One of my favorite things to do is try and understand consumer psychology. Why do people spend more than they earn is so basic, yet so complex in nature. The same goes with why we eat so much bacon when we know it’s so bad for our health. I was going to publish this post on Financial Samurai, but I figure with so much blogging related feedback, it’s best to stay consistent.
About one week before the 2012 Presidential Election, my online affiliate income declined around 70%. Traffic was also down about 20% as Hurricane Sandy turned off the lights for some 30% of the working population.
Given I receive hundreds of thousands of pageviews a month, most of which come from search engines, my sample set is statistically significant. All things being equal, I should have seen a roughly 20% decline in affiliate income corresponding to a 20% decline in traffic rather than a 70% drop. So I got to thinking, what made for such a drastic drop?
There is no better real-time testing ground for social scientists than having their own highly trafficked website. Lucky for you, I’ve got the curiosity to make some analysis and share my findings. Damn, how I wished I had this site in college. Getting straight A’s would be a piece of cake!
To understand overspending, we must first understand why there is spending paralysis.
MAIN REASON FOR SPENDING PARALYSIS
The main reason for spending paralysis is UNCERTAINTY. Readers from all over America were not willing to check their credit scores, refinance their mortgages, or find out if they can save on their car insurance because they were simply unsure who would win the Presidential Election. The fear of a single man affecting our financial lives was real.
Meanwhile, book sales for how to negotiate a severance package actually increased up by 50% a week before the Presidential election, despite a 20% decline in traffic. And unlike the free quotes, my book costs $48. Sure, I have a money back guarantee within 15 days of purchase. However, spending $48 still takes more will than spending $0 to check your latest credit score. The main reason for an uptick in book sales can be attributed to a DESIRE FOR MORE CERTAINTY!
Anybody who is considering quitting their job is facing a lot of fear. They don’t know whether leaving a paycheck in this economy is a good idea. They probably have other things they’d much rather do with their lives like watch their children grow up, travel the world, or enter some other occupation rather than the one they’re stuck in now. Meanwhile, the 4th quarter of the year is the most dangerous time for all employees. Be most afraid right before the holidays when managers use you to the max and tell you to pack your bags right before bonuses.
My book provides more certainty by educating people about their employee rights and suggesting effective strategies to amicably and profitably leave their employers. When it’s you vs. your manager plus her HR department and Legal & Compliance, it’s not a fair fight. My book arms the Davids of the world to fight the Goliaths and win.
COMPANIES ACT LIKE PEOPLE BECAUSE THEY ARE RUN BY PEOPLE
Everyone is upset at companies for hoarding cash at record high levels. Politicians are doing everything possible to encourage companies to spend so they can invest in new technology, buy new equipment, and hire more people. Increasing employment trumps everything else. Yet, for some reason, politicians don’t realize their political bickering is one of the main reasons why companies don’t want to spend.
If you are the CEO of a cyclical company such as Intel, you are afraid of booms and busts. Technology evolves quickly and being nimble with a lot of financial fire power is important for survival. If you’re faced with huge uncertainty about taxes due to two very different ideologies, you’re going to be reluctant to spend. Instead, it’s rational to conserve money now to cover higher taxes in the future.
Now that President Obama has won again, at least companies have more certainty about the next four years. Companies can prepare for more of the same push to raise corporate taxes, dividend taxes, and long term capital gains taxes. At the margin, President Obama’s victory is good for the economy because companies will be spending again. They can’t hoard cash returning 0.2% forever because their competitors will invest in higher returning assets, which includes people.
A CURE FOR OVERSPENDING AND ALL EXCESS
On the flip side, the cure for people who consistently spend more than they should is to introduce uncertainty in their lives! It’s amazing why people continue to destroy their finances, and ultimately their lives by getting into suffocating consumer debt. You know it’s not for a lack of education because any dummy realizes spending more than you earn is unsustainable.
The reason for overspending is therefore because of too much certainty. Those who have the most credit card debt are too certain their credit cards will continue working forever. After all, so long as they pay the minimum back every month, the credit card company loves them for paying such high interest rates.
Those who live irresponsible lives are certain their parents, friends, spouses, or government will bail them out for making poor decisions. How many times do you see a child fail because their parents over-coddled them? How many times do you see a grown man continue to live at home with his parents because his parents never learned to say, “Get the hell out of my house junior!”?
Those who fail to see the benefits of good exercise and healthy eating are more certain future medical miracles will be there to cure unforeseen illnesses. I am concerned about the new certainty of so many Americans who might now indulge a little more because they no longer have to pay as big a price for unhealthy eating habits. I tried to argue our weight is mostly due to genetics, but I got a tongue lashing.
If you want to cure someone’s poor habits, send them pictures of blackened lungs, bed-ridden people who are morbidly obese, men in jail, mothers living on the streets, starving children, workers on strike, and so much more for the sake of scaring some uncertainty in their lives. Only then will people change. Maybe.
DON’T BE SO CERTAIN ABOUT CERTAINTY
Now that the Presidential election is over, my affiliate income has normalized. In fact, a new year brings a surge in action. There will clearly be concerns about what goes on in CONgress and raising the debt ceiling, but at the margin, President Obama’s presence is a calming reassurance to at least 50% of Americans.
Being too certain ruins your potential. This is why it’s important to have an open dialogue about why we do what we do. The only thing we’re certain about is how hard we work. There is a strong correlation with luck, success, and work ethic. For everything else, we just hope for the best!
Readers, what do you think is the cure for overspending? Is being overconfident dangerous? Did you notice a decline in revenue during the Presidential election as well? Why do people spend more than they earn?
Regards,
Sam
Note: The site is going through a juice cleanse over the next couple months. Apologies for the slow load times.
