How to Stop Yourself From Spending Money Like You Own a Lamborghini

You don’t own a Lambo but you spend money like you do

The science of decision making is, quite honestly, fascinating. Your whole life is full of decisions; every day you make decisions about food, people, technology, mood, your thoughts. Everything.

Do you have a coffee now or later? Do you read a book or watch TV? Do you have that $5 coffee or do you save that $5?

Well, the chances are you are in the habit of spending. If you’ve come here in the first place it might suggest that you are partial to a cheeky trainer purchase here or there (even though you’ve got ten pairs already) or maybe you have a coat obsession that you just can’t kick. Or possibly, quite possibly, you just want to know what science has to say about kicking bad spending habits. You know, ‘you’re asking for a friend’, it’s cool I get it.

Humans are pretty impressive let me tell you

Whilst the human body may be similar in anatomy to other animals, you and I are different from our fellow animals in many ways. Whilst we have a relatively larger brain (well-developed neocortex, prefrontal cortex and temporal lobes) our differences are clearer with our capabilities.

“Humans are capable of abstract knowledge and possess a rich language, reasoning and complex problem-solving abilities, creativity and a capacity for innovation, reflective learning, moral conscience, religion, funeral rites for the dead, behaviors that denote praise and punishment, and specific forms of social life and cooperation in the development of cultures and civilization.” (1)

Have you ever stepped back to wonder at the brilliance of a human? I mean you are quite spectacular. Not just you, I mean definitely you but not onlyyou. But let’s talk about you because you are reading this.

You have some quite incredible qualities. Like the ability to think, breathe, talk and get angry all at the same time. Or perhaps in a more accurate example, the ability to accurately predict the trajectory of a ball and coordinate both your feet to move in the right place and your hands to cup the ball as it enters your proximity.

The simple catch is a combination of incredible mathematics, coordination and brainpower. All of that happens over the course of a few seconds. Every day presents a whole host of challenges and problems for us to overcome, yet most of the time, you exit the day unscathed.

Human beings are pretty impressive.

How do we deduce the value of a glass of water and a rain jacket?

The science of spending and making decisions with money is quite the perplexing subject. Behavioural Economist Meir Statman at Santa Clara University, states that:

“If you go out to eat at a restaurant that typically charges $70 for a plate and you get your meal for only $7, it will taste better to you. But if you ate at that same restaurant without knowing the cost, you wouldn’t enjoy your food as much. Knowing the total amount saved gives savers immense pleasure.”

Similarly, Rory Sutherland, Vice Chairman of Ogilvy says that perspective is everything. Take for example the idea of unemployment. Those that are fresh out of University who are searching for a job are indeed unemployed. It’s likely that these folk will feel unhappy about this fact. Conversely, retirement is exactly the same state of employment, yet retired people seem to be very happy with their current unemployment. Two different sets of people who are framing the same employment status as different. In other words, they’ve got different perspectives on the same matter.

Sutherland argues that when it comes to decision making we need to apply three trains of thought in order to get to a conclusion that is ‘the sweet spot’ in other words, takes into account all facets of decision making to conclude something that it reasonable. Those three things are psychology, technology and economics. So how does this help us with our raincoat vs. water dilemma? Well, it’s that’s a tricky question.

One thing you will likely struggle with is this idea of understanding value. By value, I mean what something is worth. That’s not because you are different from anyone else. On the contrary, it’s because you are the same in many respects to the population around you. How would you put a price on a raincoat in comparison to a glass of water? A glass of water is vital to life in many respects, without it, well the water part, you won’t survive long. Does that fact mean it’s worth more than a raincoat?

A raincoat is an item that can be used multiple times, unlike the water which can just be consumed once. Perhaps, the effort that went in making the raincoat could be (in proportion to) much more than it takes to make a single glass of water (per raincoat per drop of water). You could measure that in total energy per cm of raincoat vs ml of water. Perhaps that would mean the raincoat is more valued.

But how do you make a decision on this? How do we conclude that one raincoat is much more expensive than a glass of water?

