By the third day of their honeymoon in Las Vegas, the newlyweds had lost their $1000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. Upon inspection, he realized it was a $5 chip they had saved as a souvenir. Strangely, the number 17 was flashing on the chip’s face. Taking this as an omen, he donned his green bathrobe and rushed down to the roulette tables, where he placed the $5 chip on the square marked 17. Sure enough, the ball hit 17 and the 35-1 bet paid $175. He let his winnings ride, and once again the little ball landed on 17, paying $6125. And so it went, until the lucky groom was about to wager $7.5 million. Unfortunately the floor manager intervened, claiming that the casino didn’t have the money to pay should 17 hit again. Undaunted, the groom taxied to a better-financed casino downtown. Once again he bet it all on 17 – and once again it hit, paying more than $262 million. Ecstatic, he let his millions ride – only to lose it all when the ball fell on 18. Broke and dejected, the groom walked the several miles back to his hotel.
“Where were you?” asked his bride as he entered their room.
“How did you do?”
“Not bad. I lost five bucks.”
**This story was pulled from the book I just finished, How Smart People Make Big Money Mistakes.
Are You A Mental Accountant?
Maybe the above story is a bit extreme, but the psychology should seem familiar because we each are guilty of it – the tendency to place a lesser value on some of our dollars over the rest and in turn waste them. I’ll openly admit my guilt. Just recently I wrote an article explaining how A Dollar Saved Isn’t A Dollar Earned because the satisfaction of the dollar earned is greater than the dollar saved. I’m sure each and every one of you can think of a time when you thought the same.
In the story above, the newlywed is suffering from a common tendency among gamblers called “playing with house money.” When he left the hotel room with $5, the greatest loss he could incur would be $5. Once he hit the surprising sum of $262 million, he could’ve used it for a number of real things – but in his mind, it wasn’t real money.
The idea of mental accounting was first introduced by behavioral economist Richard Thaler. More formally, it’s the inclination to categorize and handle money differently depending on where it comes from, where it is kept, or how it is spent.
Do you find yourself guilty of mental accounting?