Contents

The Psychology of Spending

Quinn Barry & Ginevra Davis

The nature of spending has fundamentally changed in the coronavirus era. More consumers are shopping online, and businesses are using innovative techniques to encourage consumers to spend more. This chapter will explore how consumers can leverage knowledge of their own psychological mechanisms to improve spending habits. Specifically, we will review the psychological research behind different forms of nudging, including the decoy effect, priming, illusion of scarcity, endowment effect, reciprocity, social proof, and anchoring, that businesses leverage to increase sales. While there is a wide variety of both academic and commercial articles that explore how businesses can implement psychological tricks to nudge consumers into spending more, there is little research into how consumers can identify these techniques and make more optimal purchasing choices. The purpose of this research, then, will be to review the common psychological strategies that businesses employ and arm consumers with the knowledge and advice they need to fight back.

Demystifying nudging

In this section, we will define the nudges that businesses use to increase consumer spending, review psychological research that demonstrates these nudges work, and offer research-backed advice to help consumers recognize these nudges and mitigate their influence. Each subsection on the seven nudges we discuss will include the following information: a clear definition of the nudge, a brief review of the canonical research that validates the existence of the nudge, an example of the nudge in action, and research-supported advice for consumers for when they encounter this nudge.

Priming

Priming occurs when exposure to one stimulus affects an individual’s evaluation of a later stimulus.1 In an early study on internet priming, Mandel and Johnson demonstrate that the color of websites and graphics on welcome pages can significantly affect purchasing decisions. To test this effect, Mandel and Johson created two identical car marketplaces with slightly different opening pages: one with an orange welcome page with flames to prime customers to value safety and one with a green welcome page with dollars to prime customers to value purchasing price. Mandel and Johnson found that subjects, when primed with the orange background, preferred safer cars to cheaper ones, and when primed with the green background, preferred cheaper cars to safer ones.2 In the brick-and-mortar world, priming could consist of a restaurant playing Italian music in the background to encourage customers to spend lavishly on Italian food, or a grocery store placing arrows on the floor to direct customers toward the healthy produce aisle. There is not a large array of psychological evidence for how consumers should avoid priming. The Decision Lab, a Quebec-based behavioral science research firm, notes that awareness of priming can produce more optimal consumer behavior and reduce its harmful effects, though eliminating the influence of priming all together may not be possible.3

Decoy Effects

The decoy effect is when a company includes an additional pricing or product option to make the real pricing or product look more attractive by comparison.4 The effect was first documented by Huber et. al in a wide-ranging 1981 study of consumer preferences in cars, restaurants, beers, lotteries, film, and television.5 A real life example of the decoy effect would be a travel company using an artificially expensive “premier package” with some small perks and extras to make their standard package look like an economical choice, or a blender company comparing their standard product to a “lite” low-powered option to make it look more premium. In order to avoid the decoy effect, Psychologist Itamar Simonson found consumers should take time to decide what qualities (such as price, size, quantity, capabilities, etc) they want in a product before they start shopping.6

Illusion of Scarcity

An illusion of scarcity is when companies highlight or artificially inflate how close a product is to no longer being available to encourage consumers to “act now.”7 In an early documentation of this effect, Worchel et al. found that subjects rated the attractiveness of the same cookie much more highly when it was in scarce supply.8 Many online retailers use the illusion of scarcity to encourage consumers to make purchases. For example, popular craft-resale platform Etsy includes the statistic “there are only X number of this product available and it is in Y people’s carts” on products’ landing pages in order to create the perception that dozens of other users are about to buy the product you are interested in. While there has not been particular research on how consumers can respond to scarcity marketing specifically, general best-practices against impulse purchasing (such as making a list of items you want before you go shopping) are likely the best bet for conscious consumers.

Endowment effect

The endowment effect is the psychological phenomenon in which people price goods they already own as more valuable than they would if they did not own them.9 Kahneman et al. documented the strength of the endowment effect by demonstrating that subjects place a higher value on mugs when the experimenters randomly assigned a mug to them than when they had the option of purchasing a mug from a marketplace.10 One way businesses may leverage the endowment effect is by instituting money-back guarantees. Since businesses know that people will value objects they buy at a higher price once they own them, they can be confident few people will exercise the money-back option. Citing Weaver and Frederick (2012), who find that people price items higher than their value in order to ensure they do not accept a below-market deal, the Decision Lab recommends that the most optimal strategy for avoiding the negative implications of the endowment effect is to price your goods as close to market value as possible.11,\ 12 Whether you are buying or selling goods, then, comparing prices for similar goods across different marketplaces can reduce the endowment effect.

Reciprocity

Reciprocity’s psychological definition is no different from its common definition: it refers to the concept of people, organizations, or entities providing one act or service in response to an equivalent act or service.13 Businesses can take advantage of the norm of reciprocity by giving consumers small free gifts, causing them to feel socially obligated to reciprocate by spending more later on.14 A real-world example of corporations taking advantage of reciprocity is the practice of giving out free branded swag to potential customers at conferences and store openings, with the hope that recipients will remember and feel more inclined to support the brand in the future. While there has not been extensive research on how to counteract the social urge to reciprocate, common sense suggests that the best tactic for consumers would be to refuse or return unsolicited gifts from corporations.

