Why we buy: how to avoid unnecessary spending

We all sometimes behave thoughtlessly with finances, and some almost always. But many mistakes can be prevented by understanding how we think about money. Psychological research has revealed 10 distortions that influence our decisions.

1. Striving for consistency

One of the main causes of financial failure is the force of habit. People become attached to what they have already tried, as if not noticing other, better options. We tend to choose the same. And we continue to use the same goods or services, despite all the alternatives.

This trend has long been confirmed by a study of investment decisions. People remain loyal to the same pension plans, stocks and bonds, even when better offers are available in the market.

Changing old views is not easy, because it requires some effort. We are also afraid to regret our decision. But the benefit can only be seen by dropping blinders.

2. Justification after purchase

After an unreasonable purchase, we convince ourselves that we did the right thing. Most people refuse to admit mistakes — especially expensive purchases. Marketers are trying to lure us in by paying in installments and using tricks like a money-back guarantee. One has only to agree, as we already prove to ourselves that we did the right thing and begin to value the acquired item very much, because now it is our property.

Fight it! If the goods or services are of poor quality, or simply not needed, discard them. The legislation of most countries provides a return period — do not justify the purchase, return it!

3. The comparison trap

We always compare prices, and business knows about it. Therefore, the recommended retail prices go up and down. Some expensive items on a restaurant menu are included just to make the cost of other dishes look reasonable by comparison.

The comparison trap is also called the anchor effect. A certain price is fixed in our minds. This ruse is easy to fall into, but also easy to get around thanks to thoughtful comparison, which is not at all good for a restaurateur.

Use price comparison sites. Try to compare different product categories. Is the new iPad really more important than a whole month of eating, or three years of going to the movies, or a full wardrobe?

4. Possession effect

We really appreciate the things we own. For example, when you have to sell all sorts of rubbish, you are tempted to break the overpriced price.

That’s why we sometimes find used goods at completely wild prices. Unlike professionals, amateur sellers can never get over the emotional attachment to their property.

This also works vice versa. When bidding on eBay, it’s very easy to feel like you’re a partial owner of an item before you’ve purchased it. And it all ends in overpayment.

When buying or selling, remain impartial. Know that if you do not pull yourself together, your unconscious will take over.

5. Momentary «Wishlist»

Human creatures generally prefer momentary pleasures, and postpone pain for later. Economists call this hyperbolic discounting.

Here’s an example: When picking out a set of foods for the next week, 74% of the participants in Reed and van Lewen’s study chose fruits and vegetables. But when they had to decide what to take for today, 70% chose chocolate. This is how people are arranged: chocolate now, vegetables and fruits later.

It’s the same with money. Marketers are aware that we are being led by discounts and installments, therefore, they diligently hide future suffering. Unfortunately, under the tempting offer “buy now, pay later” is most often a very dubious deal.

To avoid knowingly unprofitable purchase, imagine yourself in the future. Imagine how the “future you” perceives the decisions of the “present you”. And if you don’t like it in the future, don’t do it now.

6. Fear of loss

People tend to sell when prices rise and hold when prices fall. This is our natural desire to avoid losses. This effect has been described in a number of stock market studies.

However, the fact that prices sometimes fall is a great clue. Those who manage to overcome the fear of loss end up winning.

7. Illusion of awareness

Advertising works only partly because we like familiar images, even if they are vague. We choose the understandable, despite clear signs that this is not the best option.

Whatever you buy, always analyze the reasons. If it’s just a big name, the advertisers have won. Small companies that can’t or don’t want to pay for expensive TV spots often offer great products and services.

8. Idealized Memories

Past decisions often seem to us better than they really are. This attitude haunts us when a similar opportunity presents itself again. We tend to think that the previous decision was great: a place to stay, buying a house or a car. This is approximately why the same financial failures are repeated: we forget that we made a mistake last time.

Before you take an important financial step, try to remember well what the previous decision cost. Take off your rose-colored glasses and don’t repeat your mistakes.

9. Free!

The slogan «free!» works magically, and marketers understand this very well. As research in the field of behavioral economics shows, many make completely stupid deals for the sake of insignificant freebies. Beware of free «buns»: sometimes there is a catch in such a purchase.

10. Loss of self-control

Many unwise spending comes from a lack of self-control. We believe we are in control, but we are powerless in the face of temptation. Research shows that people are depressingly optimistic, believing they can always control their behavior.

Don’t fall for the temptations. That is why it is so often advised to cut a credit card. We are much weaker than we think, which means it is better not to leave loopholes for ourselves.