The Science of Painful & Painless Spending
What makes us cut corners when it comes to paying for anything
Law 40 from Robert Green’s 48 Laws of Power states that:
What is offered for free is often dangerous- it usually involves either a trick or a hidden obligation.
What has worth is worth paying for.
By paying your own way you stay clear of gratitude, guilt and deceit. It is also often wise to pay the full price- there is no cutting corners with excellence.
“Tada Yori Takai Mono Wa Nai”, meaning “nothing is more costly than something given free of charge.”
- The Unspoken Way, Michihiro Matstumoto, 1988
There is no such thing as free advice. Free is a price you pay.
Let these words sink in.
The one question that most individuals are not able to get past comfortably when trying to take up any service that could possibly add value to their lives:
‘How much does it cost’.
This is especially true when talking about health or investing services.
This phenomenon is known as the pain of paying, and there is a psychological and neurological reason for it.
The concept was explained by Dan Ariely and Jeff Kreisler in their book Dollars and Sense.
It states that the more time we spend mentally accounting for how the money we’ve spent will generate value, the more pain we feel.
Decisions such as hiring a financial coach or a health coach fit into this category, as per our experience. On the other hand, spending money on our favorite greasy snacks while lounging on our couch has the opposite effect, it’s a painless feeling.
The more we contemplate our spending, the more painful it becomes.
If we happen to consume or experience something while thinking about the payment, the pain of paying worsens, making the experience seem far less valuable than it actually is.
The book gives the example of a great holiday—when we pay for our expenses upfront and can simply enjoy the experience, we appreciate that cocktail more, savor that dinner more, and have a better time with water sports.
However, when we have to pay a large sum after experiencing these activities on the holiday, a part of the fun psychologically diminishes.
I don’t make the rules; this is just how our brains work.
Neuroimaging and MRI scans have shown that paying does indeed stimulate the same regions of the brain involved in physical pain.
And when we experience pain, our first instinct is to avoid it. However, what occurs in this process is that we often transition from painful spending to painless spending.
Painless spending includes indulging in multiple nights out, regularly spending money on junk food, and engaging in many painless activities like buying a stock and selling it after making 20% gains, and hoping we can do it again and again.
These painless spending activities release just that. Paying for something that doesn’t require effort or commitment doesn’t hurt as much, and we humans prefer easy and painless options.
Avoiding a certain level of pain causes us to lose our focus on the actual value we receive in exchange for the pain of paying. This, in turn, leads to a phenomenon called ‘borrowed conviction’, a term in market lingo for free advice taken from an individual without having paid for their services, stemming from our inability or reluctance to pay for an adviser to guide us in important decisions.
This explains why we tend to place trust in someone else’s free advice without investing the time to conduct our own research, it’s a process that is both painless and easy. This plays out spectacularly in the stock markets in the lure of quick and easy money. Trading in futures and options in the financial markets is, in fact, one of the most dangerous ways of playing with our money. If we really want to participate, we ought to hand over the management of the money full-time to a trusted organization or professional.
If you have watched the show Scam 1992, there is a story arc where a young individual with no experience in the stock market makes a good amount of money on futures and options taking tips from Harshad Mehta. He makes money while the going is good, but loses everything and eventually dies by suicide when the markets crash.
As harsh as this sounds, I would say that the trader who took Mr Mehta’s advice was wrong and hence suffered because of this unsolicited advice.
In fact, a SEBI study even showed how nine out of ten traders lose money while trading in derivatives.
Despite knowing this, retail traders keep coming back for more. An October 2023 study by Axis Mutual, titled ‘Gamification of Indian Equities’, highlights a stark truth, that with options now available for day-trading of futures, the volumes of futures and options have gone up.
This typically takes place when the market is doing well, but ends badly when the market eventually comes down. The study highlights another interesting data point. ‘In fantasy sports, the take rate of the pot is 15 percent. For every hundred put in by the retail participants, they get eighty-five back. The skew is the opposite in derivatives, with only 15 percent of the pot coming back to retail.
As per a SEBI study in FY22, retail traders on aggregate lost more than 80% of their bets (Rs 45,000 crore was lost by 90% of participants while 10% of the participants earned Rs 6,900 crore),’ it states. 7 out of every 10 traders suffer from losses.
Despite all these warnings, even today, investors continue to make the same mistakes in the markets in the lure of quick money, with free unsolicited advice.
A sound financial adviser helps you not only with expertise in the subject but also ensures you do not make behavioral mistakes.
You are not just paying for the financial advice- financial advice, after a point of time, is essentially the same 3-4 boring maxims repeated over and over again. A sound financial adviser ensures you stick on the path.
In the same way, a sound fitness trainer ensures you stay on the path. The exercises and eating plans are a small part of the advice
Conclusion:
Free is a price you pay :)
Order my book today, The Health and Wealth Paradox