Service of Smart Frugality

February 25th, 2016

Categories: Discounts, Frugality, Poor, Saving Money

pinching pennies

I was drawn to Sendhil Mullainathan’s Wall Street Journal article “Pinching Pennies in the Right Places,” because according to this Harvard professor of economics, my thinking, while intuitive, is wrong. Not surprised: I almost failed economics in college. I ended up passing the course by figuring out the answer and writing the opposite. On the other hand, what he wrote makes sense. Maybe I’d have aced his class.

He shared two instances where you’re at a store and the salesperson tells you that another branch 30 minutes away has what you want for less. One item costs $50 and would be $40 for the same model. The other item costs $400 and you could get it for $385.

20 percent off“Research by Daniel Kahneman and Amos Tversky the psychologists whose work helped spawn behavioral economics, suggests that people are more likely to make the trip for the $40 headphones than for the $385 speakers,” wrote Mullainathan. That would be a mistake. “In each case it will take 30 minutes to save some money. But with the headphones, you save $10; with the speakers, you save $15.” He continued: “It’s as if you had two identical job offers, but one paid $20 an hour and the other $30. Yet you consistently chose the lower-paying job.”

He observed that people spend chunks of time finding the best deal on a pair of jeans and none on the fees charged by mutual funds for example. “Do Consumers Make Too Much Effort to Save on Cheap Items and Too Little to Save on Expensive Items?” is the title of the paper of Ben-Gurion University economist Ofer H. Azar. Mullainathan’s answer is “Yes.”

piggy bankThere is an exception according to Anuj K. Shah from the University of Chicago who conducted research with Mullainathan and Princeton psychology professor Eldar Shafir. “Poorer people tend to value a dollar more consistently, irrespective of the context. It is not simply that those with less money pinch more pennies; it is that they are compelled to value those pennies in absolute rather than relative terms…A dollar saved is a dollar to be spent elsewhere, not merely a piece of token accounting.”

Mullainathan advises: “When it comes to money, stop looking at relative values and start looking at absolutes. Dollars, not percentages, matter. In this case, the well-off can learn something about money management from the poor.”

How much would you have to save to travel for 30 minutes? Are you, like most, driven more by the percentage of a discount—which was 20 percent off the $50 headphones and 3.75 percent off the $400 speakers–than by the amount of money saved?

Driving in traffic

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11 Responses to “Service of Smart Frugality”

  1. Donna Boyle Schwartz Said:

    Donna wrote on Facebook: I share your pain–Econ was the only class I ever got a “C” in! We’re driven by the monetary value, not a % off. And just a pet peeve–BOGO advertising when they don’t list the price–how do I know that the price of “one” isn’t double the price of the same item somewhere else?

  2. Jeanne Byington Said:


    You are smarter than most and smarter than I am as well. I admit falling for the percentage. I will try to retrain my brain starting NOW.

  3. ASK Said:

    Because I am lazy, and also value my time, I would not travel for 30 minutes to save $10. I shop at a supermarket that is most convenient to where I live. There is a supermarket that has lower prices on some items, BUT it’s farther away and the check-out lines are so long…There must be some law of economics that applies to people like me. I also did not do well in econ…

  4. Jeanne Byington Said:


    There are certain luxuries I like that I need to travel to get at a price I can afford so that I do that pretty regularly–such as wine at Trader Joe’s. Because I live in two places, I have a lot of choice and when I’m in the car, in an area with little traffic, I do so happily, listening to the radio. However, if as in the case the Harvard economist described, I was told I could save $10 by driving 30 minutes, unless I had other errands to run in that neighborhood, I wouldn’t do it but would appreciate the tip.

    I am amazed that two smart people I know and admire both didn’t do well in economics either. Hmmmm.

  5. Jeanne Byington Said:


    I also meant to address the buy one get one free comment you made. Most often I don’t want two of just those items so marketed either because I don’t have room to store a second one or don’t use the item enough and the second one will expire before I can.

