"A behavior called loss aversion tends to freeze consumers in place in one area even as spending in other areas remains unchecked. Mr. Brafman noted that many would-be travelers, rattled by the rise at the pump last summer, canceled their vacation plans while continuing to spend at home. Gas prices were up, on average, $2 a gallon, he said. 'It seems like a substantial amount, but for a 600 mile trip, that amounts to $80 in savings. This could have been easily recouped by cutting out one trip to a restaurant.'"Also, people tend to view money in relative rather than absolute terms. Dan Ariely, author of Predictably Irrational, explains:
Read the NY Times article here.
“Need” and “cost,” he pointed out, are deeply personal and wildly relative. “I have a student at M.I.T.,” Mr. Ariely continued, “a very smart guy, who just wrote me bemoaning the fact he’d lost all this money in the stock market.”
The student told Mr. Ariely he had wanted to buy a $4,000 mountain bike, and regretted not doing so before the stock slide. However, he had decided to buy the thing anyway.“He had lost so much money already he was immunized against feeling the pinch of the purchase of the mountain bike,” Mr. Ariely said. “In other words, having lost $40,000 in one week, looking at spending $4,000 on a bike seemed like nothing.