A Last Minute Shopper’s Guide To Avoiding Overspend
‘Tis the season to be spending. It started with Black Friday bargains and has carried through our lists of Christmas gifts and will keep going for almost two months afterwards. January sales! Valentine’s Day!
We tell ourselves that we’ll be good. But once we’ve reached the end of that nearly three-month stretch, we sometimes look back in frustration. There’s a combination of factors that go into it. Our own thinking. The powers of persuasion stores use to entice us. Recent nonfiction releases have taken an interest in these phenomena, so check out these takeaways before you take to the mall.
We make irrational spending choices
- 15 min reading time
- 129k reads
- audio version available
You may find it surprising, but humans are innately irrational. Daily decisions, including what we purchase, are usually not guided by logical thinking. Our emotions, expectations, and social norms heavily influence our choices, especially when it comes to spending.
Misguided buying behavior isn’t random, we make the same mistakes over and over again, causing us to be ‘predictably irrational’ in the eyes of top MIT behavioral economist, David Ariely.
Read on if you want to know why we overstuff ourselves at the work Christmas buffet, the reason we can’t resist ‘3 for 2’ offers, and why ‘free shipping’ isn’t a gesture of goodwill.
We love freebies
‘Free’ has a powerful emotional trigger. We’ll take it, even if it’s useless. We’ll eat that extra piece of cake at work’s holiday buffet, because it’s free. Why? When we pay for an item, we take the risk of losing out and hate the feeling of disappointment. But when something is free, there is no immediate economic risk plus a heightened value.
Amazon cashes in on the spending power of free by offering ‘free shipping’ when you spend over a certain amount of money. We are also often enticed by supermarkets to ‘Buy 2, Get 1 Free’ when we actually only wanted one of those items, or perhaps none at all. With the promise of ‘free,’ we just can’t resist.
Arbitrary coherence: The first quoted price affects our future purchases
How much we’re willing to pay for the latest gadget is not based on a rational ‘supply-and-demand’ calculation. Instead, we expect prices to be coherent, no matter how arbitrarily they are derived. To get an idea of what a new product is worth, we take the first price quoted as an anchor. Say the first Virtual Reality (VR) headset to hit the market is priced at $2,000. That’s our benchmark now, and we expect all other VR’s to be coherent with that sum. Another VR model for $1,800 will seem like a bargain, whereas one advertised for $3,000 a complete ripoff.
We’re blinded by brands
A banging headache will miraculously disappear after an 80-cent aspirin, but persist if we take a 1-cent aspirin… even if it’s the same aspirin! We irrationally believe that more expensive medicine works better, and this affects its potency. Similarly, our preference for brands radically impacts how we experience their quality.
In a blind taste-test of Pepsi and Coca-Cola, the majority preferred the taste of Pepsi. But when the brands were revealed, the same group liked the taste of Coca-Cola better. Surprisingly, our expectations shape our experiences from taste, to enjoyment, to physical health.
To appraise things, we look for comparisons
Our minds are wired to make direct comparisons. To judge if something is good and worth having, we compare it to similar items that we can easily perceive. Marketeers cleverly cash in on this phenomenon by lining shelves with ‘decoy products’. By offering an extraordinarily priced bottle of wine, suddenly the second-most-expensive wine doesn’t sound too bad. This is one subtle way of persuading you to spend more than maybe you initially would have wanted.
Paying with plastic makes us spend more
We can even be caught when it comes to how we pay for our purchases. We irrationally tend to spend more money when we’re paying with credit cards than if we just use cash. Psychologist Richard Feinberg revealed that tips left at a restaurant by people paying by credit card were 13-percent greater than tips from cash-paying customers.
Another study showed that people with credit cards purchased more items in a department store than those who opted for cash. So, when you spot the signs at the cashier encouraging you to pay with contactless cards, remember, shop owners are not just thinking about your convenience.
Prevent yourself from being caught in traps
Phishing for Phools
Phishing for Phools
- 12 min reading time
- 6.6k reads
- audio version available
In Phishing for Phools, Nobel economics laureates George A. Akerlof and Robert J. Shiller, offer great actionable advice on how to avoid spending money you don’t want to spend. Before you hit the shops, make a budget according to the 50-30-20 rule. Divide your salary into three parts. Fifty percent is reserved for “must-haves,” such as food and rent; 30 percent goes to “wants” (new shoes, family presents, Christmas decorations); and that leaves 20 percent for savings. If you stick to your budget, you’re less likely to become carried away with every whim, as strict limits on spending makes it easier to resist temptation.
Irrational decision-making doesn’t just apply to spending behavior, it also affects our diet, health, and relationship choices. By taking note of common irrational pitfalls, you can learn to override them and spot situations when it’s likely they’re being exploited. This will help you to act towards long-term interests in many aspects of your life.