Psychological reasons we spend way more than we mean to
Author: Karen Banes
While some of us are pretty disciplined when it comes to spending, some of us are more impulsive, and that's not entirely our fault. There are some important reasons why we tend to spend more than we need to, and being aware of them can help make us more mindful when it comes to splashing out more cash than we should.
I've been reading Money: A User's Guide by Laura Whateley this week. While it's aimed at a UK audience and much of it may not be that useful to international readers, the author's observations on overspending are interesting and universal. Here are some of my takeaways, and some things to watch out for if you regularly spend more money than you intended.
This is a term used to describe what happens when we are persuaded to pay more than we meant to because a higher price is quoted for something, but a cheaper alternative also exists. This makes us feel like we are paying 'less' for something because theoretically, we could have spent even more. As an example, Whateley refers to what happened when credit card machines were introduced in New York taxi cabs. In short, drivers' tips shot up, with New York cabbies collectively making an extra $144 million that year.
This was due to the machines automatically suggesting a tip of either 20%, 25%, or 30%. Formerly tips had been around the 8% to 10% range on average, but they increased to 22% when the machines were installed, suggesting that many passengers picked either 20% or 25%, no doubt feeling they were getting off lightly because the option to pay 30% was right there in front of them, even though they might previously have added a 10% cash tip and felt that was generous enough.
This happens every time we pick a cheaper, or 'middle' option when a range of options are presented to us, whether we're choosing food off a menu, picking an insurance policy, or buying a bottle of wine. If there are more expensive options available, we feel like anything cheaper is a good deal, even though, objectively, it may still be very expensive for what it is.
The Endowment Effect
This is the idea that we overvalue things we already own or have committed to. It's why we keep paying for subscriptions or gym memberships we rarely use, and why we may be reluctant to shop around for a better deal on a bank account, credit card, or insurance policy. It's also why it feels so drastic to downsize our home, or buy a cheaper car, even though we don't need the amount of space, or car, we currently have. We are already committed to being the type of person who lives in a certain type of home or drives a certain car.
This one is closely linked to the idea of 'sunk cost fallacy' which I've written about before. When we've already spent a lot of money on something, we feel like we should continue to do so. The money we've wasted so far on that gym membership won't be quite so much of a waste if we just continue to pay it, and start going to the gym. Next week, of course.
Whateley touches on this in her book too, but she calls it 'herd mentality’. Buying something because it's 'in fashion' is nothing new, of course. It's the reason that people have dressed in a similar way, and indulged in similar pastimes, throughout history. Now, however, social proof has taken on a whole new importance.
With so many consumer decisions happening online, we are easily persuaded to patronize the brand that has a million Instagram followers or buy the product that has hundreds of positive customer reviews. Brands know this of course, and building social proof online is now a major part of any well-thought-out marketing strategy.
While customer reviews are indeed a good way to decide whether to buy a particular product, there's little justification for buying something you don't need and won't use, just because others are talking about it online. Social proof can make us feel like something is indispensable when really it's just a fad. And while this has always been the case, social spaces online tend to really exacerbate it.
Ultimately, spending money is complicated, and our brains, egged on by clever marketing tactics, and only too happy to persuade us that we need to buy something when we don't (our brain, after all, has no idea what actually makes us happy). If you're experiencing a lot of buyer's remorse, it could be due to these influences. Maybe it's time to become a little more aware of your purchasing decisions and commit to more mindful spending.