How Behavioral Economics Has Made Me A Better Shopper

How Behavioral Economics Has Made Me A Better Shopper

Are you a rational consumer?
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For the first time in my life, I need to do my own grocery shopping. So at least once a week you'll find me (along with my wife) at Aldi or Schnuck's, getting groceries for the week. The both of us being students we try and maintain some kind of budget, which has lead to me being more aware of how much we pay for some of our items.

Namely, what I've noticed is that many items cost twice as much at Schnuck's, then at Aldi, and yet - I still shop at Schnuck's, even if it does cost more. But I comforted myself, saying "Jake, the only reason you would pay twice as much would be if it's twice as good". This left me content after a while, but eventually, I found myself wondering - why do I buy what I buy?

At one point, economists thought that we bought what we did because it was the most rational decision, but the emerging science of Behavioral Economics has changed all that.

It seems that part of our decision is based on our budget. In essence, what we buy will fill how much money we've decided to use for buying something. Confusing? Let me try and explain, if my milk budget is $10 a month, then I have no problem spending all $10, even if I could get away with only spending $5 a month if I shopped at Aldi's.

Shopping at Aldi's would be the smarter choice, I would have an extra $5 to spend on cookies or something, but my spending on milk has expanded to fill all $10 a month, leaving me without any extra cookie-buying money.

This idea was demonstrated by Richard Thaler, who just recently won the Nobel prize in Economics, or as it's technically called "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" (the reason for the weird name is a story for another day).

He, along with other behavioral economists, has been reshaping how we see consumer behavior, even down to why I spend more than I should on milk and cookies. Thaler's work is surprisingly easy to read. He likes to use easily repeatable demonstrations, and his work is worth looking into. If you want to read something he wrote, here's a New York Times article he wrote.

One popular demonstration of his he often did with his students while he was a professor at Cornell. He would pick a student and tell them they would remain anonymous, and that he would pick another student, and the two of them would split $100, student 1 would decide how much each would get. Now think to yourself, how much would you share with the other person? Would you want all of it, they would have no idea you took all their potential money, you're anynomous. Or would you split it 50-50? Thaler found most people want to split it 50-50. Surprised? Most economists were too, "fairness" isn't rational. Here Thaler showed that we use more than just rationality to decide how to use our money.

He later expanded this experiment where the second student could reject the amount offered to them, but if they did reject it then no one would receive any money. Traditional economists would say that as long as they received some money anyone would accept, but the less they were offered the more likely they were to refect the money. Think about that, even though they would get a free $20, they turned it down because someone else would (unfairly) receive $80.

What do you think of this? Are people too irrational? Or would you reject $49 because of your sense of justice? If you want to read more about his work here is a Vox article I looked to for writing this post.

it's worth looking into why you've decided to buy what you buy, I know in at least my life it's meant some extra spending money for cookies along with my milk.

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6 Ways To Save Money As A Broke College Student

Money saving tips so you can afford adult life while also paying for an expensive tuition.

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It is difficult to work, attend college, and make all your payments on rent, tuition, and bills, (not to mention finding a little money to spare on yourself). These are six ways to save that have helped me in this money stressful time and that you should use too in order to reduce the expenses of adulting.

1. Saving money on rent.

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Apartments are cheaper than houses because most include some of the bills in the rent cost. Make sure to check what amenities apartments offer such as free wi-fi, trash removal, or water included. When choosing roommates the more the better for cost. You should get at least one roommate because it is difficult to afford even a studio apartment living on your own. If you want pets you should choose a place that doesn't have pet rent because even if you have a large non-refundable pet fee it is cheaper in the long run then paying twenty a month per animal.

2. Saving money on bills.

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If you choose to live in an apartment complex, having an apartment on a higher floor will make your electric bill cheaper in the winter because heat rises. Even though your electric bill will be higher in the summer you can afford to work more because classes won't be in session. When purchasing light bulbs get ones that are energy efficient and use lights with batteries to help save on the electric bill. Also make sure to turn off all lights when you aren't in the room. You can save water by not running the faucet when you brush your teeth. Anyway you can think to conserve water and energy use that to your advantage.

3. Saving money on food.

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Your best friend is buying in bulk when you go to get groceries. I personally buy ten pound ground beef logs, cut them up, and place them in the freezer to use later. Everything is cheaper when you buy in bulk and you save time grocery shopping. If you don't know how to cook now is the time to learn because frozen and fast food eats up your money. You should also go to your local food bank if you are really struggling because everyone has to eat. Don't be afraid to ask for help if you need it! Going without food to pay your rent is not something anyone should have to do.

4. Saving money on furniture.

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You should buy used if at all possible when finding furniture for your apartment or house. Living in a college town has its perks because people are constantly moving you can find great deals at garage sales or on craigslist. For instance I got my couch for free, I just had to move it out of a graduating students apartment. You can also check out thrift stores and consignment shops in your town.

