Have you ever regretted buying something? (Or not buying something?) I know I have. It's no surprise that we don't always make perfectly rational spending decisions. As humans, we are sometimes prone to errors in judgment.
But we can become more mindful shoppers by learning more about our own biases, says behavioral researcher Samantha Lamas. In this article, we'll discuss a few behavioral concepts that can influence how people spend money. Understanding more about how these factors can distract us and influence our spending decisions can help us stay focused on our true reasons for purchasing something.
Choice Overload and Time Constraints
Imagine you’re in an ice cream shop. There are 20 different flavors to choose from. If you’re like me, you’ll narrow those 20 flavors down pretty quickly by eliminating all the ones that aren’t chocolate. But what if there were 100 flavors to choose from, and 20 of them were some variety of chocolate?
You skim the descriptions of the flavors, but you’re still not sure. There are so many different types of chocolate ice cream, it’s hard to tell the difference between them. Some are dark chocolate, some have caramel, some have peanut butter… Your friends have already ordered and paid for their ice cream, and now they’re waiting for you. As more time passes, you become aware of people in line behind you. Kids are asking their parents why it’s taking so long. You feel pressured. Should you choose a flavor at random? Maybe just pass on the ice cream and buy a bottle of water instead?
Having too many ice cream flavors is an example of choice overload. This is sometimes called the paradox of choice, because although having many available options seems like it would be a good thing, when there are too many possible choices, vetting all of them can seem like an overwhelming task. It can be even worse when you add in time constraints, which add psychological pressure to our decision-making process.
Of course, ice-cream decisions are never critical. But choice overload and time constraints can work in tandem to complicate all kinds of important real-life decisions, like college applications and choosing investment options on a 401(k) menu.
Here are some steps you can take to combat choice overload and time constraints, according to Lamas:
1. Look to existing solutions: For some decisions, automated solutions can give us an easy out. For example, in retirement planning, target-date funds already offer diversified solutions based on your age--allowing you to side-step the process of finding a suitable asset allocation. Some plans also offer solutions similar to robo-advisors, where a mathematical algorithm will make allocation decisions for your based on a few personal characteristics.
2. Prepare before jumping in: Before looking into options, identify a set number of attributes to prioritize. For example, if you are preparing to make a retirement decision, narrow down what metrics are important for you. There are plenty of financial data points available nowadays. But, given that we are only human, selecting a few data points to focus on can make it easier for you to make a decision.
3. Sleep on it: A surprise sale with a countdown can get anyone into a frenzy, but we can still prevent it from turning into a purchasing mistake. One way to do this is by setting up barriers to action. For example, make a rule where if an item is over $100, you must wait 24 hours before making the purchase. This will prevent you from being coerced into making an impulsive purchase that you may regret later.
Have you ever heard the expression "Keeping up with the Joneses"? As a society, we constantly compare ourselves to others, and those comparisons include what we own. Expensive car brands and designer logos have become shorthand in our culture for being well-off. They project an image that the buyer has plenty of money to cover basic expenses, and so much discretionary (or disposable) income left over that they can spend it on luxuries.
Unfortunately, that's not always the reality. Many people borrow money to buy luxuries--essentially, they take on debt to give the appearance of having extra money. A big reason for this is social comparisons. Morningstar research shows that people tend to compare themselves with those who are better-off, and this was strongly associated with negative financial emotions. In other words, we often choose to make ourselves feel bad about our own financial circumstances by measuring ourselves against those who have more.
Lamas outlines some things you can do to be more aware of how social comparisons might be affecting your spending:
1. Identify a Financial Role Model: It’s natural and unavoidable to compare ourselves with others, but we can control who we compare ourselves to. Instead of comparing yourself with social media influencers or wealthy financial gurus, focus your attention on a financial role model. A positive financial role model may be similar to you--in respect to income level, social standing, or other sociodemographic variables--but has a healthier relationship with their finances. For example, this person may have the same income as you, but they may have a larger savings account or no credit card debt.
2. Focus on your goals: Take some time to identify your financial goals and keep them handy before making any big financial decision. Too often, we lose sight of our goals because we file them away right after making them, often to our own detriment. Checking back in with your goals before making decisions can help you avoid purchasing mistakes, by making sure that purchase fits with your financial goals. Many times, the prospective purchases brought on by negative social comparisons, will not pass this step.
3. Change your environment: Some social comparisons may come from environments we can control. For example, for many of us, comparing our lives with those of social media influencers may be making us worse off. Luckily, there is an easy fix: Unfollow accounts that trigger negative social comparisons.