As a kid whenever I was given money, my parents would often remark that it was burning a hole in my pocket. In other words, I felt I had to spend it right away. But, hey, I was just a kid and seeing my 5-year-old son acting in exactly the same way reminds me of my short-term thinking back then.
In economics, it is known as hyperbolic discounting which is our psychological tendency to overvalue rewards that we receive sooner compared to long-term ones. A child would prefer to buy any toy now rather than wait to have something they might prefer at a later date. My son did this with a Star Wars light sabre he bought with the ‘lucky’ money his grandmother gave him for Chinese New Year. He didn’t go into the shop wanting a light sabre, he didn’t even know they existed until he saw it on the shelf, but no amount of encouraging him to wait until he saw something he really wanted would convince him otherwise.
And guess what? That’s right, the novelty of it very quickly wore off and now it sits unused with a host of other ‘must have’ toys. Of course, I was no different, had light-sabres had been available to 5-year-olds and not just Jedis back in 1983 I’m sure I would have ‘had’ to have one too.
And, despite having grown up, adults are no different. We still have a tendency to overvalue immediate rewards, that’s true of gadgets, fast cars and even final salary pension schemes. Big brands know this and play on it with their advertising; they appeal to our emotions knowing that is what really influences our decision making despite what rational logic might say.
It turns out that this cognitive behavioural bias isn’t unique to humans either but is present in other animals, which makes sense from an evolutionary perspective; if our hunter-gatherer ancestors came across a potential meal they weren’t likely to forgo the opportunity to hunt it now just in case a bigger and better meal turned up later on. The need to survive meant they had to take every opportunity as it came along. This is true of lions, tigers and even lab rats. Or as the saying goes:
A bird in the hand is better than two in the bush.
If you are thinking about buying anything, but particularly more substantial items, ask yourself these three questions before committing to it:
Is it essential?
Will it bring me/us closer to achieving my/our lifetime priorities?
If I don’t buy it, what better way can I/we use the saved money?
By taking the time to reflect on the decision rather than acting impulsively you will invariably make wiser purchasing decisions and avoid buyers’ remorse. Either, you will give yourself time to think logically about the decision and perhaps decide it isn’t essential and it won’t help you achieve your priorities. Or, you may decide, rationally, that it does and your post-purchase evaluation will remain positive.
This expenditure questionnaire can help you understand the long-term, true cost, of spending money on things you neither need nor value.