Sunday, March 11, 2012
When you take out a student loan, negotiate a mortgage, or even buy something inexpensive on the Internet, you probably feel as if you are making a choice using your own free will. The truth is, the moment you enter the marketplace, you are being manipulated far more than you realize. The biggest culprit is what economists call “money desensitization.”
One of the reasons buying on the Internet is so tricky is that merchants ruthlessly exploit the fact that there are no concrete cues to remind you that you are spending real money. Many Web sites, for example, are set up to encourage you to use your credit card or Paypal account impulsively. Companies design such sites to entice you to spend, spend, spend without your being aware of what is really happening.
In pursuit of their goals, merchants will use software that follows you from one page to another as you visit their Web site. Along the way, they keep close track of your activities: what pages you look at, what you decide to buy, and how often you change your mind in the middle of a transaction.
In addition, many companies also track your behavior on third-party Web sites. Their goal is, to the best of their ability, to track everything you search for, everything you look at, and everything you buy. They then purchase financial and personal information about you from third-party vendors and, using sophisticated software, analyze your habits. Their intention — which is successful more often than you are probably willing to believe — is to sell you as much as they can, as often as they can. At the same time, they often sell the information they gather about you to other companies that also want a shot at your pocketbook.
Such experiences, of course, are not unique to the Internet. They abound in our culture. Modern marketing techniques are designed to take advantage of the fact that the more abstract the transaction, the less you will realize the true impact it is going to have on your life.
Consider a particularly egregious example. Have you ever been to a casino? If so, you may have noticed how carefully the environment is designed to encourage you to suspend your critical judgment. There are no windows, no clocks, and no reminders of the world outside (the one in which you must work and pay your bills).
Instead of allowing you to bet with real money, casinos have you using clay chips that feel like play money, or small plastic smart cards that keep track of your net worth invisibly. Moreover, to keep you from thinking too much about what you are doing, the casino provides a host of distractions such as noise, colored lights, costumed hostesses, and free alcohol (not to mention ATMs, check cashing, and access to liberal credit card advances).
Casinos are purposely designed to desensitize you to the fact that the liabilities and debts you incur must ultimately be satisfied with real money — money that may represent many hours of hard work and effort on your part. Nevertheless, we must be realistic. When you walk into a casino you are fair game. After all, these are gambling establishments, devoted to taking as much money as possible from people who think they can get something for nothing. No one entering a casino should have any illusions about the purpose of the facility.
Monetary desensitization, however, is not confined to casinos: It is ubiquitous in our culture. And because our monetary system is so abstract and so complex, it is easy to have real trouble understanding the nuances. This means that, unless you are paying strict attention, it can be difficult to appreciate the true extent of your personal liabilities and debts.
For example, we all know that a gas station will advertise gas at, say, 399.9 cents/gallon, rather than 400 cents/gallon. And we have all seen the type of television commercials that advertise an exercise machine for “four easy payments of $29.95 and a small shipping and handling charge of $9.95,” rather than $129.75.
But this is small change. As the numbers get bigger, the desensitization efforts get more extreme. A particularly insidious example is the student loan system.
In the United States, many college students must take out student loans to pay their expenses. Indeed, it is not unusual for a student to borrow $10,000/year. This means that, by the time he (or she) graduates, the student will owe $40,000. Let’s say the student assumes a 10-year loan at 7 percent interest (which would require 120 monthly payments of $464). By the time he has paid off the entire loan, including interest, that $40,000 will have grown to almost $56,000.
Although this is a huge sum of money for a kid just out of high school, the financial aid system is designed to desensitize students to the magnitude of the liability they are about to incur: Once the loan is arranged, all a student has to do is sign some papers. In many cases, the student doesn’t even see a check. The money is sent to the school electronically, where a computer applies the credit directly to the student’s account. The whole borrowing process is so intangible that the student has no real feeling for what he is doing — until he graduates and has to start making payments.
Consider an alternate scenario. A university student is arranging for his first student loan. Instead of making the whole thing into a painless procedure, the loan officer takes the student into a room in which there are large boxes filled with $20 bills.
“Do you see those boxes and all that money?” says the loan officer. “I want you to count the money, out loud, one bill at a time, until you get to $40,000. That’s 2,000 bills.”
Let’s say the student is able to count one bill a second. It takes him 33 minutes and 20 seconds to finish counting, at which point the loan officer tells him, “Take a careful look at the pile of 2,000 $20 bills you have just counted. That is what you are thinking of borrowing over the next four years.”
“Now,” continues the loan officer, “I want you to count out 665 more $20 bills.” The student does so, which takes him another 11 minutes and 4 seconds.
“That,” the loan officer tells the student, “is all the extra money you are agreeing to pay in interest: $13,300. Remember, once you borrow this money, you have a legal obligation to pay it back: You are going have to make payments for 10 years, whether or not you finish school or get a good job. Now, I am going to leave you alone for a few minutes, and I want you to think about how many hours you are going to have to work to earn enough money to pay back your loans.”
This is a story, of course, that will never happen. However, you might want to remember it each time you buy something on the Internet. Before you type your credit card number, imagine yourself counting out the money, in real bills (and don’t forget to include the interest, taxes, and shipping and handling).
I once had a friend whose landlord insisted she pay him in cash. Believe me, she had a real feeling for how much she paid every month because she had to get the cash, count it, put it in an envelope, and give it to the landlord in person.
In our society, however, paying cash for anything but small purchases is unusual. Most of the time, we use bill-pay, credit cards, debit cards, or checks. Sometimes we don’t even see the transaction. Like the student in our story, it is possible for us to incur a liability, and all that happens is a sum of money is transferred electronically from one computer to another.
Here is a more formidable example. Imagine you are buying a $300,000 house. You plan to pay a 20 percent down payment and borrow the rest ($240,000) by taking out a 30-year mortgage at 5 percent interest. Imagine that, before you are allowed to borrow anything, the bank were to force you to actually count all the money, using $20 bills.
For $240,000, this works out to 12,000 bills. If you were to count one bill/second with no breaks, it would take you exactly 3 hours and 20 minutes.
But what about interest? Borrowing $240,000 at 5 percent interest, amortized over 30 years, will cost you $223,814, which means you need to count 11,191 more $20 bills. At one bill/second, it would take you an extra 3 hours, 6 minutes, and 31 seconds just to count the interest you will end up paying before the mortgage is finally paid off.
Overall, if you count one $20 bill every second without stopping, it would take you 6 hours, 26 minutes, and 31 seconds to count all the money you will have to pay to fulfill the terms of your mortgage contract.
I don’t want you to think I am suggesting you never take out a student loan, arrange for a mortgage, or use your credit card for Internet purchases. What I am suggesting is that you learn how defend yourself against money desensitization.
To do so, you need to cultivate the skill of awareness. Before you agree to incur a debt, even a relatively small credit card debt, take a moment to think about the cost of what you are about to do (including the interest). At the same time, take another moment to consider how you are going to pay it all back. Do this before you sign on the dotted line or click the “checkout” button.
Please remember that a lot of very smart people are using highly sophisticated, computerized tools in order to trick you, distract you, and manipulate your thinking. Their goal is to take as much of your money as they can, as often as they can, even if it is against your best interests.
Don’t make it easy for them.