Financial Intelligence - Counterintuitive Pattern 1: Proportion VS Absolute Value

Counterintuitive Pattern 1: Proportion VS Absolute Value




The first counterintuitive pattern is about how the human mind perceives proportion and absolute value. Essentially, our brain excels at recognising absolute value when the number is small, but it automatically shifts to thinking about proportion when the number is large. Let’s use a concrete example to illustrate this.

Imagine you’re making two purchases today. First, you need to buy a $200 printer from the local office supply store, as your partner has asked. Second, you’re buying a new car. After weeks of searching, you’ve chosen a white Honda CR-V from a local dealer. You have $20,000 in cash, freshly withdrawn from the bank, and you’re ready to pay the dealer and drive the CR-V home.

When you picked up the printer from the office supply store, you noticed a sign at the checkout stating that anyone using the Bravo Loyalty card, which you are, would receive a 10% discount on any printer purchase. Delighted, you showed the cashier your Bravo Loyalty card, paid $180, and left with your new printer.

After dropping the printer off at home, you took an Uber to the local car dealer to finalise the purchase of the CR-V. Upon arrival, Paul, whom you had met during previous test drives and negotiations, greeted you warmly. Before you could express your readiness to pay, Paul handed you an envelope with a secret smile. Intrigued, you opened it to find a paper printed in charming fonts: “Congratulations! You are the 1000th customer of this store! You will receive a 10% discount on your CRV!” What a delightful surprise! Shortly after, you took $2000 out of the $20,000 in your pocket and handed $18,000 to Paul, who then gave you the car keys. Deal done! It was a great day, saving $20 on the printer and $2000 on the car!

Now, let’s analyse the feeling. Which discount brings you more happiness, the printer or the car? Naturally, it’s the car discount, as it’s a significantly larger amount. But consider this: how many times more joy does the car discount provide compared to the printer discount? Take your time to assess your perception of the joy each brings truly. Your answer might be three, five, or even ten, but it’s unlikely to be 100. In other words, a $2000 discount probably won’t bring you 100 times more joy than a $20 discount.

This illustrates how our minds perceive numbers, a concept frequently used in finance. Due to our limited ability to grasp large numbers, we often think in terms of proportions or percentages to simplify calculations. In the example above, our minds unconsciously converted both discounts to 10%, which is essentially the same. Our conscious minds adjust this perception by applying a multiplying factor, knowing $2000 is much more than $20. After this adjustment, our perceived joy from the discounts is anchored between 3 to 10 times. In other words, when dealing with discounts, growth, multiplication, division, or any financial calculation involving proportions, we tend to focus on the proportion and overlook the absolute number.

This counterintuitive tendency to misjudge proportions and absolute numbers is often exploited in advertising. When the absolute number is low, percentages are used to make it appear larger. For instance, “This popcorn has 10% less salt than the previous version.” In reality, it’s only 0.5 grams less, as the total salt per pack is 5 grams. Another example: “This fruit bar has 20% extra fibre than average fruit bars!” This translates to just 2 grams of extra fibre, less than the fibre in two apple seeds you might accidentally chew while eating an apple. We’ll discuss nutrition intelligence in a later chapter, where fibre will be mentioned again.

Conversely, absolute values are commonly used when the number is large, even if it doesn’t make a significant difference. For example, kitchen and bathroom renovation shops often advertise a few thousand dollars in cash back. It seems substantial, but compared to the typical renovation spending of hundreds of thousands, it’s merely 1% to 3%, likely a fraction of what you pay in sales tax. Another example is political propaganda for public project cost savings: “The People Party has launched a new software program, saving more than 3 million dollars on public construction projects!” While 3 million sounds like a lot of tax dollars, it’s only 0.0015% of the 200 billion yearly spending on public construction, likely insignificant enough that it wasn’t included in the yearly budget planning.

How can we enhance our financial intelligence by consciously adjusting this pattern of absolute and proportional values? The answer is to think quickly when making decisions about small numbers, and slowly when dealing with large numbers. When making a significant purchase, force yourself to slow down, ask many questions, conduct thorough research, and compare various options. This approach reminds us, “I’m about to make a big purchase; however, my brain might incorrectly think proportionally rather than in absolute terms, so I need to slow down to focus on the absolute value.” For example, when buying a million-dollar property, any potential 0.1% savings opportunity, whether on buying agent costs, tax benefits, or compliance spending, could amount to $1000. This $1000 saving might be worthwhile, but you might not bother to explore it if you think, “Nah, just a tiny difference on a million-dollar deal.”

On the other hand, we can consciously speed up when making small transactions. When buying the printer in the scenario above —a $200 deal —consider how much time and energy you want to invest in it and stick to that budget. A chance to collect three different vouchers and save up to 10%? Thanks, but no, since 10% would only be $20, which might not justify the time needed to collect those vouchers.