The Psychology of Spending

Contents:

I.                What do we mean when we say ‘The Psychology of Spending’?

II.             How does the Diderot Effect enter the picture?

III.           What is Impulse Buying, and how do stores manipulate us?

IV.           How can one escape this trap of Impulse Buying?

First things first, when we say ‘Psychology of Spending’, are we using the word ‘Psychology’ figuratively or literally?   Well, guess what, we really mean that we are diving into the scientific research of the brain when one begins purchasing items! This is the research of human behaviour, cognition, and emotional reactions regarding spending choices. It’s not a figure of speech— it is the examination of how the brain and its different parts work, and what all thoughts run across the mind, and the social and emotional triggers when it comes to buying a product.

For example, under this heading of Psychology, you get to know about the parts of the brain like the Prefrontal Cortex, the Nucleus Accumbens, the Insula and about how hormones like Dopamine, Adrenaline, Cortisol, etc., can force you to do things, of relevance here is buying unnecessary items.

Example: Suppose you notice that those trending chocolates are finally in your neighbouring store. You barge into the store, pick up your chocolates, and then see that some limited edition chips are available at 50% off, you categorise them as a ‘must-grab’ and buy 3 packets without hesitation. As you are paying at the payment counter, some chewing gum kept over there catches your attention. You take them with you, too.

Let us understand the role of the aforementioned hormones and areas of the brain that came into play with this example.

First of all, when you saw those chocolates, your nucleus accumbens got excited, and adrenaline shot up, anticipating the reward. Then the example says that you wanted to buy the trending chocolates. This act can be classified as an act of FOMO (Fear of Missing Out), as you went to buy the chocolates just because everyone else is trying them. This act of FOMO is closely linked to the Prefrontal Cortex, which helps in making thoughtful financial decisions. Then you see those chips on sale, your dopamine (the pleasure hormone) overrides your logical ability.  

The Insula is the part of your brain that causes hesitation before making a financial transaction. Cortisol is the stress-inducing hormone, which gets reduced in some people after shopping.

Now, we move on to the Diderot Effect, which cannot be explained explicitly without an example.

Example: Say you get one wall of a single room of your house painted. Then you will notice that the other walls of that room appear dull when compared to the shining wall. You will get the whole room painted, and then the other rooms will start to look shabby, even though they are unchanged. Now you paint your whole house just to find that the furniture does not suit your “new” house. What options do you have? Leave everything as it is, or change the furniture to suit the newly styled house? Obviously the latter! “If I leave my house unorganised, what will others think of me?” you say. Then you get the furniture changed, and now your house is the most beautiful one. Such a happy culmination until you check your bank balance!

This example explains how the Diderot Effect influences consumer behaviour! This psychological phenomenon occurs when an initial purchase leads to a spiral of additional spending. Essentially, once you upgrade one aspect of your surroundings, everything else starts to feel outdated, creating a desire for further purchases to maintain a cohesive aesthetic. This is what happened with the French Philosopher Denis Diderot, after whom the effect has been named. He was gifted a very stylish piece of clothing. Compared to that new clothing, Diderot’s other clothes started to appear out of fashion. Like you in the second example, Diderot, too, replaced his whole wardrobe with new clothes. He realised how these huge companies fool the common man using such techniques that directly attack the human emotions. He decided to write about this strategy in 1769 in an essay titled Regrets for My Old Dressing Gown, or, A Warning to Those Who Have More Taste Than Fortune. 

The first example that we gave you is the classic example of Impulse Buying. Impulse buying can be simply defined as unplanned shopping, which is powered by emotions. It happens when a consumer suddenly decides to buy something without prior intention, typically influenced by factors like discounts, product placement, or psychological urges.

The main question is, “How do stores trick us into buying things we don’t want to?”

To answer this question, we will take a very small example, or should I say, that we have already taken that small example? Just in case you have a pretty sharp eye, you might have noticed that in the first example, we discussed about every single line in detail, except the last one.

“As you are paying at the counter, some chewing gum kept over there catches your attention. You take them with you, too.”

This is the simplest, yet the cleverest trick used by these general stores and grocery shops. They keep cheap items like chewing gum and chocolates at the payment counter. How does that help? Well, if you are exiting the store after buying a lot of stuff, your reaction will probably be like, “I am already paying thousands, buying this ₹2 gum will hardly make a difference.” And you will simply purchase that too. Or, if you are not shopping much, your reaction may be like, “I have hardly bought anything, I can certainly buy this ₹2 gum.” However, the biggest trap set up by these retail giants is that you are buying that ₹2 gum which was actually manufactured at the cost of ₹0.50. This is where they earn tons of profits. Next time you are leaving the store, always remember that whatever items are on sale at the payment counter are those that generate the maximum profit percentage for the companies.

Now we will take one last example.

Example: Say you are a regular customer of a coffee shop. You grab a small cup of coffee costing ₹250 every day from that shop. One morning, the employee of that shop advises you to buy a gift card for ₹2500 and whatever purchases you make by the end of that month, will cost you half of the actual price. Now, from that day on, you will be buying a large coffee instead of the small one, which was supposed to cost you ₹600, but your super saving card will make you pay only ₹300, more than what you used to pay for your small coffee.

Before buying the card, you were spending (₹250 ´ 30) = ₹7500, and now, after purchasing the card, you will be spending (₹300 ´ 30) = ₹9000 + ₹2500 (i.e., the cost of the card) = ₹11,500. Moreover, you will visit the shop more often or bring more people with you, thus increasing the number of customers for the shop. So, who is actually making the profit after buying that card? Is it you who is happy thinking that paying half the price is advantageous for you, or the company that lured you into its trap?

This strategy can be termed as “Price Bundling and Psychological Discounting”.

Before bidding goodbye, we must not leave the question “How to escape these traps that lead us to impulse buying?” unanswered.

There is only one way to not fall into these luring traps – learn to control your emotions. You can start paying in cash, as people usually waver while paying big sums in cash, which mainly goes unnoticed while using a card or UPI. You can also use the Delayed Gratification Strategy, which implies the 24-hour rule. In this, you just have to tell yourself not to buy something today, but come back to the store tomorrow. Generally, the urge to buy that particular thing will perish. (Also, now you know what strategy your parents were using on you to fool you throughout your entire childhood!) You can also try limiting yourself to buying only the necessities by carrying measured money with you.

After all, you cannot spend too much on chewing gum or chocolate, as:

“You must gain control over your money, or the lack of it will forever control you”

-        Dave Ramsey