Bank Notes

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 Dr. Raj Sandhu, 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.

For this edition, the behaviour we are looking at is the goal gradient effect. Raj breaks down how this impacts us.

What is it?

The closer we are to achieving our goal, the more effort we are likely to put towards achieving the goal.

Give me an example of how this works.

Have you ever been given a loyalty punch card at a coffee shop with holes already punched for you? If so, then the owners of the coffee shop are likely behavioural economists! In an experiment where people were given a loyalty card needing 9 purchases to get the 10th purchase free, they completed their card in 15 days (on average). When people were given a card needing 12 purchases, but the first two stamps were pre-filled, they completed their card in approximately only 10 days.*

Even though both types of cards needed the same number of purchases, the second card made people feel like they were closer to their goal of a free coffee, and so they put more effort into achieving the goal.

How does that affect me?

Well it might mean that you buy more coffee than you need! But, what it also shows is that people can accelerate their savings by setting a goal and tracking progress towards that goal.

How do I make that work for me?

Write down your goal in a visible location and record your progress toward that goal on a daily/weekly/monthly basis. If you see yourself building savings for that trip, house, car – you will be more encouraged to keep going.

*Kivetz, Urminsky, and Zheng, 2006
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