• Agnes Chikukwa Hove

Behavioural Economics 101

Many South Africans live beyond their means. Did you know that South Africa has an overall savings rate of only 3%, which is compounded by the changeable economic environment? Currently there are 25 million credit-active consumers, however, household debt as a percentage of disposable income is at around 72%. What drives us to spend too much? There can be numerous reasons why we overspend. Behavioural economics provides us with some insights as to why we go over budget and how to curb the impulse.

1. Opportunity cost neglect

In a world of scarcity, choosing one thing means giving up something else. When we spend money on one thing, it’s money that we cannot spend on something else, now or later. So there is an opportunity cost to everything we do. And that cost is expressed in terms of the next-best alternative. For example, the true benefit of buying a new car can be assessed in terms of other equally significant items we could have done with the money.

2. Special occasion

We tend to overspend on “special occasions” (birthdays or Christmas), because we don't keep track of just how many of them we have. Consequently, we end up spending over above and beyond our normal budget. Failure to incorporate an exceptional purchase into our budget as one in a series of special purchases can encourage overspending. You can overcome this by budgeting for infrequent expenses by creating special savings accounts earmarked specifically, say, for birthdays.

3. Present bias

Present bias occurs when individuals place extra weight on more immediate rewards than those in the future. For example, my future self may want to buy a home, but my present self wants to go away on holiday. The more we disregard our longer-term interests in favour of immediate gratification, the more likely that we will have the overspending problem.

4. Hard cash versus credit

Present bias also explains why people have an easier time spending money on credit cards as opposed to spending real money. Paying with cash is more painful than paying with credit cards. The main psychological force of credit cards is that they separate the pleasure of buying from the pain of paying. So if you want to get your spending under control, stop using credit cards.

5. The “what the hell” effect

The so-called “what-the-hell" effect suggests that falling off the wagon causes a feeling of failure, which leads to more indulgence. This is a case when minor lapses grow into self-control collapse (“If I’ve already messed up, I might as well go all the way”). For example, an amount of, R 800 for dinner in the context of a R 25 000 monthly credit card bill seems small, less significant, and less painful than it does on its own. This is a common bias, especially where the credit card is involved.

6. Low on willpower

Willpower refers to effortful control that is exerted with the purpose of controlling our impulsive behaviour. Willpower can be viewed as a resource. When resources are depleted, people tend to act on impulse and are more likely to be swayed by desires, urges, and cravings, although they may regret them in the long run. This insight suggests that shoppers who are distracted with music or displays will likely increase impulse purchases. In contrast, being deliberate allows one to see the overall context and be less concerned with sensation.

7. Retail therapy

People admit engaging in “retail therapy” which they say results in immediate improvements in their mood. When we are feeling down, we tend to splurge. Shopping allows people to visualize themselves in a “better” life, where they’re dressed in nice clothes or surrounded by nice things. Buying makes these visualizations a reality.

8. Shopping addiction

Shopping addiction is characterised as an impulse-control disorder. About 6 percent of the population could be considered compulsive buyers. This disorder exists along a continuum. There are excessive shoppers, and there are compulsive shoppers. They buy things they do not need and often cannot afford, and place their work, their families, and their mental health in jeopardy. Some of those people who end up in bankruptcy are binge buyers, suffering from a disease similar to alcoholism. The most effective first step for treatment is to identify why and how shopping initially became a problem. Experts suggest starting a journal to keep track of your triggers.

9. Self-justification

People are concerned with justifying their choices to themselves and to others. Making sense is a deep human motivation, but making sense is not the same as being correct. For example, the person who has bought a luxury item, but feels guilty about it may try to alleviate his guilt by coming up with additional reasons that justify his choice, such as “it was on sale, I had to buy it.”

Hopefully the above gives you insight into the reasons why you overspend and how you justify your spending. Once you understand your weakness you are better equipped to find ways to deal with it. Happy saving!

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