Nobel Prize-winning family budget savings method

Nobel Prize-winning family budget savings method

For a long time, economic theory was based on the indisputable postulate: “The human acts rationally, and therefore does not take decisions at his own expense”. And all consumption models were based on this statement.

But in the 21st century, researchers won the Nobel Prize for a discovery that says it’s all complete nonsense!We are not that rational at all. And we can sometimes do completely stupid and spontaneous actions. We often make emotional and inexplicable decisions, and very often to our own detriment.

Here’s a simple example: imagine a situation where you need to buy a cell phone. What would you choose: buying a smartphone on credit or with cash? Let’s say you decide to buy a phone with cash, and you have $300. What do we usually do? We go out and look for the best possible option for $300. If we’re offered a higher-priced phone, for example $500, we tell the salesperson: “No, I have $300 and I want a model in that budget”.

And now let’s consider how our behavior would change if we plan to buy the phone on credit. Let’s say we only have $300 on hand, but we really like the model for $500. What happens in this case? You’re right! We will buy this model, even though it was not in our plans.

Why does this happen? Because of the several traps of our thinking:

  1. First, because we think that it’s not our money. We didn’t earn this extra $200 ourselves. We don’t have it. And we treat it like it’s not ours and spend it much more easily;
  2. Secondly, we don’t even see that money. We don’t feel it. And if we don’t feel it, it’s not there. And it’s easier to part with that money;
  3. And the third point: even if we realize that we are overpaying, it is easier for us to accept it if it is not plus $200 to your immeately expenses, but only plus $30 to the monthly payment. We start thinking: “What is the problem? Can’t I afford to spend that extra $30 a month?”.

As a result, you buy a phone that wasn’t originally planned, and with additional features you don’t need. As a result, you overpaid $200, plus you’ll be paying additional interest on the loan. That’s clearly not beneficial to you. But that’s what you’ve decided for yourself.

But it could be even worse. For example, if you came to the store not only for a phone, but also for a TV or other appliances. Imagine what would happen to your family budget if you buy it all on credit!

This behavior, by the way, explains very well the indebtedness of citizens in the U.S. and many other developed countries. It would seem that they are not stupid and educated people, but they are constantly in debt. How is this possible?! It’s simple: they don’t think rationally, they think emotionally.

How to avoid all this?

  1. You need to accustom yourself to a clear planning of purchases;
  2. You must avoid any spontaneous acquisitions. You need to avoid emotional and ill-conceived purchases completely, no matter how much you do not want this. You must decide in advance what to buy and how much to spend;
  3. You must discipline yourself, don’t give away your emotions in the store, not to listen to the salespeople. You must trust only your eyes and your mind;
  4. And, of course, you must refuse to make small purchases on credit. So you protect yourself from irrational actions. If you can’t avoid the temptation to buy something on credit, then don’t take your passport and credit card to the store.

Is there any proof?

The main proof of the irrationality of shopping on credit is a huge study of researchers, for which they received the Nobel Prize. Here are a few postulates from their study.

When shopping, people are influenced by many effects, but the key ones are two:

The effect of mental accounting

Usually we separate all the money we have. We create different accounts in our heads for money. For example, we have $500 that we got as a paycheck, and $500 that we got as a payout from the insurance company. There’s $500 there and there. They are the same money, and they have the same purchasing power and value. But just not to our brains:

  • The money that is our paycheck, we will spend carefully and frugally;
  • But the money we get from our insurance paycheck for us seems as easy money. And because is easy it can be spent on all sorts of nonsense. Easy money is always like that: “Easy come – easy go”.

Following this same logic, we divide the money into purposes and spend it in different ways:

  • If it’s about buying food, we’ll set aside a minimum of our money for that purpose. And even spending $100 at the supermarket will seem gigantic to us;
  • If it’s about our status, our appearance, or our vacations, we’re much more willing to part with the money. And we can spend almost all of our earnings in a month.

The effect of ownership

It consists in the fact that we value more something that belongs to us than the same thing that is not ours.

This trick is used very well by sales clerks. They know that if they give a person in a store some thing to hold in his hands (or get into a certain car), then after that the other thing will be less interesting to him. Going back to the example above: the salesman gives you a $500 phone to hold, even though he knows it costs more than you planned.

But what’s even more interesting about this study: the things stores try to sell us and put in our hands don’t have to be different. They may even be the same. Thus, according to the study, people were more willing to buy items they had already held in their hands than those on shop window, even though their price, features and appearance were exactly the same!

These are such interesting and insidious traps of our thinking and consumption. There are many more discoveries in this direction. If you want to better explore this topic I advise you to enter the phrase into a search: “behavioral economics”. You will find a lot of interesting things there.


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