A Last Minute Shopper’s Guide To Avoiding Overspend
‘Tis the season to be spending. From our lists of Christmas gifts then after-Christmas clearance blowouts then January sales and on through Valentine’s Day!
We say we’ll be good. But once we’ve finished that nearly three-month stretch, we sometimes look back in frustration. Many factors go into it, including our own thinking and the stores’ powers of persuasion. 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
Predictably Irrational
- 15 min reading time
- audio version available
You may find it surprising, but humans are innately irrational. Logical thinking doesn’t usually guide daily decisions like our purchases. Rather, it’s our emotions, expectations, and social norms that influence our choices.
Plus, 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 find ourselves stuffed with food and, well, stuff at the end of the holidays.
We love freebies
‘Free’ is a strong trigger. We’ll take it, even if it’s useless. Why? When we pay for an item, we risk losing out, and we hate feeling disappointed. When something is free though, there is no immediate risk.
Amazon cashes in on the power of free. It offers ‘free shipping’ when you spend over a certain amount of money. Supermarkets convince us 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.
The first price we see affects our future purchases
How much we’re willing to pay for the latest gadget depends greatly on how much something similar costs. Say the next major video game console goes for $700.
That becomes our benchmark.
If a competitor sells its system for $650 and has more or less the same features, then it will feel like a bargain. Another competitor’s $750 console then seems like a ripoff.
We’re blinded by brands
A headache will disappear after an 80-cent aspirin, but persist if we take a 1-cent aspirin. The catch? It’s the same aspirin! We believe that more expensive medicine works better, and this affects its potency.
Similarly, our preference for brands impacts our sense of taste, pleasure, and physical health. 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 reported liking the taste of Coca-Cola better.
To appraise things, we look for comparisons
Our minds are wired to make direct comparisons. To judge if something is worth having, we compare it to similar items nearby. Marketeers cleverly cash in on this phenomenon by lining shelves with ‘decoy products’.
A $15 bottle of wine doesn’t sound so bad when a $40 or $60 bottle is on the shelf right above it. This is one subtle way of persuading you to spend more than you 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 paid in cash. Those signs at the cashier encouraging you to pay with contactless cards are not just there for your convenience.
Prevent yourself from being caught in traps
Phishing for Phools
- 12 min reading time
- audio version available
In Phishing for Phools, Nobel economics laureates George A. Akerlof and Robert J. Shiller, offer advice on how to avoid spending money you’d rather save.
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). That leaves 20 percent for savings.
If you stick to your budget, you’re less likely to become carried away. Limits on your spending make 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 noting your own 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 the long-term interests in many aspects of your life.
