Though money isn’t everything in life, it’s the most valuable and useful things in life as it helps in meeting all your needs. Though everyone earns money, only a few have mastered the art of using it wisely, while many others spend money lavishly on things which aren’t really worth for.
If you ever wonder ending up spending money on things that really don’t matter and unable to get rid of this habit? It could be a psychological problem that’s encouraging you to spend money unnecessarily.
1. Delayed Reward Discounting
According to psychologist Carla Marie Manly, people who suffer from this tend to overspend and misspend while they can actually save the money. According to Carla, these types of people are highly impulsive and don’t think of future rewards and act on the instinct.
2. The Scarcity Principle
It is an economic theory that examines the relationship between supply and demand. When applied to the field of psychology, the scarcity principle basically states that the less available something is, the more desired it becomes.
According to professor Vassilis Dalakas, people suffering from this feel more pressure to buy something because they think it could become unavailable soon.
For instance, when shopping online, you might see a message like “limited-time offer” or “only two left at this price.” Those claims may or may not be true, but, either way, you feel a sense of urgency to buy.
“A consumer who was debating whether or not to buy that product is more likely to go ahead with the purchase out of fear that it will go away and he or she will miss out,” Dalakas explained.
3. Sunk Cost Fallacy
According to economics, a sunk cost is any past expense that has already been incurred and can’t be recovered. In case of a business, for example, sunk costs might include machinery or equipment that was purchased. Since that money has been spent, it isn’t factored into future decisions regarding spending.
But sunk costs also come up in our daily lives. And, unfortunately, we sometimes make poor spending decisions based on money, time or effort spent in the past. That’s known as the sunk cost fallacy.
One common example is a gym membership. Maybe you signed up a few months ago and had to pay a hefty initiation fee. However, you don’t really love going to the gym after all and rarely make it. Even so, you keep paying your monthly dues because you don’t want to “waste” the money you already spent to get the membership.
The truth is that you aren’t getting that money back regardless of whether you keep going to the gym or not. So why not save yourself the future cost of membership dues and just cancel?
And buying something you don’t need just because you spent a whole day at the mall doesn’t make sense, either. Quit while you’re ahead.
According to Dalakas, one more psychological principle that causes people to overspend is known as “anchoring,” which involves how people evaluate price points when making decisions about purchases.
For example, say you’re shopping for an item with a purchase price of $100. However, that item was marked on sale for $50. It’s likely that you’ll focus on the initial price of $100 (the anchor) and therefore consider the new price of $50 a great deal ― even if it isn’t. The original price might have been inflated, or you might not really need to spend the money in the first place. “By concentrating on the anchor, we are actually thinking more about the $50 we are saving than the $50 we are spending,” Dalakas said.
5. Social Facilitation
At times, being in the company of other people will help you in making better decisions. This is known as social facilitation, or when the presence of other people pushes you to achieve better results. For example, you might run faster if you’re racing against other runners instead of a clock, or work more productively in an office environment than at home.
But in terms of your spending, social facilitation might actually work against you. Auctions are a perfect example of how being around other people can encourage you to spend more than you would if you were alone. The idea that others are all vying for the same item creates psychological arousal and makes rational decision-making much tougher. But you don’t have to be in the throes of auction fever for social facilitation to take hold; simply spending money with other people around can cause you to make irrational decisions.