Smart SpendingSmart Spending

A different way to think about money

How many Bahamas vacations could you get instead? Those questions put big purchases into perspective.

By Kim Peterson Nov 25, 2009 1:15PM
Bargain Hunter © Hill Street Studios / Blend Images / Getty ImagesAs we head into a big spending season, Dan Ariely of Duke University suggests thinking about money in terms of sacrifice.

In other words, what are you giving up in order to buy that Christmas gift? In economics terms, that's called the opportunity cost, and it's something people don't think about enough, Ariely said.

Ariely, a professor of behavioral economics, once went into a Toyota dealership and asked people what would they not be able to do in the future if they bought that car they were eyeing.

"You would expect people to have an answer," he said in a video essay. "But people were kind of shocked by the question. They never thought about it before."

Bottom line: When we buy something now, something else has to give down the road.

Ariely said he's trying to develop an iPhone application that puts money in these concrete terms. First, you tell the application what you really like (vacations, shoes, lattes and books, for example).

Then, when you want to buy something, it will remind you that the purchase is the equivalent of, say, half of a day in the Bahamas. Is it worth giving up that half-day to make the purchase?

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