Being too certain really can be dangerous and detrimental. I thought with almost 100% certainty that I was going to get promoted last month and when it didn’t happen I took it reeeeally hard for several weeks. It was a good slap to reality that nothing is certain in life even when we’re doing everything right.
I’ve become a lot more conservative in my spending as I’ve gotten older and have learned to set both short and long term financial goals. I think people who only think short term have a lot more problems with overspending.
That really sucks about the non promotion. Sorry about that. Look on the bright side, you don’t have to feel as guilty running errands or leaving when you’re supposed to, as opposed to marathon after hours. Less stress, more life.
The older we get, the less we need to spend to be happy imo since we find things that make us happy already. We don’t need to keep searching (spending).
I have this problem with job applications. Despite having a quota of 5 job-search “contacts” each week, I don’t apply to just anything. I tend to get emotionally attached to each job I apply for. The more interested I am in the job, the more attached I get to it and the more certain I am that I will get it. When I don’t, I find myself going through the stages of grief!
He who cares least, wins! It’s the mindset I go through during negotiations, especially real estate. Dangerous to get attached to anything.
This is a great article, Sam and I semi-agree with the results of your analysis. I agree with the first part – spending paralysis is probably because of uncertainty; and a particular group of PF bloggers glorify it (mostly the frugality camp) I believe this can be really detrimental to people and ruinous to the economy which is based on consumption (what I think about this one is a different matter entirely). Where I am not so certain is that overspending is because of certainty – I think here the relationship is more nuanced and it is likely one of correlation not causality. In other words, whether ot not overspending is linked to certainty or not depends on many other variables (most at individual level) and the type of over-spending (compulsive, calculated, inrresponsible, blowing off steam etc.). Also, I don’t believe people over spend because they feel secure although they may generally do it when they do.
I am convinced though that in our lives we need a very precarious balance between insecurity and stability to be able to achieve great things.
And this is officially my longest comment ever – which it a testament to your post rather than my commenting :). Good work!
Honored to have your longest comment!
No doubt there are many variables for the reason why we do what we do. However, this experiment with the resulting snapback and then some post Presidential election points towards certainty (4 more years of Obama) as a big reason to spend.
It doesn’t make sense why someone would consistently over the long haul overspend if they weren’t certain about their income, stability, back stop.
It is not about ‘certainty’; with some people it is about ‘carefully chosen areas of ignorance’. In other words, they tend to take the ‘be present in this moment’ thing to a bit of an extreme :). This is a hypothesis worth testing at least.
Great article on spending! I totally agree with you, we can cure overspending by not being too certain about the future. We really need to see the future as uncertain which it really is, in order to prepare well for it by saving our money instead of spending it on things we don’t really need and could live without.
Very interesting! I think you are trying to make sense about something that is a (bad) habit. Many people go shopping as therapy for their insecurities and out of habit. They overspend out of habit too. The consequence of overspending is not enough to stop them. Is it that different from the addictive behavior such as smoking? The price of cigarettes is ridiculous and the medical evidence is staggering, yet there are still new smokers. I think your revenue slide was due to the holidays and nothing more.
I think you are really saying “stay hungry, stay foolish”! If you get too comfortable or complacent you become satisfied with the status quo. Many people have overspending, debt and other financial problems and do absolutely nothing! It is hait, albeit a bad one. Just another perspective.
I remember checking out how much Marlboro Mediums cost in NYC the other year, and was shocked at the $10/pack price tag. Kinda crazy to spend so much for something so bad. Maybe at $2/pack, the carcinogens would be worth it. But $10/pack is ridiculous.
I’m just trying to be objective in my blogging research here. It’s amazing to observe what people DO, not what people say.
You can teach people about money,saving, and debt. But the art of negotiation is an art. Most folks don’t even bother. I stink at it. You have to have a little nerve to put yourself out there.
But the art of the deal is something that’s built into some people. They have to get a deal or they can’t go on.
It is easy to overspend and fall in a vicious cycle of debt, minimum payments and more debt. So many psychologists have studied why people overspend and live above their means. The reality, I think, is that overindulging is an innate human characteristic. We always want more.
We want more until the pain of greed overwhelms us to stop?
Human nature sounds like a bad excuse.
Psychology drives so many of our decisions. That is why when our investment portfolios increase we spend more and when they go down in value we get scared and stop spending. (even if we don’t need the money until retirement, decades into the future).
Have to admit I feel the same way.
That said, it’s just the difference between saving 50% of my after tax income during a bull market or 70%+ during a beat market!
Absolutely agreed…Whenever market goes down all we can think is sell as opposed to a buy. Ideally , if human psychology or even herd mentality was not there, the time is ripe for picking stocks. Hmm may be Warren Buffett understands that better than most of us !
It’s about survival in investing or in gambling frankly. If you have a deep enough bankroll like Buffett, then you are loving collapses. If you are on margin like so many during the bubbles, then goodbye!
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Certainty can be a dangerous thing. I think when we’re confident that our job (and income) will always be there.. we don’t hesitate to spend money. If our investments are doing well…spending a bit of extra money makes no difference in the grand scheme of things. One or two splurges are fine… but if we make it a habit, those small expenditures can have a big effect overall. I think being uncertain and not being totally comfortable with your financial position can be beneficial. Makes us all think twice before spending more money.
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Great article. Uncertainty or certainty won’t have any effect on individuals who practice habitual financial responsibility. Whether it’s financial or physical or mental health, smart people practice common sense regardless or external factors.
I dont know if this is the right place to post this question but I am looking for someone (professional?) to help me and my wife develop a budget. I live in NYC. Any thoughts or ideas?
Thanks
Hi Alex,
You can check out my personal finances services page here: http://www.financialsamurai.com/fs-online-services/career-personal-finance/
Please fill out the quick form if interested.
Regards,
Sam