WE LIKE TO THINK we’re rational, especially when it comes to spending and investing. But in truth, all of us are susceptible to impulsive decision-making and unconscious persuasion. Result? We often end up wasting our hard-earned money.
According to traditional economics—which depicts humans as conscious, rational decision-makers—this shouldn’t happen. But this traditional view has been under attack since the late 1800s, when Thorstein Veblen explored conscious irrational decisions, such as buying items simply to impress others. His research laid the groundwork for what has become known as behavioral economics. One of the field’s best known academics, Richard Thaler, won the 2017 Nobel Memorial Prize in Economics, in part for his work describing how people can be subtly “nudged” into making decisions.
Building on this work, the emerging field of media literacy looks at how the media—in all its forms—is used to nudge people into making less-than-optimal economic choices. One of media literacy’s goals: empowering consumers to resist, or at least be aware of, such nudges. Here are five tricks used to influence our financial decisions:
1. Buying bling. Veblen was purportedly inspired to study behavioral economics because he saw a rich man strolling through a park with an ornate cane he didn’t need. Instead, the cane was clearly intended as a signal to others that he could afford such swag.
Dubbing such acquisitions “honorific booty,” Veblen may have been the first to identify how we waste money just to say, “I’m better than you.” Few stop to think how such acquisitions—whether it’s a huge house or an annual extravagant vacation—come at the expense of a far more satisfying purchase: a well-financed retirement.
2. Price as quality. When the free market system was first described by Adam Smith more than 200 years ago, consumers were familiar with most of the products they bought and most of the people they bought from. As knowledgeable buyers, this gave them the power to assess the quality of the goods proffered and thus determine a fair price.
Today, consumers need to purchase a host of items, from tires to computers, that they aren’t familiar with—and they buy them from salespeople they don’t know or over the internet with no salesperson involved. How do such consumers judge quality? Many, in a reversal of how the free market system should operate, use price to gauge quality. Who hasn’t, when opting for something they’re unfamiliar with, shrugged their shoulders and opted for the mid-level price? Obviously, this opens us up to being played by marketers, who raise the price just to convince people that quality is commensurate.
Even more worrisome is the lure of what’s now called a “Veblen good.” These are products, usually luxury items, the demand for which increases after a certain price point. It’s as if people want to pay more—and brag about paying more—to feel better about what they’re buying.
3. Limited offer. In economics, scarce things are valuable because there aren’t enough of them to meet demand. Rare things are those that are few in number, but which may or may not be valuable.
Marketers conflate the two by creating false scarcity with “limited offers,” where they exhort you to get their goods “while they last” or “before time runs out.” A major department store for years ended a clothing line with a “last call” sale, driving frantic consumers to grab what they could while they could.
My advice: Don’t be rushed. As my father used to say, “If it’s a good deal today, it’ll probably be a good deal tomorrow.” Do your research and give the slower, rational side of your brain a chance to weigh the pros and cons.
4. Bandwagon effect. We don’t like to think of ourselves as followers, but we are. That isn’t always bad; think of a group moving away from danger.
But the bandwagon effect can also hurt us, as we become infected by FOMO—fear of missing out. A lot of people couldn’t explain cryptocurrencies, but they also didn’t want to be the prospectors who missed “the gold in them thar hills.” Remember, by the time you hear “everyone’s doing it,” the price may have been bid up to bubble levels—and could be ready to burst.
5. Appeals to centrics. No matter how rational we are, we all have weak spots. Young people wish to be older; older people wish to be younger. Marketers know this, so they’ll couch their goods and services in terms of these gut values and vulnerabilities, which are known as “centrics.”
Whether it’s cookies or vacations, ads will show slow-motion families bonding and smiling as they use the product. One luxury car kept using the word “gorgeous” in its ad, as it alternated between sleek images of the car and shots of older, gray-haired men frolicking with young, sexy women, even saying, “Gorgeous gets in… everywhere!”
Financial firms also do this. An ad for Fidelity Investments showed clips of Paul McCartney’s life and told his story, finishing with the tagline, “We’ll help you plan for the next part of your life.” And yet I suspect McCartney’s success stems from writing and performing hit songs—and not because Fidelity advises him.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. His previous article for HumbleDollar was Gaming the System. Jim’s three-book series on teaching behavioral economics and media literacy, Media, Marketing, and Me, will be published in early 2019. Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at YourThirdLife.com.