Why We Spend the Way We Spend

FF Fashion

Ma. Salve Duplito
Thu, Nov 20, 2008
Philippine Daily Inquirer, ANN


HAVE YOU EVER WONDERED why you sometimes skimp on restaurant meals or deprive yourself of your usual airplane model hobby purchases, and then all of a sudden buy a new leather bag or pair of shoes - just like that?

The urge to splurge can hit quick and fast during unguarded moments and before you know it, the trying-hard-to-be-frugal guy is separated with his money quicker than anything you have ever seen. These moments of irrational spending may or may not be major enough to cause deep dents in financial plans, but understanding why they happen - and when they normally do - will help you prevent the next one.

Drazen Prelec, associate professor of marketing at the Sloan School of Management, says in a study that 'people's complex behaviors towards money defy economic theory.'

For example, some buy lotto tickets habitually and invest in insurance at the same time. What's the big deal about that? Buying lotto is risky behavior while insurance shows risk-averse behavior.

While Prelec's findings are used mainly by marketing companies to improve shopping conditions to make consumers buy more, they provide fascinating insights on how people's relationships with money really are very complex.

One of his findings is that we all have personal rules when it comes to spending'rules that we think will keep us out of money trouble. One example would be never to buy an item if it's not on sale. When we don't live by the rules, we feel guilty. That guilt is what he calls a moral tax on consumption, which interferes with the pleasures that we get from buying what we buy.

Marketers take advantage of these findings by offering bundled pricing. A home theater system may have additional high-definition television cables included in the package and a set of speakers, plus a table. The cables and table may not be free, but you will feel better purchasing the entire set.

Credit cards, he says, are 'insidious' when people don't understand how they work, because they remove the pain of that moral tax or make it appear that the pain is not there. A separate study has shown that most people who pay with plastic tend to spend more than their budget.

Money, wellbeing and success

It is no secret that people associate success, happiness, contentment, and status with what they have, the brand of clothes they wear, where they shop, the size of their homes, or the kinds of car they drive.

Some have what would seem like less selfish or shallow reasons for spending: making children or spouses happy, or keeping relatives and friends close.

With the boom of the consumer economy and the creation of factories and plants all over the world that create anything from toys to home decors, we never run out of things to buy but most often find that happiness and contentment remain elusive.

Studies on the psychology of spending shows that culture is now easily determined simply by measuring what sells and the average consumer, bombarded by choices, finds himself first knee-deep and then neck-deep in consumer debt and headlong into a jungle of consumerism-driven race in status.

This becomes more complicated when parents who try to fit into society by adjusting to the income brackets of people two or more notches above them, unwittingly send signals to children, who in the end wants the same PSP or mobile phone accessory that their classmates and friends have.

How to fight the urge to splurge

Understanding how or why we spend means we have to look into whether we fall prey to the contrived psychological triggers that marketers cook up to remove the rationality in our spending.

Augustus J.V. Ferreria, a registered financial planner, is an expert on heuristics where he analyses people's spending patterns and customizes their financial plans based on his analyses. He recommends bringing a little notebook with you or using your mobile phone to jot down for a month anything that you buy - from gum to Spam - and what time. He says you will find patterns of spending you haven't noticed about yourself. That should show you why you spend the way you do, and alert you to triggers.

Some triggers you should watch out for are emotional, like loneliness from being away from home or fights with loved ones, advertisements, holidays and special occasions, sale season, and promotions at work. The list is endless.

After all, there's always a reason to spend if you want to find that reason. Taking control of your money will not happen by magic; it will require conscious choice.