. Those tools cost less than a $1000 generator, but I was certainly tempted to get one!
A recent study, by Porcelli and Delgado (2009), casts light on the second point – about stress. They show how our willingness to take major risks to avoid losses increases when we’re stressed. We vigorously defend what we have but we are much less aggressive with trying to win new benefits; we go into defense-mode. Worse, we go into a dangerous type of defense – willing to do stupid things to defend our stuff (that’s my phrase not Porcelli and Delgado’s!). Imagine a person who drives through a hurricane to get gasoline for a generator – risking his or her life – to keep the power on. That’s stress talking.
There’s really only one way to fight this. Get away from the stress so you can think clearly. As Jean Chatzky and other personal finance authors recommend, wait a day before any big purchase. In the case of getting a generator before a storm, you can’t really “wait a day”. But, you can take a mental break. Think back to the previous day – were you in such a rush to buy it? What changed? Probably, the immediacy and vividness of the threat – images on the news that made it seem “more real” (another part of behavioral economics talks about how powerful vivid images are in our decision making).
Speaking of stress and money, I learned about some great research on stress during a trip I took a few weeks ago. I visited the Busara Center, a new behavioral economics research center in Nairobi Kenya. The scientific director there, Johannes Haushofer, does research on how stress affects the neurochemistry of the brain. It raises cortisol levels, which then affects how we think. Ironically, he recently did an experimental study of how the absence of rain causes stress among farmers. He and other researchers are trying to understand whether frequent stress makes it even more difficult to get ahead, financially. It’s fascinating research, and I’ll talk more about it as the results come out.
But, for now, I need to cleanup from the storm. We were relatively lucky in DC, but my roof sprang a leak that needs to be fixed, and the city is pretty much shut down.