Ask a Behavioural Economist: How can I make better spending choices?

We all want to spend less, save more and plan for the future. We don’t always do that, but why? In our Ask a Behavioural Economist series, we talk to Stephanie Bank, a behavioural economist.

Behavioural Economics is the scientific study of decision-making that examines the psychology behind an economic outcome, basically why we do what we do with our money. If we can understand the reasons behind our spending and saving habits, we can set ourselves up to make better decisions for better outcomes.

We talk to Stephanie about common behaviours that get in people’s way and how we can work to overcome them. These sorts of behaviours are called behavioural biases. 

For this edition, we are looking at choice overload (aka analysis paralysis). Stephanie breaks down how this affects us.

What is it?

We are unable to make the right decision or any decision at all when faced with too many options.

Give me an example on how this work.

A study in a supermarket tested two displays of jams - one with six options and the other with 24 options. While individuals were more likely to stop at the larger display, they were much more likely to buy something at the smaller display.¹

How does that affect me?

We think we like having a lot of choice, but when faced with too many options we end up buying things or enrolling in programs that don’t reflect our true preferences. Alternatively, we are too overwhelmed by the options and don't make any decision at all.

How do I tackle that?

Before making a purchase (new car, enrolling in health care program, getting new credit card), write down a few criteria to help narrow down what you're looking to buy. Planning ahead helps you make choices that will work best for you and your goals.

1.        Lyengar & Lepper, 2000.

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