Tangibility Bias
If you had $100, would you use it to:
Buy that object you've been wanting.
Give it to someone who is struggling.
Pay down a debt.
Save it for an upcoming expense.
Go out for a fun meal.
Let's up the ante. If you had $25,000, would you use it to:
Deposit it into your kid's college fund.
Give it away to a charitable organization.
Buy a vehicle.
Use it as a downpayment for a house.
Contribute to your retirement account.
In the first example, most people would buy the object or the meal. In the second example, most people would use it to buy a car or a house. It's not because these are right or wrong decisions. It's because of something subconscious. I've watched people make these decisions for years. Time and time again, I can guess what most people will do.
It's called tangibility bias. It's subconsciously prioritizing things we can see, touch, and feel. Houses, vehicles, and possessions all fit this category. People are allured to the idea of buying something they can physically see. Some of these things can be good things, but it often comes at the expense of other less tangible things. Things such as retirement investing, college funds, generosity, and future needs.
It's why a person doesn't bat an eye at their $800 car payment, but "can't afford" to invest $200 into retirement. Never fret, though, as the car "is very reliable and will hold its value well."
It's why a person will go from spending 30% of their income on renting a house to buying a house where they are now spending 60% of their income on their house payment. All in the name of "not throwing away money on rent."
It's why a person will run to the nearest Apple store to drop $1,000+ on the newest iPhone, but perpetually has less than $100 in their emergency fund.
All three of these are real stories. There's a lot going on in each, but tangibility bias is in full force. When spending money on items we can touch, see, and feel, we'll jump through all sorts of mental, emotional, psychological, and financial hoops.
Speaking of financial hoops, this is one of the reasons why Americans are saddled with record-high credit card, auto, and mortgage debt. At the same time, we are more under-prepared for our kids' college and our retirement than ever before.
This is the risk of tangibility bias. We can't touch, see, or feel these other items. However, in due time, we'll touch, see, and feel the pain and turmoil we set up for ourselves. Setting our children up to be crippled with student loans. Backing ourselves into a corner where we're forced to work full-time into our 70s or 80s just to pay the bills. Putting ourselves in a position where we are cash-strapped because of our car and house payments.
Be aware of tangibility bias. As G.I. Joe once told me, knowing is half the battle!