By Uma Shashikant
The festival season brings cheer, joy and fear of overspending. With attractive deals on cars and consumables being the flavour of the season, carefully drawn plans for savings can go completely awry. Buying clothes and jewellery is too tempting. Demands for refurbishing the home or taking a holiday cannot be postponed any longer. Some of us simply take the plunge and splurge, while others cannot hide the resentment that comes with spending. Why this difference and how does it matter?
In 2007, Scott Rick and others published a paper, famously classifying spenders as Tightwads (TW) and Spendthrifts (ST). TWs spend less than the amount they would ideally like to spend and STs spend more. The authors created a TW-ST scale to measure the pain associated with spending and found that it varied significantly across spenders. The TW-ST framework classifies emotions as ‘immediate’ and ‘expected’. An immediate emotion is one where the consequences of making a choice are instantly experienced. Street vendors battle against them, when customers haggle for discounts as the pain of spending cash is immediate.
An expected emotion is one where the consequences of a choice are experienced much later, even though they are known at the time of making the choice. Credit card providers smartly exploit this—customers buy in the present, but experience the pain of payment much later. Little wonder then that the difference in spending actions between TWs and STs narrows down the most when it comes to credit card usage. Rational decision-making requires that people view money as a limited resource and, therefore, consider the opportunity cost while making a decision. For example, before replacing a car with a new model, a household should consider the possibility of using that money to save for retirement.
Every current expense cuts into the future wealth. However, spending decisions are not made keeping this in mind. In reality, the buyer considers the pain of driving an older car when his peers are driving better ones; or the joy of driving a new car to his relatives’ homes on Diwali; or the pride of the family in driving a better car; or the improved social status in his community with the new car signalling his purchasing power.
These joys are much more immediate, retirement is too far in the future. The TW-ST scale depends on the emotion perceived at the time of making the spending decision. If the pain of spending is small compared to the joy it brings, financial discipline becomes tough to impose. The EMI is a smart ploy based on this understanding. It diminishes the current pain associated with buying a car, making the joy and convenience look far bigger.
Festival sale—buy one, get one free, buy now, pay later, waiver of admin fee, grand discounts—is also a smart ploy designed to enhance the joys associated with spending. Striking down a price sticker of Rs 400 and labelling it ‘now, Rs 200’, works to instantly reduce the pain of spending compared to the joy of getting a ‘better’ deal. The credit card limit is also intended to serve a similar purpose. When a limit of Rs 3 lakh is offered to a cardholder, the provider essentially taps into his sense of importance. An extravagant meal for Rs 6,000 or an expensive gift worth Rs 15,000 seem too small compared to the card limit. These tricks to reduce the pain of spending are used to their innovative best during the festival season.
The pain does come, a little late though. Many binge on sweets and liquor during the festive season, but are overcome by guilt pangs later. Spenders rue their lack of financial discipline when they see the credit card bills.
In an interesting extension of their work, Rick et al point out that one of the ways in which guilt and regret of overspending manifest is in seeking partners of the opposite nature. Spendthrifts seek out Tightwads, and vice versa. After an initial period of ‘adjustment’, many such marriages deteriorate over money matters. Diwali parties have their share of spousal cribbing on spending, or the lack of it.
There is much more to the urge to spend. Psychologists have found that spending may just be a plug to deal with complex emotions, such as avoidance, depression, low self-esteem or the need for instant gratification. There is evidence to show that those with disturbed childhoods end up being financially unstable as adults in a bid to avoid the earlier trauma. Credit cards are toys that hand over the rewards they were denied. Shopaholics seek the approval from obliging salesmen to escape dealing with disappointments and setbacks. Some hide their true selves through attention-seeking behaviour that focuses on their spending.
They convince themselves into believing that their acceptance in society depends on what they own, and they cannot stop themselves from buying things that they may not actually need.
People often shift the blame for their tendency to overspend to their psychological make-up. However, with research having found solutions to fix the problem, this excuse may not be good enough to absolve them. Accountability is the first known tool, even if it is to themselves. If spenders take a few minutes to read through their bank statements every month, they will find it tough to ignore the information they routinely see. Keeping accounts, tabulating expenses, analysing spending patterns are methods to achieve the same objective. Discipline is the second potent tool. If spenders are able to turn the desired behaviour into habits, they will soon be able to exercise control. By first allocating their income to long-term benefits, they can ascertain how much of their income is available to be spent in the present.
In apportioning money between spending and saving, our psychological make-up might be loaded in favour of one over the other. Recognising the way we tilt and making corrections can ensure that joys today do not turn into sorrows tomorrow.
The author is Managing Director, Centre for Investment Education and Learning.
