Decoy Effect and It’s Influence on Your Financial Decisions

– Meghashyam Sinkar

Why does Apple always come up with three versions of iPhone?

Let’s understand this by an example.

Let’s say you are an ice-cream lover and one fine day, you are out to treat yourself. Shopkeeper provides you below options:

One Scoop Ice Cream : Rs 13/- 

Two Scoops Ice Cream: Rs 19/-

Three Scoops Ice Cream: Rs 20 /-

The negligible difference between the prices of 2nd and 3rd options gets your attention.

This is called Decoy Effect.

The Decoy effect, popularly known as the asymmetrical dominance effect with economists, is a phenomenon where people tend to have a change in preference between two options when presented with a third option that is asymmetrically dominated.

A 2nd option is just a Decoy option. Companies provide Decoy option so that customer can compare Decoy option with an expensive option and select the expensive one.

In the absence of a decoy option, the customer will compare: Rs 13/- vs Rs 20/- and may probably go with a cheaper option. But with decoy option, the customer now compares Rs 19/- vs Rs 20/- and most likely selects the expensive option.

Can you see a similar pattern in the pricing of iphone11 by Apple?

iPhone 11:
$ 699

iPhone 11 Pro:
$ 999

iPhone 11 Pro max:
$ 1099

Yes, Apple does use Decoy effect to drive consumer to buy the expensive version of their product.

It is explained very well in Dan Ariely’s book “Predictably Irrational”.

Here is a snippet from Dan Ariely’s TED talk which talks on psychological effects of options pricing.

Click Here => YouTube Dan Ariely TED Talk

How to avoid it ?

1. Make the budget and do not get swayed or confused by the number of models or prices.
2. Identify how much you need, so you don’t end up falling for ‘I can get so much more for “only Rs XX” extra.’
3. Try to Identify the decoy. Deliberately consider another reference point. Don’t ignore it while making the decision.

A popular saying goes “A Penny Saved Is A Penny Earned”

Happy Saving and Happy Spending !!!

The Concept of ‘IKIGAI’ In Financial Freedom

– By Meghashyam Sinkar

Financial freedom is achieved when you have the OPTION to work rather than being COMPELLED to work. It is achieved when you have reached a place where you are no longer stressed about money and feel at peace . So people trade their time or skill to earn money in order to achieve the financial freedom .

Now , if someone is loving what he /she does and continue to work and in this process , earn money then it’s perfectly ok . But how many of them are actually loving what they do.

In fact , in this modern societies & communities , people do what they are told to do or what others do , rather than what they want to do . This may be due to number of reasons like social pressure , peer pressure , lack of clarity on life goals , fear , greed etc.

Lets consider that someone works unhappily for 20 – 25 years in trade of money say Rs. 100 /- p.a. and the other person works happily for 40-50 yrs ( or till his body supports physically ) in trade of money say Rs 50 /- p.a and both of them are able to fulfil their financial commitments and achieve financial freedom . Which is better ?

This is where the concept of Ikigai’ comes into the picture.

‘Ikigai’ is the Japanese secret to a long and happy life. It’s a Japanese word which means your reason for being. It roughly means the “thing that you live for” or “the reason for which you get up in the morning.”

When you do what you love , then you get into flow .You work towards excellence which automatically sharpens the skills or processes which results into monetary benefits . It gives you sense of satisfaction. It keeps you mentally happy which has direct impact on your physical health. You don’t retire from your work which means money keeps coming for long period of time .

In the book “ Ikigai – The Japanese secret to a Long & Happy Life”, it talked about the real life example of people who have their Ikigai’ . One of the example, the author talks about is Jiro Ono. He is the owner of one of the most popular Michelin 3-star Sushi restaurants, enjoyed serving his perfection in sushi to happy customers. He is currently 91 years old, and once said that he might die while making the sushi he loved.

You can watch the documentary movie Jiro Dreams of Sushi here. 

You can find many more such examples .

E.g. Amitabh Bachchan currently 76 years old but most sought after & one of the busiest actor even at this stage of his life . He found his Ikigai’ which is Acting . Today after 50 years of working (ups and downs ) but doing what he loves to do with persistence made him a veteran in his profession . Money then automatically flows . Recently, in one of the interview ,he mentioned working till he can because that’s his Ikigai’ .

The other great example is Steve Job who discovered his Ikigai’ and that passion made him today what he is known for .

Tiger Woods does not play Golf for the money, he doesn’t need the money, yet he plays. In April’19, he won his 15th Major Grand Title almost after a drought of 11 years. In the past 11 years, he went through 4 back surgeries and one heck of a divorce that took the world by surprise. He lost all his sponsors and the best of brands abandoned him. But, at the age of 43, he made one of the greatest comebacks in the history of sports. Because , Golf is his Ikigai’ .

Warren Buffett is 89. He has made enough money – one of the richest man on this planet. Yet, he drives to work and actively invests. He does not need to. But investing is his Ikigai’ .

Discovering Ikigai’ and working towards it makes your cash flow / financial plan feasible in long run as your income (cash inflow) time frame expands along with incremental growth after certain period when you achieve excellence .Infact after getting over through survival period , these people don’t work for money . Money becomes a by-product . They just enjoy the journey and its process .

So , find where your Ikigai’ lies. Enjoy the process, the outcome will take care of itself for your financial freedom .

Happy Discovering & Happy Investing !!!

Pay Yourself First

– Meghashyam Sinkar

When you receive the salary / professional income , who do you pay first?

Do you not pay to your driver ? Do you not pay to your maid ? Do you not pay to your DTH , broadband services ? Do you not pay to employee ? Do you not pay to your milkman? Do you not pay to bank in case of EMI ?

But do you pay to yourself FIRST ?

You pay everyone for their work and services as soon as your receive your salary or profession income except YOURSELF . What about paying yourself for the work you do for 25- 30 days in a month ?

In 1926 , George Clason in this classic book “The Richest Man in Babylon” shares the secrets of creating wealth through few simple rules . It says – ‘Pay Yourself First’ 

The book says that the first principle is “A part of all you earn must be yours to keep.”

He goes on to explain that by first putting aside at least 10% of earnings — and making that money inaccessible for expenses. It should be not less than a tenth no matter how little you earn. It can be as much more you can afford .
Over and even longer time, it would grow into a lot of money, because of the power of compound interest.

Below is the simple analogy given by him in his book .

“Wealth , like a tree, grows from a tiny seed . The first copper you save is the seed from which your tree of wealth shall grow . The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings , the sooner you may bask in contentment beneath its shade.”

Even a small amount can harness the power of compounding  and create the significant value given enough time. As the income grows, contribution grows . E.g.  A person with Rs 10 Lacs of earning keeps aside Rs 1 Lac every year for next 30 years can create a corpus of Rs. 1.64 cr. However , if the person keeps increasing the said contribution by 5% each year, then the corpus becomes Rs. 2.6 cr. That is huge difference in retirement nest.

Pay urself graph

Putting “Pay yourself First” strategy into practice will inculcate good savings habit . If you are not able to do it right now for some reason , then assess your cash flows , make budget sheet , see where you can curtail or prioritise your expenses and keep aside at least 10 % yourself first ,come what may.

Majority of the investors follow below equation

Income – Expenses = Savings . But it is conventional Thinking .

Financial Freedom thinking says Income – Savings = Expenses. So PAY YOURSELF FIRST.

The legendary investment guru Warren Buffett has quotably remarkably in simple word –

“Don’t save what is left after spending, spend what is left after saving.”

Happy Savings & Investing !!!