Social Proof

Social proof is a concept popularized by Robert Cialdini, which states that people who are unsure what to do in a given situation will copy the actions of their peers.15 Companies can take advantage of consumers’ desire for social proof by creating the perception that “everyone” (or everyone in their peer group) is also buying their product. One study found that consumers were more likely to buy low-fat cheese when they were shown a banner advertising that it was the most sold cheese in the store, even when placed under conditions that would usually cause them to prefer the high-fat cheese.16 A common real-world example of social proof is the emerging trend of consumer brands paying teenage “micro-influencers” to promote their products on social media, with the goal of convincing other young people that many of their peers have purchased the product independently. While people will always be influenced by their peers, most social media platforms now require that sponsored posts be tagged with #ad or #sponsored, giving consumers more ways to avoid artificial social proof. Preliminary research has found that users engage with visibly sponsored content at lower rates than organic content, although sponsored content still receives significant engagement.17\

Anchoring

Anchoring bias is the tendency for people to give excessive weight to the first indicator they are given about the value of an item.18 Companies can exploit anchoring bias by initially listing their products at artificially high prices before discounting them, which makes customers feel like they are getting a “good deal” at an otherwise regular price. This phenomenon is seen regularly in the luxury resale market, where consumers feel as though they are “saving” money by buying brand name items at a discount, even though the original prices were not representative of the true value of the item. Anchoring has such a strong effect that psychologist Kit Yarrow found that customers who seek out sales and discounts aggressively often spend more in the aggregate than customers who buy goods at market prices. Yarrow finds buying at a discount disproportionately results in unsatisfactory shopping experiences and also gives consumers an addictive rush, which encourages them to shop more.19 With this in mind, smart shoppers can save money by focusing on buying products they will use for the long-term rather than indexing their purchasing decisions on sales and promotions.

Conclusion and Review

Whether online or in-store, advertisers use many psychological nudges to encourage consumers to make impulsive purchases. The best thing you can do as a consumer to avoid impulse shopping is to make a list of items you want before you go shopping, enabling you to make your purchasing decisions before being exposed to companies’ nudges. Similarly, consumers can optimize their purchasing decisions by deciding what qualities they are looking for in a product (size, price, brand, capabilities, etc) before looking at individual products and potentially being exposed to deceptive advertising. Even using the above strategies, it is extremely difficult to resist these nudges, as consumers are working against their own psychology. Nudge theory is a powerful tool for affecting human behavior for both positive and negative ends. By understanding what nudges are and how businesses use them, consumers can maximize their budget and improve their spending habits.

References

1.  American Psychological Association. APA Dictionary of Psychology. 

2.  Mandel, N., & Johnson, E. J. (2002). When web pages influence choice: Effects of visual primes on experts and novices. Journal of consumer research, 29(2), 235-245.

3. The Decision Lab. (2021, January 22). Priming - Biases & Heuristics.

4.  Huber, J., Payne, J. W., & Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. Journal of consumer research, 9(1), 90-98.

5.  Huber, J., Payne, J. W., & Puto, C. (1982). Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. Journal of consumer research, 9(1), 90-98.

6.  Simonson, I. (1989). Choice based on reasons: The case of attraction and compromise effects. Journal of Consumer Research, 16(2), 158. 

7.  Quelch, J. (2007). How to profit from scarcity. Harvard Business School Working Knowledge.

8.  Worchel, S., Lee, J., & Adewole, A. (1975). Effects of supply and demand on ratings of object value. Journal of personality and social psychology, 32(5), 906.

9. The Decision Lab. (2021, January 29). Endowment Effect - Biases & Heuristics. 

10. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348.

11.  Weaver, R., & Frederick, S. (2012). A reference price theory of the endowment effect. Journal of Marketing Research, 49(5), 696-707.

12. The Decision Lab. (2021, January 29). Endowment Effect - Biases & Heuristics. 

13.  American Psychological Association. APA Dictionary of Psychology. 

14.  Gouldner, A. W. (1960). The norm of reciprocity: A preliminary statement. American sociological review, 161-178. 

15.  Cialdini, R. B. (2007). Influence: The Psychology of Persuasion (Vol. 55, p. 339). New York: Collins. 

16.  Salmon, S. J., De Vet, E., Adriaanse, M. A., Fennis, B. M., Veltkamp, M., & De Ridder, D. T. (2015). Social proof in the supermarket: Promoting healthy choices under low self-control conditions. Food Quality and Preference, 45, 113-120.

17. Barnett, D. (2018). Sponsored vs Organic Content: Does it affect engagement? Influencer Intelligencer. 

18. APA Dictionary of Psychology. American Psychological Association. 

19.  Yarrow, K. (2013, January 7). Why Shoppers Just Can’t Resist Clearance Sales. TIME. 

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