The festival season brings cheer, joy and fear of overspending. With attractive deals on cars and consumables being the flavour of the season, carefully drawn plans for savings can go completely awry. Buying clothes and jewellery is too tempting. Demands for refurbishing the home or taking a holiday cannot be postponed any longer. Some of us simply take the plunge and splurge, while others cannot hide the resentment that comes with spending. Why this difference and how does it matter?
In 2007, Scott Rick and others published a paper, famously classifying spenders as Tightwads (TW) and Spendthrifts (ST). TWs spend less than the amount they would ideally like to spend and STs spend more. The authors created a TW-ST scale to measure the pain associated with spending and found that it varied significantly across spenders. The TW-ST framework classifies emotions as ‘immediate’ and ‘expected’. An immediate emotion is one where the consequences of making a choice are instantly experienced. Street vendors battle against them, when customers haggle for discounts as the pain of spending cash is immediate.
An expected emotion is one where the consequences of a choice are experienced much later, even though they are known at the time of making the choice. Credit card providers smartly exploit this—customers buy in the present, but experience the pain of payment much later. Little wonder then that the difference in spending actions between TWs and STs narrows down the most when it comes to credit card usage. Rational decision-making requires that people view money as a limited resource and, therefore, consider the opportunity cost while making a decision. For example, before replacing a car with a new model, a household should consider the possibility of using that money to save for retirement.
Every current expense cuts into the future wealth. However, spending decisions are not made keeping this in mind. In reality, the buyer considers the pain of driving an older car when his peers are driving better ones; or the joy of driving a new car to his relatives’ homes on Diwali; or the pride of the family in driving a better car; or the improved social status in his community with the new car signalling his purchasing power.
These joys are much more immediate, retirement is too far in the future. The TW-ST scale depends on the emotion perceived at the time of making the spending decision. If the pain of spending is small compared to the joy it brings, financial discipline becomes tough to impose. The EMI is a smart ploy based on this understanding. It diminishes the current pain associated with buying a car, making the joy and convenience look far bigger.
Festival sale—buy one, get one free, buy now, pay later, waiver of admin fee, grand discounts—is also a smart ploy designed to enhance the joys associated with spending. Striking down a price sticker of Rs 400 and labelling it ‘now, Rs 200’, works to instantly reduce the pain of spending compared to the joy of getting a ‘better’ deal. The credit card limit is also intended to serve a similar purpose. When a limit of Rs 3 lakh is offered to a cardholder, the provider essentially taps into his sense of importance. An extravagant meal for Rs 6,000 or an expensive gift worth Rs 15,000 seem too small compared to the card limit. These tricks to reduce the pain of spending are used to their innovative best during the festival season.
The pain does come, a little late though. Many binge on sweets and liquor during the festive season, but are overcome by guilt pangs later. Spenders rue their lack of financial discipline when they see the credit card bills.
In an interesting extension of their work, Rick et al point out that one of the ways in which guilt and regret of overspending manifest is in seeking partners of the opposite nature. Spendthrifts seek out Tightwads, and vice versa. After an initial period of ‘adjustment’, many such marriages deteriorate over money matters. Diwali parties have their share of spousal cribbing on spending, or the lack of it.
There is much more to the urge to spend. Psychologists have found that spending may just be a plug to deal with complex emotions, such as avoidance, depression, low self-esteem or the need for instant gratification. There is evidence to show that those with disturbed childhoods end up being financially unstable as adults in a bid to avoid the earlier trauma. Credit cards are toys that hand over the rewards they were denied. Shopaholics seek the approval from obliging salesmen to escape dealing with disappointments and setbacks. Some hide their true selves through attention-seeking behaviour that focuses on their spending.
They convince themselves into believing that their acceptance in society depends on what they own, and they cannot stop themselves from buying things that they may not actually need.
People often shift the blame for their tendency to overspend to their psychological make-up. However, with research having found solutions to fix the problem, this excuse may not be good enough to absolve them. Accountability is the first known tool, even if it is to themselves. If spenders take a few minutes to read through their bank statements every month, they will find it tough to ignore the information they routinely see. Keeping accounts, tabulating expenses, analysing spending patterns are methods to achieve the same objective. Discipline is the second potent tool. If spenders are able to turn the desired behaviour into habits, they will soon be able to exercise control. By first allocating their income to long-term benefits, they can ascertain how much of their income is available to be spent in the present.
In apportioning money between spending and saving, our psychological make-up might be loaded in favour of one over the other. Recognising the way we tilt and making corrections can ensure that joys today do not turn into sorrows tomorrow.
The author is Managing Director, Centre for Investment Education and Learning.
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