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Tuesday, May 27, 2014

Anchoring in Montevideo

Anchoring in Montevideo
We are here in Montevideo, the capital of Uruguay, which apparently is not pronounced "Mon-tee-VID-ee-o" as I originally had thought. We live, we learn. Once again we were able to score a room upgrade with the hotel when we let the good people at the front desk know that we were celebrating our three year anniversary, and they were so nice that they gave us a suite. After going out for dinner, we came home to find a chocolate cake and a card waiting for us. (And maybe even more importantly, free wifi.) I can't say enough good things about the good people at the Four Points here -- everyone on the staff is so dang nice.


Something that's a little less nice is the exchange rate here, which we originally thought would be fantastic since you get an astounding 22.5 Uruguayan pesos for one measly American dollar. When you hand a money changer one hundred bucks, this is what you get back (minus the cost of a taxi ride):

Anchoring in Montevideo

There is something very satisfying about pulling a $1,000 bill out of your wallet. And that's what you have to do to pay for a fancy lunch here (which is a good deal less satisfying) since that amounts to about $45 American. We've been spoiled by the low prices of Buenos Aires and we thought things would be even better here in Uruguay because, well, isn't that what's supposed to happen when you get a 22:1 exchange rate? Unfortunately, prices seem to be even a bit higher here than in the states. We walked by a McDonald's and saw that a quarter pounder, just the burger without fries or a drink, is going for $110 (about $5 American). It's the same story at other restaurants, and in the grocery store, too. In fact, Uruguay has become one of the most expensive countries in South America, due in part to inflation.

This is especially unpleasant for us, since we'd anchored our price expectations based on what were were paying in Argentina. Anchoring is what happens when your first prediction, or first piece of information, has a lingering effect on how you perceive things going forward, even when there's glaring evidence that your first impression was wrong. I was expecting to find juicy, six dollar steaks here, like we saw in Buenos Aires. So when we are presented with a $18 ribeye and fries in Montevideo, it seems expensive, even if it was the best steak I've ever eaten, and even though that seems to be the going rate at all the restaurants here. I'm not letting go of the prices I saw last week, even though they are from another country, and have no bearing at all in the place I'm in now.

We do this sort of anchoring all the time. As Jason mentioned in his excellent post on investing, we anchor based on the number we bought or sold an investment at previously. We let an old price impact our decisions on current prices. When we see a home that is listed at $200,000 and decide to counter with a 10% reduction, the anchor is already impacting our negotiation. The discount itself is calculated from the first price, which is given legitimacy via the anchor, and established as the starting point for negotiations. It goes on and on. We lament when a sale ends or a coupon expires, and the current deal suddenly seems too high, since we could have had it for half as much. We see prices rise due to inflation, and remember way back, when a gallon of gas or milk only cost a dollar, and when college educations could be paid for with student work. We look up, and everything ends up seeming too expensive. 

We should forget the past when it comes to prices. It is done and gone, and the old prices aren't coming back anyway. Only the current information matters. Find a benchmark. Compare an offer to the other offers you can find in the here and now. Do the best you can with the situation you're currently faced with, and don't bother yourself with reminders of past opportunities. As always, the lesson seems to be to live in the present. I have a few more days to do just that, with my wife, in a cool little corner of the world, and I am very happy about that. Cheers.


*Photo is from magnetismus at Flickr Creative Commons.

44 comments:

  1. Wow, sounds like a great trip! Too bad that you started in Argentina, if you had started in Montevideo and THEN gone to Argentina you'd be amazed that everything was so cheap, right?

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    1. You're right! The order definitely matters, Color Me Frugal. We had tried to do just that, but the flight to Montevideo was a good bit more expensive than the ones we could find to Buenos Aires. Still, I wonder if the improved perception might have been worth the money. :)

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  2. That's awesome they gave you some free cake. What's better than that? I have noticed that with the move, I've been caught up in what things *used to cost* versus what they cost here. It's a bit disheartening, as I've heard everything is cheaper in the South, but that hasn't been completely true. It's probably time to get go of that and get used to what is in front of us now. Enjoy the rest of your vacation!

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    1. You're in a very similar situation, EM, with the new environment & prices. I noticed the same impact when I first moved to San Diego -- I kept thinking, man, rent is so much more here, meat is so much more here, and the like. But since there was no going back, the best I could do was to find the best value options available.

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  3. I still remember being in London thinking, why does Burger King cost $12 or 6 pounds, am I missing something? It certainly can be a little tough seeing the difference in money exchange. No BK for me, but still expensive.

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    1. I hear you Even Steven. Even if we're not giving in to the fast food temptation, they provide a decent benchmark.

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  4. I'm glad you are enjoying yourself but yeah, that would be sticker shock coming from the prices in Argentina. I had that in Iceland, but when I got back to the states, everything seems do cheap again, until my baseline once again shifted. Enjoy the rest of your time with your wife.