The use of context in everyday decisions

The truth is, it’s very hard to price things appropriately which then means it’s hard to make a decision on whether to purchase the item or not. It makes it near on impossible to put a price on a glass of water in context to a raincoat. Those two things are very hard to compare. One thing that does help us though, is context.

Context is the help we need to make a decision. How do you know you are looking at a good price house? It’ll perhaps be because you’ve looked at other houses in the area. You’ve counted the bedrooms, assessed the garden, took note of the size of the rooms and concluded that for the money, this one is a good deal.

So in order to compare things they need to be comparable. So for a glass of water, you need to reference something similar, like a glass of milk. Milk of course is different in many ways yet similar enough to compare. Hence why milk and water are in a similar (not the same) price bracket. It’s not as if a glass of water is $1 and a glass of milk is $44. For the raincoat, well how do you know that the coat you’ve decided to buy is a good price? You might choose to look at several different coats online. Weigh up all the important features to you and make a decision on which one you want.

In decision making context is everything, you have to know you are comparing apples with apples.

But this is about stopping spending — how to stop spending money regardless of raincoat or water

Dan Ariely, James B. Duke Professor of Behavioural Economics says that bad spending habits start with some questions. He states that “You might begin by questioning that habit. How did it begin? Second, ask yourself what amount of pleasure you will be getting out of it.” From his book Predictably Irrational.

When you make a decision to buy a raincoat or a glass of water or even a cup of coffee you have essentially said to yourself “I am willing to pay this many dollars for this thing”. It provides what’s known as an anchor. Let me explain.

Say you see a cup of coffee for $3 at your local coffee shop and you decide that you want to buy that coffee. The next time you walk past your local coffee shop because you’re in a rush and maybe you get a coffee for the shop just outside your work. This time the coffee is $4. $1 more for the same thing. Now the $4 coffee seems expensive and the $3 seems a steal. That’s because the $3 is your anchor. You are comparing the $4 to the original $3. Now consider if that first coffee was $5, you will feel as though the coffee just outside work is a bargain.

It’s likely that the decision to have coffee every morning is one of habit. It’s also likely that because it’s a habit you often ask yourself:

“Where should I get coffee this morning?”

Instead of:

“Do I want a coffee this morning?”

The first step in any purchasing decision is to question the function of it. Often with habitual spending, it’s difficult to get out of the cycle. That’s because it’s embedded like any other habit.

By asking the actual purpose of the purchase you start to unpick the habit.

  • Do I want another pair of shoes?
  • Do I need another pair of shoes?
  • Do I need a raincoat?
  • When will I wear this jumper?
  • What occasion will I wear this dress?

Questioning the function over just purchasing is the first step. The second step is to question the origin of this purchasing habit. Think back to the first time you started buying coffees on the way to work or buying online after you got paid. What sparked this habit and are the conditions still true for you to continue on?

For example, you may have started getting coffee on the way to work because when you first started work you were incredibly tired. In order to bypass falling asleep at work and making a horrible impression, you decided that the steep $3 or $4 purchase was worth it. After a few days of this, you experience this phenomenon called self-herding which is essentially when you make a judgement of your prior experience. I.e you have a tendency to follow the same decision you made in the past.

Now, 6 months later, you’re body has adapted to this way of life and you no longer need the coffee on the way to work. So you can start to wean yourself off.

Questioning both the need and the origin of the spending is just a few of the steps you can take to curb the habitual spending.

The top takeaways and conclusion

  • It is hard to put a value on two items that have no comparison or context to one another.
  • Once you do have the context you can make an informed decision about your purchase.
  • You make judgements based on past experiences otherwise know as self-herding.
  • You become anchored to the first price you are exposed to and therefore that becomes your context.
  • In order to influence future decisions to question the current spending worth to you, do not act like the purchase is a foregone conclusion.

Citations:

(1) Melé D., Cantón C.G. (2014) Human Nature and the Uniqueness of Each Person. In: Human Foundations of Management. IESE Business Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9781137462619_6

Science-led self-help. BSc Biomedical Science, studying MSc Behavioural Science.

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