5. Saving money on entertainment.

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There are a lot of deals and discounts for college students so take advantage of that for entertainment.. For example movie theaters usually offer a student discount and if you go to a matinee showing, tickets are even cheaper. Find out when your local bar's happy hour is and use it. Also see what meal deals are offered by restaurants around you, such as 3 items for 10 or specials on Thursday nights. You can also use apps to find coupons, my personal favorite being pocket points because it rewards you for studying.

6. Saving money and side hustles.

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Put back money during the summer in order to have a backup fund for when things get crazy busy during the school year. Scope out banks and find out what interests they offer on savings accounts in order to increase the amount of money you have saved over the years. If you need extra money you can get paid for donating plasma and you can sometimes find research studies that will offer participants cash for things as simple as just an opinion. There are also baby sitting and pet sitting apps you can download to get one time gigs if you are low on funds for the month.

These are all great tips that I have been taught or have learned living as a broke college student. It isn't easy living life in the adult world and pursuing a degree at the same time. I hope these tips will help you save money and keep you out of hard times.

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11 Financial Tips For College Grads Who Don't Know Where To Start

Most people learn how to navigate their finances as they go, at the cost of making several mistakes and starting good habits later than they should've. Don't be like most people!

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Adulting is hard, especially when it comes to money. If you're like me and you took a personal finance class in high school or college, you probably don't remember much because the information wasn't relevant to you at the time. Well, now you're almost done with college and you're ready to be welcomed into the real world as a freshly-minted adult. Suddenly you realize that class was probably one of the most important classes you ever could've taken.

Here are 11 tips to start making money moves today.

1. Start building your credit

It may not seem important now, but it's a good idea to start building your credit early. In three to five years or so, when you're ready to apply for a car or home loan, you're going to want to be approved to get the best interest rates, and that means having a credit score of at least 760. See tips two and three for more on how to increase your credit score.

2. Open a credit card if you don't have one already

One huge factor in your credit score is how long your oldest credit card account has been open, so you want to make sure to start early. A first card many people get is called a "secured" credit card, which basically acts like a debit card so the bank knows you won't go all "Shopaholic" and max it out. Make sure to pay every single one of your monthly payments on time and in full. No excuses, no exceptions.

3. Make all of your student loan payments on time and in full

JUST DO IT.

4. Embrace the concept of paying yourself first

Paying yourself first is a concept that many millionaires, even billionaires, swear by. Decide how much of your income you want to save. Then set up a portion of your paycheck to deposit directly into your savings before you can even think about it. The rest can go to your checking account for spending on bills, food, rent, and other expenses.

5. Build a three- to six-month emergency fund

Did you know that 33% of Americans would struggle to pay $1,000 in an emergency? This is a serious issue. You don't want to ever experience living "paycheck to paycheck," let alone have a minor crisis throw your life upside down. That's why you're going to build this emergency fund before you do anything else with your money. Think of this fund as something that you can't touch until you absolutely need it. If and when that time comes, you'll know, and you'll be so grateful that you were smart and were prepared.

6. Open a Roth IRA

There are so many things to be said about Roth IRAs and why you should get one as a new college graduate. In short, IRA stands for Individual Retirement Account. A Roth IRA is unique because any money you put into it is taxed now, so you won't have to pay taxes on it when you're retired and ready to use it. The main benefit: you also won't have to pay any taxes on the money you earn in the account. In addition, because you're young, you get to take advantage of the power of compound interest for a long time before you retire. This could potentially earn you hundreds of thousands of dollars. The best time to open a Roth IRA was yesterday. So go do it now!

7. Contribute as much as possible to your 401k

A 401k is basically an investment bank account that you can't use until you retire, and it will be taxed once you start using it (so it is not taxed now). Many employers offer 401k matching, and they open one up for you when you start your first job. If your employer offers 100% matching up to 6% of your salary, that means that if you can afford to put 6% of your income into your 401k, your employer will also contribute the exact same amount. Listen to me: this is free money. I like free money. You like free money. Take it.

8. Open a high-yield savings account

This is 2019. Don't keep your money in cash or in a regular savings account, where it'll depreciate 2-3% in value every single year it sits there. Get yourself a high-yield savings account, in which interest rates are anywhere between 2.0 and 2.25%, and watch your money make money while you sleep.

9. Start tracking your spending

Since it has become much easier to make quick and painless purchases these days, you should definitely be aware of your spending. I personally like to use a free app, like Mint, that does all the work for you because it puts all of your financial accounts (ie. savings and checking accounts, investments, loans, assets, etc.) into one place.

10. Create a monthly budget for each of your spending categories

These include food, housing, transportation, entertainment, subscriptions, health and wellness, and maybe more. You should know the things you always buy on a monthly basis and how much they typically cost. Comparing your budget to what you really spent after a month will show you exactly where your weaknesses are. Try to stay at or under your budget for each category every month unless there's an unusual event, like a vacation or a car repair.

11. Learn the basics of investing

Compared to the other tips on this list, this is one you can put on the back-burner for a bit. However, that doesn't make it any less important. It's critical for everyone who is financially independent to understand the basics of stocks, bonds, Exchange-Traded Funds, Mutual Funds, REITs, and more that you can use to diversify your portfolio, including in your new Roth IRA and 401k!

What are you waiting for? Up your financial game!

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