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    1. We were so close to making a trip to Iceland back in 2011 for a friend's wedding, but ended up not going. Price was the driver. The Euro really makes things pricier, even the frugal options. You did so well with your trip though -- I was impressed with your overall budget.

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  5. That's a fantastic attitude, sir. Glad you're not letting it get in the way of a phenomenal trip. Anchors can suck it. I know that first hand. I like what you said briefly about even prices at the supermarket. I never really thought about it as anchoring, but it certainly is. I need chicken, but now it's $2.99/lb versus the $1.99 I paid last week. Or I need pasta sauce, but now they aren't BOGO. I get irrationally frustrated by these occurrences. Like you, I need to just remind myself that it's all good. The extra few buck won't kill me this month, and I'll probably get some other deal at some point anyways. Keep livin' the dream, friend. Cheers.

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    1. Grocery prices really illustrate the anchoring effect, since the screaming deals we get stick in our memory. We'd do better to think of the average prices, rather than the best-case scenarios...but where's the fun in that?

      Thanks for the kind words, buddy. See you guys in a bit.

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  6. I get anchored on gas prices. I use GasBuddy and track them in my phone as my husband drives past the stations, not believing the changes from one week to the next, whether they go up or down. Go figure! Glad your enjoying your vacation. :-)

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    1. I've never used GasBuddy, debt debs, but maybe I should. It seems like a really good way to find the best prices locally.

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  7. I got price anchored by our hosting provider and got upset when the renewal charge went through at ~50% more than we had previously paid. It took Mr PoP talking me down and telling me it's not worth the $60 or so over two years to switch us to another hosting provider. *sigh*

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    1. That's too bad about the price increase, but the context of the total cost in absolute dollars is a good reminder. Sixty bucks over two years is a really small cost, even if it is a huge percentage increase. Like you said though, there's a cost to switching...is it worth the headache?

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  8. I don't like to forget the past completely as it gives me some kind of reference point. But you do make a good point. Price comparing what's relevant today is most important. Enjoy Montevideo. I bought a drawing from a street artist while I was there and it's one of my all time favorite pieces.

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    1. We might have seen that same artist - Mrs. Done by Forty was very close to buying a painting and was haggling and everything. I, as usual, acted as the wet blanket and talked her out of it. I have no way of bringing a framed painting home and don't want to pay to get the canvas stretched back in the states.

      Man, I'm a real stick in the mud.

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    2. Hah hah! I think you and my husband were separated at birth! He does the same thing!!! And he anchors!!!!!!! This cracks me up, nice to know he's not the only one,

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    3. He's definitely not alone, Handmade! Cheapskates unite!

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  9. Wow, that's really nice what the hotel comped you with (I'd be most excited about the cake!). The prices sound similar to Chile, but I hope you have fun nonetheless! Take more pics, please :)

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    1. It really is the little things that matter. The free cake with a handwritten card saying "Happy Anniversary" really made the trip.

      We have a lot of photos, Anna, and I'll share those in a future post all at once. :)

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  10. Great to hear from you again DB40, and fantastic that you and your wife are still having a great time away together! Although that is a tough adjustment when you’ve been spoilt with super-cheap prices in Buenos Aries – I’m really surprised at how (relatively) expensive things are in Uruguay. I ignorantly assumed much of South America would be similar.

    I so agree with your lesson of living in the present. It’s such a life-changing mindset, and does help combat the anchoring bias, but it's something that’s so surprisingly hard to do consistently. Hope you can experience a bit of this over your next few days though! Relax, have fun, and enjoy the rest of your trip with your wife!

    And thanks so much for mentioning my post!

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    1. No problem on the mention, Jason! I think the readers really enjoyed it.

      South America, at least the parts I've seen, really is pretty cheap most of the time, but Uruguay seems to be an outlier. We're in Colonia now and I love it though...enough to overcome the high prices. As I usually do, I now have decided I want to live here.

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  11. Dude, that article on anchoring you linked to is AWESOME - thanks for that. Also, save me some currency while over there, will you? :) One of these days I'm gonna come out and join you for some beers in another country!!

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    1. Thanks, J Money! If you haven't read that guy's book, You Are Not So Smart, I'd highly recommend it. One of the best 10 I've ever read.

      I have been saving some Uruguayan coins for you. They are by far the coolest flipping coins I've ever seen: their $10 coin has a flipping Puma on it, and their $2 coin has the world's largest rodent on it. No joke. Email me your address and I'll mail them your way.

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    2. Recently discovered the You are not so smart blog through one of the posts/comments on here (or maybe somewhere else) and it is fantastic I have to say! Another book to add to the reading list.

      We always check MacDonalds prices when in another country, it is a pretty good barometer of what the cost of living is there.

