We’re Terrible At Buying Things

We suck at buying things, we’re literally wired this way. According to psychological science, there are 2 common things about human nature:

  • We don’t always act in our best interests
  • We’re easily manipulated

We may not even realize it, but these 2 small little character traits affects the decisions we make everyday. Even if we’re good with our finances, we can still make mistakes, it just who we are.

Comparative shopping

Dan Gilbert, author of “Stumbling on Happiness” took a look at these character traits and applied it to the way we spend money and some of his findings were spot on.

To simplify things, Gilbert uses the example of wine shopping. You’re at the LCBO and you have 3 options for wine; $8, $27, and $33? Which one do you choose? The majority of us will choose the $27 bottle since we don’t want the most expensive one, nor do we want the cheapest.

Retailers are well aware of how we think; they strategically place items on the shelf to force our hands. Let’s replace that $27 bottle of wine with a $100 bottle. Our choices are now  $8, $33, and $100; all of a sudden that $33 seems like a deal, but in the earlier situation most of us wouldn’t have even considered it.

I learned a long time ago that more expensive doesn’t mean better, but in these situation, I for sure would fall into the majority. Who knew that buying things was such a mind bender.

We're wired to make poor decisions

Travel deals

This same psychology applies to travel deals. Let’s say there’s are 2 similar package deals to the Bahamas, one is on sale for $700, while the other is $1,200. Both sound great so after a few days of research you’re ready to book the $700 package, here’s the thing it’s now sold out, but the $1,200 deal is still available, do you take it? Most people won’t since we’re comparing past prices to the prices of today, as a result we lost out on some great deals, but that’s the psychology doing it’s thing.

This exact scenario happened to me when I was booking my accommodations for Japan. I found a decent price on a hotel but decided to wait a few days, when I was ready to book the price had gone up $50. I was pretty annoyed so I explored my other options and decided to book via Airbnb. I made an emotional decision based on a past price which was an emotional mistake.

Related: How much does it cost to go to Japan?

Emotional investing

When it comes to investing, we’re no different, for most of us it actually resembles the herd mentality. The herd mentality or mob mentality is when people follow certain trends. Take a look how the stock markets are doing and it’s not hard to see why many of us are a bunch of sheep.

When markets are doing well, everyone is buying in, trying to get in on the action. But when markets start to decline, the average person will start to sell off their investments due to fear. That makes us emotional investors since we’re buying high and selling low.

Long term investors know to do the exact opposite. They buy low and sell high. As long as it fits with their overall financial plan / asset allocation, there’s no need to make any emotional decisions.

Final word

As an index investor, I have no emotional attachment to the decision I make, yet I can totally become manipulated when it comes to buying things on a daily basis. Sure I have budgets in place that keep me in check, but in hindsight I haven’t always made money decisions in my best interest. I need to pick up Gilbert’s book and find out what else I’ve been doing wrong all this time.

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Image courtesy: Jing / Flickr

By | 2016-10-17T12:42:12+00:00 April 20th, 2015|Personal Finance|

10 Comments

  1. Stephanie@t he money savvy blog April 20, 2015 at 12:04 pm - Reply

    Even as an Index investor, I am pretty sure your decision to buy ETF # 1 over ETF # 2 was not entirely devoid of emotion. There are lots of psychological factors in investing too!

    • Barry Choi April 20, 2015 at 12:19 pm - Reply

      Stephanie,

      Fair point. Damn psychology messing with my emotions!

  2. Tonya@Budget and the Beach April 20, 2015 at 10:50 pm - Reply

    Hmm, I always buy the $8 wine…I’m not sure what that says about me. 🙂

    • Barry Choi April 20, 2015 at 11:22 pm - Reply

      Tonnya,

      I think it says that you’re a lot smarter than the rest of us.

  3. seattlegirluw April 21, 2015 at 11:37 am - Reply

    Yep, we’re emotional creatures. That tends to play havoc on our finances. We have to gear our financial choices toward what we’re comfortable with, rather than the ideal one.

    I’ve definitely always found it amusing how much people rush to stocks that everyone is jumping on. And it baffles me when people sell a stock just because of what’s probably a short-term dip. It always seemed counterintuitive when it comes to the adage about buying low and selling high.

    • Barry Choi April 21, 2015 at 12:29 pm - Reply

      Seattle Girl,

      Ha yes I never understood why people only like to buy things at their maximum value, that applies to both stocks and real estate. They let emotions get to them.

  4. Aldo Teodori April 21, 2015 at 4:28 pm - Reply

    I think emotions play a great deal. In everyday items, like food or clothes or gadgets is easier to pinpoint emotional reasons. In stock, is a little more subtle…but results can have gargantuan proportions. When a stock is ‘hot’ everyone wants it without stopping to think that it will start going down at one point, same with stocks going down, it seems that some investors believe the stock is gonna crash and burn and never make it back. Smart investors know that the market goes up and down.

    I’d say that the two emotions ruling investments are Greed (how far are you’re willing to go) and Fear (How much you’re willing to lose)

    • Barry Choi April 21, 2015 at 5:18 pm - Reply

      Aldo,

      Greed is definitely a major factor when it comes to stocks. People have no one to blame but themselves when the party is over. When it comes to shopping emotions do play a factor but at least generally speaking, the spending is on much smaller items.

  5. Aleksandra Sagan April 22, 2015 at 10:04 am - Reply

    All this reminds me of what I tell myself when I stand infront of canned goods at the grocery store: “Just because it’s no-name and only 69 cents doesn’t mean it’s any worse than the brand-name that’s a $1.29.” It’s a mantra that I find myself having to repeat over and over again because I’m so prone to want to reach for the $1.29 can of beans instead. Now I know why! 😉

    • Barry Choi April 22, 2015 at 10:39 am - Reply

      Aleksandra,

      Oddly enough I have no problem buying no name foods. Well its taken some trial and error to figure out which no name brands taste similar to branded ones, but just cuz it’s not branded won’t prevent me from buying it.

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