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| Edited By: Rama Moondra |Source: DNA |Updated: May 15, 2018, 05:50 AM IST
Have you ever been in a situation where one is acting against one’s own interests? Sometimes it is out of fear, miscalculated circumstances or biases but the end result remains going against individual’s best interest.
The field of behavioural economics actually deals with happiness by providing valuable insights of economics and psychology. Let us see, how we sabotage a few of our financial decisions by making errors.
The pattern of our financial errors is repetitive. The situation where one behaves erratically is usually recurring. A group of researchers offered participants of the study to make a choice: Hershey’s chocolate for 1 cent, ($ 0.01) or Lindt truffle for 15 cents ( $0.15). Most people chose Lindt as its brand and cost were higher. In the next phase of the study, Hershey’s was made free of cost and Lindt came at 14 cents. About 89% people picked up Hershey’s.
No awards for guessing this one right. People will pick up free stuff over a discounted one. won’t they? But see, getting an exotic truffle versus ordinary candy had made people overspend earlier. So, what happened here? Psychology plays its role in biases. “Free” is a very positive word that makes one buy innumerable stuff from junk sales because its “free” with something you otherwise would never have bought in the first place. “Buy one get one free” and you gobble up the offer.
Ideally, a rational person will weigh pros and cons of each financial decision based on cost and benefit analysis. Simply put, that person will make sure to seek answers to questions such as: Do I need an upgrade of that fridge? Or I want it just because the earlier one is 10 years old? Now, there is an irrepressible offer with “no interest EMI” and unbeatable technological upgrade with not to mention, the pride of owning up a new gadget. We buy vacation packages or a house or a gadget based on how pricing options are positioned. Exercising self-control is as difficult in financial decisions as it is when controlling diet.
Reducing the options that one could pick up from makes people buy more. Most ‘never before sales’ that say, “That’s last three pieces to grab and time is ticking away” will give you only a few options of items at throwaway prices with not much alteration or choices of sizes. However, the sense of urgency will make you pick it.
Another interesting research was conducted in a supermarket. A group sat with 24 varieties of jams for sale, all giving free tasting sessions. Meanwhile, another group had just six varieties. While people visited the stall of 24 jams in high number, the sales were higher in the stall of six variants. The difference was astonishing, from 3% in the former to 30% in the latter. The study says that customers love to see choices but too many options are baffling and then they walk out without making a decision to buy a thing.
Now why the taste of behavioural economics here? Because it directly coincides with happiness as it does not let you overspend and feel the consequent regret. Not just this, the science also nudges you to save more by exercising self-control. Professionals globally lure you daily by using these formulae. The basic understanding of short-term happiness and long-term savings will get you better bank balance this financial year and thereafter.
The writer is a strategic advisor and premium educator with Harvard business publishing