      Uruguay sounds brilliant, I watched a tv program about it the other night and it looked really nice as well. Still jealous! :)

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    3. Thanks, Firestarter! McDonald's really is a good shortcut to understanding prices. There's probably a larger idea in there somewhere. I'm a big fan of the book & the blog, too, though I'm not sure if he's still updating it.

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  12. Sounds awesome! I would totally feel like a baller with a couple of $1,000 bills in my wallet!

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    1. I know! I feel like a big shot now. My wife asks me how much cash we have, and I get to say, "We're good. I have like, three grand or so in my pocket." Like it's no big thing.

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  13. Great points on anchoring...and definitely happened to me recently when looking at house prices. Would love to hear more about Uruguay...I keep reading about the president and while I don't know his politics, he seems like inspirational figure. Instead of living in the presidential palace, he decided to live on his farm, flies economy class, drives his old VW Beetle, and donates a majority of his earnings.

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    1. I wish I knew more about the politics here. I see non-ironic "Vote for Pedro" signs everywhere, for Pedro Bordaberry, a candidate for president. Interesting guy: wikipedia is saying he's the son of a former dictator, and heavily involved in the Rugby Union. Sorry for the tangent, we're like two bottles deep in wine right now.

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  14. Sounds like you're having a fantastic trip - so jealous. Argentina and Uruguay are both next on our list for an international trip. Go where the expats go I say.

    Anchoring is a great concept. We are currently trying to get rid of a rental unit that my husband bought as his primary residence in the peak of 2006 at $215K. 8 years later and the value still hasn't come back - current comps show it's worth about $185K - a BIG difference that I just cannot accept in my mind.

    Enjoy yourselves!

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    1. Hey, Emily. Buenos Aires is awesome, but if someone were visiting the region I might recommend skipping Montevideo altogether and just heading over to Colonia (a 1 hour ferry ride from Buenos Aires). Just my opinion though.

      I think in the case of leveraged property, the price delta becomes more of a real thing and less of an academic concept, since a big enough price dip might necessitate a short sale. We had a similar situation when I foolishly told my wife to dump a five figure inheritance into a front loaded mutual fund in 2008. In 2013, the value still hadn't come all the way back...but we eventually had the guts to just sell and use the money to achieve another one of our goals (being debt free & saving for rental property).

      I might need to chat with you sometime about the pitfalls of that whole rental property thing, to make sure I'm not being foolish again...

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  15. Happy 3rd Anniversary! An upgrade with cake sounds like a good way to celebrate it.

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    1. Thanks, Laura! It's the leather anniversary, so I surprised Mrs. Done by Forty with some boots. :)

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  16. Nice photo. Go to Korea with less than $1k and become a Korean millionaire! OR a few years ago in Zimbabwe you could have been a trillionaire for a few bucks :) Don't you just love fiat currency? All the more reason we need our dividend stocks to keep pace with inflation,

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    1. Yikes, I forgot to give credit for the photo. Thanks for the reminder! Inflation is a real concern, most definitely, for all our investments. I think as our portfolios grow, we become more concerned with defensive concepts like inflationary risk & interest rate risk.

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  17. Sometimes I think locals get better prices than tourists. If the median income is lower than in the USA, prices should be lower too.

    I know in Hawaii, with a Hawaiian driver's license things are almost half price in places.

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    1. Good point -- the locals definitely know where to find the good eats and the gringo tax is a real thing.

      That discount in Hawaii always rubbed me the wrong way, but I suppose it's no different than the higher taxes they invoke at hotel rooms to hit up tourists...

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  18. Happy Anniversary - if a bit late! I look at the prices of beer and wine unless I'm in a "sin tax" country like Singapore. Beers are usually similarly priced everywhere I've been!

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  19. Happy anniversary! That really stinks about the inflation. I hope it was a great time despite that! Yay for four points!

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  20. I just love hearing about your adventures in other countries, DB40. Interesting about the food prices there, and so cool of your hotel staff to put the cake and card in your room - chocolate cake definitely trumps wifi, though.. ;-)

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  21. Congratulations on your anniversary Mr and Mrs DB40! Your trip sounds amazing - great that you got an upgrade! Sorry that Montevideo seemed expensive though compared to the last place but I imagine it's well worth it. Have a lovely time! :)

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  22. I became really interested in economics, fractional-reserve banking, etc. when Ron Paul ran for President in 2008 and have continued to be interested in it. You are correct that for personal decisions it really only matters what the current information is not the history. I think if you want to weigh in on long-term solutions to problems like inflation it's important to look historically, though.

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  23. Good stuff! "We let an old price impact our decisions on current prices." This happens all the time in sports as well. Players get current contracts based on what people remember they did or did not do in the past. A 36 yr. old baseball player should be paid based on his current abilities, not because he hit 40 home runs when he was 27.

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