There's No Black And White

Our financial decisions are not just about numbers or charts. They are much more than listing of do's and dont's, and needs and wants

- LARISSA FERNAND

A friend called me the other day with a very interesting query. He wanted to purchase a home espresso machine, and after much back-and-forth narrowed down on the gold standard.

The two Italian models were Lelit Bianca 2.21 and La Marzocco Linea Micra. The first would set him back by ₹2.21 lakh, while the other by ₹3.41 lakh.

My friend is passionate about baking and coffee. I suspect that he surreptitiously nurtures the dream of running his own café, or a coffee bar. And he had set his heart on this purchase.

So what was holding him that he kept wavering on this decision for the past year? Well, the tug of war between his heart and mind was because he could not justify the cost to himself. Somewhere in his mind, he believed that it was not right to spend so much on a “want”.

This black-and-white classification of need and want is where he erred.

I answered him based on the tremendous research and brilliant insights of author and behavioural finance expert Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University. Statman suggests that we need to view our preferences, wants and errors through the prism of benefits. And this helps individuals choose wisely.

What do people want? They want three benefits: utilitarian, expressive, and emotional.

Utilitarian

Q: What does it do for me?

A watch has the utilitarian benefit of informing you what the time is. The utilitarian benefits of a car are in ferrying us from one place to another. The utilitarian benefit of a restaurant is in feeding us when we are hungry or when we have not cooked sufficiently to feed our guests. The utilitarian benefits of investments are to create wealth so that one day we don’t have to work.

Expressive

Q: What does it say about me?