The season to be jolly is officially over and it is that time of the year where people are starting to borrow money. This behaviour seems to be the norm and we have become so comfortable with this state of being. We have learned to embrace our “brokeness”.
Studies have shown that this bad habit is a recurring mistake which people often find themselves in when they are younger. We can blame Instagram and other social media platforms for promoting a make-believe life which prompts us to be reckless with money; however, that would be shallow as the problem is older than social media and it deeply stems from our emotions.
How we spend our money is determined by the feeling we anticipate when we have purchased something.
Humans are impressionable, impulsive, short-sighted and optimistic in nature. We are impressionable because we spend money on items that makes us happy, hence malls, vacation packages and events will normally promote “joyfulness” to lure people into spending during December. Having a relatively large amount of money at once tends to make us impulsive and short-sighted as we place so much value in consuming things immediately only to later regret it. At the time of purchase we are only concerned about filling our emotional void, therefore making choices that are not in line with our long-term interests.
We are always optimistic about the future, some people will even borrow large amounts of money in January as they are hoping to earn a higher income to enable them to pay back their loans. My point is we are in most cases influenced by the environment around us and we tend to be guilty of shallow thinking.
We begin the year on a positive note as we always plan to be better than the previous year. We plan to lose weight, save more money, stop procrastinating etc., however after 3 months we resort back to our natural selves. This leads to the time inconsistency problem, where people or an organisation would set out a plan or strategy for a specific time frame and when it is time to act then they would deviate from the plan. As a result, it is easier for us to go back to our comfort zone as we feel safer and secure with habits familiar to us. We thus follow the same kind of pattern year on year and from generation to generation, hence the study of behavioural economics is so important.
Behavioural economics is a study of economic analysis that uses psychological insights into human behaviour to explain economic decision-making. It focuses on the irrational behaviour of humans, which is different from mainstream economics as there are less mathematical models to prove human behaviour.
Factors such as imperfect self-control and social preference play a huge role in the making of decisions, as people tend to make decisions that they will later regret. Therefore, it is important for economists to understand human behaviour rather than always assuming people are rational and make calculated decisions.
However it is not all doom and gloom for the human race, we are actually becoming better and smarter with time.
Often as people get older, they learn from their mistakes and want to have more self-control over their finances. This might be too late for some as people at that stage of their lives they are close to retirement and would have to face the harsh reality of retiring without enough savings. The problem is that people devalue the future. For instance, they buy a lot on credit and, as a result, they buy less over the course of their lifetime thus they using most of their money to pay previous debt. We underestimate the cost of paying back credit and overestimate our ability to repay the loan in future.
I must say it would be nice to have a bank that truly had our best interest at heart, like one that would introduce a type of account that would freeze a certain percentage of our money during December and release that money on the 2nd or 3rd of January. But then again banks are there to maximise their profit. Giving out loans is more beneficial to them than holding people’s deposits who will withdraw them when the New Year dust settles.
Behavioural economics can help business understand consumers through the combination of psychology and economics. As well as assist consumers understand business practices (like how we have noticed that food is cheaper in December but hiked in January and the opposite notion on clothes). With all this information that we have, we should be rational in the way we behave towards our spending habits, but we ARE humans and emotions will always prevent us from being rational. My advice is that sometimes we need to go against our natural self and strive to stretch past our comfort zones; maybe, just maybe, we will beat the monotony and be savvier with our money.