  6. Lucrezia Said:

    It’s all very fine to claim that the wealthy can learn the art of penny pinching from the poor, but the fact remains they don’t need that lesson. They’re rich, and probably enjoying it! Others in the “got rocks” crowd have an inborn sense of how to get more for less — a hobby so to speak, thus becoming richer in the process, and also enjoying it. In above cases, much depends on personality and not size of bank accounts.

    I’m only speaking from observation here, not having the slightest interest in economics, let alone texts on the subject. The exception is Paul Krugman, who is able to make one of the dreariest (my evaluation) topics come to life. To my knowledge, admittedly close to non-existent, he has yet to address penny pinching!

  7. Jeanne Byington Said:


    I made such a hash of interpreting my economics texts that I’m hardly the one to accurately interpret what Sendhil Mullainathan of Harvard meant with his the rich could learn from the poor comment. What I read was that the rich could do better–I loved your “got rocks” expression–if they focus on the dollars saved and not the percentage. I, like the majority, have kept my eyes out for discount percentages. An exception: If I see a package of giant rolls of Bounty that usually sell for $17+ on special for $11+, to heck with the percentage, I’m buying.

    I haven’t heard or read Krugman’s thoughts lately. He used to be on political shows a lot and on editorial pages of the newspapers I read. The last I read his name mentioned was by Hillary Clinton in a Washington Post article. It quoted her as saying he [among a list of others] endorsed her proposals to rein in the excesses of Wall Street. As she is one who benefits from these excesses not only in $675,000 speaking fees from Goldman Sachs but in super PAC endorsements, I wonder how stringent these could be and just what part of her proposal Krugman did endorse.

  8. hb Said:

    Lots of thoughts…

    Failing economics (me too) reminds me of my old friend the late Stanley Cohen, with whom I worked for many years and lunched with two or three times a year as well. Stanley was very smart (He used to brag that he beat out his classmate, Cardinal Bernard Law, for first in his Harvard class), but he had a problem. He was opinionated and liked to tell you what to do, not just what was legally possible. Since there was no way you could win an argument with him, I just listened and nodded, and then usually did the opposite. I was right far more than wrong.

    As to bargains, I have a sports coat which I had made for me in London in 1971. It is beginning to show its age, but its per wear cost is now the lowest of any coat I ever wore. Buy quality at a fair price and you’ll usually save money in the long run.

    The “time value of money” is an old bankers’ phrase; “the money value of time” is just as important.
    Seldom do bargain seekers factor this important ingredient in to equation of pricing their buys.

    You can also save money simply not buying. More than once have I drunk sickenly sweet wine, because I couldn’t afford to go out and buy dry. Don’t buy what you don’t really need.

    However, don’t forget what Francis Bacon said, “Money is like muck, not good except to be spread around.”

  9. Jeanne Byington Said:


    A good way to be smartly frugal is to be aware of prices. Some people are better at this than others. I am spoiled. There are a lot of luxury things I like to eat and drink. If I paid boutique prices I would run out of funds. I don’t belong to Sam’s Club or Costco because none are near where I live. Were I to visit the one in NYC, it would cost what I’d saved in cab fare to get home. I was excited to see strawberries at a store with great fresh produce at $5 for two boxes and bought them. A few days later I saw the same size boxes three for $5. You can’t always get the best price!

  10. Hank Goldman Said:

    We have been debating this ever since Joanie read it. Of course one should look at the absolute values, however, human nature being what it is, it’s difficult to change!

    We think that car dealerships take advantage of this human nature frailty. As long as you’re spending tens of thousands of dollars, what’s a few hundred more for needless extras, like better mats, and undercoating, etc.!

  11. Jeanne Byington Said:


    That’s what car sales folks count on. No doubt the add-ons are the most profitable part of the car!

    As for changing my nature when it comes to prices, I’ll try because it makes sense to focus on the amount of money saved not the percentage. No promises. At least I’ve been warned!

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