The Strategist

Pain of Paying: Save Without Thinking

04/16/2015 - 17:30

Today, the phrase "life without money - the air without oxygen" is more than valid ever. Money guide our behavior and outlook, make feeling self-sufficient and independent possible. One of the greatest inventions of mankind has become the most mundane thing that we have to face every day.

However, as it turned out, not every person with a hundred dollar bill in the pocket can sensibly assess its value and make a rational decision to buy or to reserve for a "rainy day." Think about how often, standing in the shop and intending to buy another "right" thing, you ask yourself about the value of future acquisition - whether it will bring you as much fun as now in a few weeks? Maybe we should postpone this money and spend it later on something more important?

Dan Ariely, a professor of psychology and behavioral economics at Duke University, author of the bestseller ‘Predictably Irrational’, 2008, came to the conclusion that for most people saving money is not just difficult, but impossible.

Lessons of ITracking

Primarily, the problem exists due to the fact that people are not predisposed to perceive reality through the prism of the long-term prospects. Today we will try to understand the rules of behavioral economics to strengthen our offline and online offers. All human actions are based on the desire to meet their needs at the present time, with the thought of the possible consequences subconsciously blocked or not occured at all. It is very difficult to find a person whose actions would be based on the principles of long-term benefit.

Imagine that you have a choice: get half a box of chocolate in a minute or whole box in a week. After thinking a bit, after weighing all the "pros" and "cons", most would prefer the option of immediately enjoy delicacies. The same thing happens with the money: buy half a box of chocolate now or save and buy a box in a week?

Now let’s fast forward to the year ahead and imagine the same situation: half a chocolate box in a year or a year and one week? 99.9% of people will answer something like this: "If I waited a year to get half, why not wait another week and get the whole box?".

Psychology of Selling: feelings and prices

The second reason that explains why people are so hard to save, is the abstraction of money. Every time one shops, come to a restaurant or a movie, they think quite narrowly. You never think how many liters of milk could be bought for the price of one bottle of red wine, sitting at a table in the restaurant, don’t you? One of the strongest psychological barriers is the complexity of human perception of the alternative value of money. Ask a Toyota owner to think about what he lose in the future by purchasing this machine. It can be quite a shock for him!

The response options can be various and depending on what to compare:
Lose nothing;
From Honda to laptop;
From a two-week resort to 700 cups of latte; 1500 books, and so on.
A person who received $ 10as a gift may be confused just the same way. What is the boundary usefulness he can draw from this money, and how to assess the value of such a gift? Once again, we have an excessive amount of answers. It is these two reasons (abstract concepts like money and opposition now vs then) converted money saving in such a complex and impracticable process.

From the perspective of a rational approach to the economy solution to this problem, it would be better to teach people how to properly evaluate the "price-benefit" comparison to seek and find all the necessary information about goods and so on. But there is no guarantee that this method works. After all, if everything was done according to the principles of traditional economy, the problems with the savings would not have arisen.

According to Dan Ariely’s theory of the irrationality of human behavior, the best way to save is to change our environment so that we do not participate in the economy. Sounds a bit mysterious, but actually everything is quite simple.

The first secret is to light savings system automatically charges. Ideally, one estimates the number of money still unspent and puts them on the savings account at the end of each working month. However, as we have already managed to make sure, the risk to remain entirely without savings is too high in this case.

The opt-out plan to deduct a certain amount of money (usually 3%) of an employee's salary, may be an alternative. Its advantage is that the savings will be accumulated without any action on the part of the participant, and quite complex process of eliminating deductions will keep the person in the system.

Another popular method of saving is so-called Christmas clubs - informal systems of savings in the implementation of the team, when anyone can make a certain amount each month, without the right of withdrawal before the end of the year. With this system, you can achieve greater control over their desires, and over cash - as a result.

The second secret is a saving principle called pain of paying, designed by George Lowenstein and Jon Elster. The essence of this method - as opposed to the usual "cost-benefit" - is to compare how people would feel having spent a certain amount of money.

Imagine that there are two options to pay for a cruise in the Mediterranean Sea: 6 months prior to the beginning of the cruise, or at the end of the voyage. At first glance, it seems more reasonable to make payment of the second embodiment. But think about how would you feel in the last day of the trip, knowing that tomorrow your wallet will be much thinner. Not the most pleasant memories, right?

Dan Ariely has developed several methods of control pain of paying. Each of them is quite simple and effective at the same time. From the viewpoint of economy, it is appropriate to use Arieli’s methods to prevent excessive costs. Here are some of them:

Use cash when paying (so you can feel money melting)
Get notification from your bank account (this will help to keep accurate records of all expenses)

Save without thinking about it.

original by Dan Ariely,