Behavioral Psychology: How to Stay Disciplined with Money
Does it feel like you have no will power when it comes to saving money? You know you shouldn’t buy that new item, but it’s a steal, and it’s available for a limited time!
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Behavioral psychologists suggest that we don’t always make the most reasonable and rational decisions. Several cognitive and emotional factors within our brains influence how we make choices. Marketing companies realize this and exploit your reactions to get you to spend money.
Key Benefits of Understanding Behavioral Psychology
To start learning how to stay disciplined with money and overcome these tricks, you must understand the basics of behavioral psychology. There are two key benefits to this.
- First, you can recognize and pierce through the marketing tactics used against you.
- Second, you can develop long-term habits to make better decisions.
How Behavioral Psychology is Used to Separate You from Your Money
When we talk about behavioral psychology as a factor in your spending patterns, we’re focusing on your cognitive biases. These are systematic errors in how we think that impact our judgment. They may appear as mental noise, or motivational (wishful thinking). Our biases can be broken down into three major categories:
- decision-making, belief and behavioral;
- and memory errors.
Within each of these segments is a wide range of behaviors. Let’s look at two of them in particular: loss aversion and sunk cost fallacy.
Loss Aversion as an Example of Irrational Behavior
Loss aversion says the psychological pain from losing something is twice as intense as the pleasure of gaining the thing. In other words, it’s better not to lose $100 than it is to win $100. Loss aversion is very similar to risk aversion, with a key difference. The benefit of monetary “reward” is dependent on what was experienced in the past, or what should have happened. Loss aversion is the basis for the endowment effect and sunk cost fallacy and can affect the status quo bias.
This can explain why limited time offers are so compelling. In a limited time offer, a negative condition follows an expiry date. You’re told that you’ll pay more (lose money) if you don’t purchase an item or a service by a particular time. The idea of losing money by spending more brings on anxiety. We become convinced that buying the item is a good idea. The next thing we know, we’ve purchased the item.
Loss Aversion Examples
Limited time offers are not the only way loss aversion occurs. Marketers use many behavioral tricks to get us to spend money via loss aversion, like
- Retail clothing stores offering you bags and baskets to carry around your purchases, especially during a sale. You’re less likely to give them up (not purchase them) the longer it’s in your physical possession.
- Purchasing extras. It capitalizes on the fact that money was already spent to get this point. What’s the cost of a little more money (or effort) sunk into the endeavor? You’ve already spent $1000 on that new phone, what’s an extra $21 per month on insurance? Imagine how much you’ll save if your phone gets damaged. (Never mind the cost of the number of months you’ll be paying for this insurance, plus the insurance co-pay.)
- Free trials. Your cable company is offering 3 free months of HBO. After three months, can you cancel the subscription? Your cable company is counting on you preferring not to give up HBO. They’re helpful enough to renew your subscription without you lifting a finger automatically.
How can you fight against this? The first thing you need is to be aware of your loss aversion bias. If you know it’s there, you can actively work against its influence. Remember, a limited time offer is not truly limited.
One More Example – Sunk Cost Fallacy
The Sunk Cost Fallacy is a little flaw in our brain programming that could be affecting your personal finance and other areas of your life. Watch the video to find out what the sunk cost fallacy really is and how to avoid it.
How to Stay Disciplined with Money through Consistency
Do you want to know how to be disciplined with money? It will involve learning how to hack your brain to develop better habits, in a process called habit formation. In habit formation, you’re building a pattern in your mind that should become automatic after a certain amount of time. It’s what allows you to get used to waking up in the morning and going for a run before work. If you automatically reach for a cigarette on your coffee break, that’s habit formation. When you stop doing so, that’s habit formation too.
How Long Does It Take to Create a Habit?
It depends on who you ask. Most behavioral psychologists will agree that a habit is not formed in one day. Some researchers believe that you can retrain your brain in a month. Others say it takes 66 days (or a little over 2 months).
Habit Formation Tips
There are a few concrete actions you can use to make a habit stick. The first thing is to select a specific and reasonable goal. Take into consideration how external influences may work for, or against you.
You can then use the discipline system we’ve developed to help with habit formation.
The steps are:
- Keep it easy. You make the habit easier to form, and you’ll be less resistant to change. One way to make this even easier is to know why you’re making this goal. Once you remember the why, it’s easier to commit.
- Keep it realistic. Choosing a goal that is too ambitious can make it easy for us to fail. If we fail, we may lose the motivation to try again.
- Keep yourself accountable. We need honest feedback to measure our progress and self-correct if necessary.
Our system breaks down each major step into smaller, more achievable steps, taken from our own experiences. Check it out, and see how you can apply our tips to your life.
If you can identify your biases, you have the foundation for learning how to stay disciplined with money. You can see when marketers are using tactics against you and develop a realist plan to counteract them. Forming a habit takes some time, but the payoff is that you are spending less and saving more.