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Divide and Conquer

Jim Wasserman

IF WE GO TO the movies and buy a mega-tub of popcorn, we’ll eat a lot, probably too much. If, however, that same amount of popcorn is packaged into four bags, we won’t eat nearly so much.

Why? With the four bags, we keep arriving at a decision point—that moment when we have to ponder whether it’s worth opening a new bag. This is the insight of behavioral economist Dilip Soman of the University of Toronto’s Rotman School of Management, who offers the popcorn example to illustrate a simple yet profound insight into our decision-making.

The separation of bigger decisions into smaller choices is called partitioning. It gets us away from automatic or abstract thoughts, such as “I like popcorn,” to a more specific decision: “Do I like popcorn enough right now to open a new bag?”

At that moment, we make a cost-benefit analysis of our choice. We might weigh the enjoyment of more popcorn against the effect it may have on our waistline. Somewhere before the fourth bag is opened, people tend to realize that they’ve already eaten enough.

Partitioning has obvious benefits for money management, too, and saving in particular. If we earmark funds for “house purchase,” “kids’ college” and “retirement,” it lets us visualize our goals. That’s better than thinking of our wealth as one collective pot available for any need.

Naming our goals also makes them more tangible, which can encourage us to direct more money toward them. With this kind of intention, we might even achieve our goals faster.

In addition, having a named savings goal gives us a yardstick to measure our progress. For example, we might compare the growth rate of our college fund to the rise in tuition costs to see how we’re doing.

On the spending side, inserting partitions is helpful, too, because it adds an extra step called a transaction cost. Transaction costs make us pause before we spend money.

For example, when I turned old enough to gamble in casinos, my father advised me to think—and then rethink—the maximum amount I was willing to lose. I then set that amount apart from any other money I had when I walked into the casino. Once my stake was gone, whether in three hours or three minutes, I walked away.

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That’s good advice and it works for any form of gambling, including investments. Got an itch for risk? Think and rethink, and then put up a wall around your possible losses. You can designate that any gains be reinvested in the cause. Once your stake is gone, however, ignore that voice that says, “Maybe I’ll just put in a little more to make it work.”

To be sure, the siren’s call of the sunk cost fallacy is hard to resist. Still, a partition may be just enough of a check to keep you from going overboard in any one direction. Perhaps, like the Greek hero Ulysses, you might even plug your ears with wax to resist temptation.

We all have projects and adventures we want to spend money on, whether remodeling the house or having a grand family vacation. It’s wise to partition money for these goals as well. If we set a dollar limit at the start, it helps us resist the temptation to spend more than we can truly afford.

For other types of spending, we can invent our own transaction costs. Put the credit cards in a special place where it’s an effort to get at them, though perhaps freezing them in ice may be a bit much.

Another type of transaction cost: Impose a 24-hour pause before completing any big-ticket purchase. Or, similar to the casino example, take a limited amount of money when shopping, either at the mall or online. Then hold that line.

The objective is to get ourselves to think before we spend. It’s like the Second World War poster that discouraged the waste of gas and oil. “Is your trip necessary?”

Of course, with behaviors we want to encourage, we should look to remove partitions. Setting up automatic deposits to our 401(k) account removes transaction costs. Making healthy snacks like carrots easily accessible helps to make them our first choice.

Partitioning is so commonsensical that many are surprised it has to be offered as advice, let alone studied by behavioral economists. But it’s these very simple steps that are often the most overlooked, even if they offer the easiest of remedies.

We know we should consciously think through our spending decisions. Yet it’s almost as if the system is set up to encourage us to part with our money unthinkingly. That, however, is a topic for another day.

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He’s the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He’s also authored several educational children’s books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. They have a book that examines the impact of social media influencers on youth consumerism and identity development coming out in 2023. Check out Jim’s earlier articles.

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HumbleGardener
HumbleGardener
9 days ago

At the beginning of our marriage, I was a little better at saving and disciplined spending than my wife. Partitioning, putting our savings into individual piles with labels, helped her to visualize what each was needed for and prevented conflict. I’ve also used the method in working with others with whom I share responsibility for organizational budgeting and spending. It helps avoid draining the coffers for short-term wants at the expense of long-term needs and emergency funds. For snacks, we developed three lists, from foods that were free choice to those that required parental permission.

R Quinn
R Quinn
10 days ago

I’m with you on this, Jim. Partitioning in all phases of money management and saving/investing is how we have lived our lives since the day we were married in 1968. Buckets have goals, buckets set limits.

When our family went on vacation when our children were young we allocated $100 a day for the family of six to spend on food, etc (excluding housing). One of the children kept track of our spending so we knew if we had anything left to add to the next day.

I find I develop a mindset about the money in each bucket. It can’t be used for the purpose of other buckets and once I know it’s there for a goal or project, there is less stress about spending it when the time comes.

Even today well into retirement we use seven linked bank accounts each with a designated purpose. People laugh, but it works for us and heated discussions over money are non existent.

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