Dear Irrational (did my house cause me to spend too much?)

Dear Dan,
In 1996 at the age of 50 my wife and I built a new house, which contained everything we always said we wanted to have. It was larger than we really needed since the children had grown and left home.

During the 6 to 8 month building period, we continually made choices and decisions that led to the spending of large amounts of money. In fact, when you are building a house and negotiating with builders and suppliers spending in the thousands becomes a normal part of life.

However, I noticed that when life returned to normal, we had happily moved into our new house, and the money we had saved and borrowed had dried up, my behavior did not return to normal. I remained, for a time, in the habit of not worrying about cost and still purchasing at the same rate.

Now for the question: Although I was fortunate and realized what was happening and was able to pull back on heavy spending, is it this sort of situation that leads many people, especially to bankruptcy? Especially when they are in the habit of spending big in one area of their life, say employment, and then they carry this over into their private lives and spend big on houses, boats, holidays etc., that are far beyond their means.

Regards,
Bob

———

Dear Bob,
Thank you for these questions.

Spending is influenced by a number of factors, which can create the patterns you suggest, possibly leading to extreme and regrettable situations.

The first thing to consider is that when we think about spending money, we tend to do so in relative, as opposed to absolute, terms. For instance, as you experienced when you were building your home, if you’re already spending $100,000, then spending an extra $1,000 is trivial because we think about the additional cost as relatively insignificant. After all it’s only 1% of the initial amount. However, if you are buying a sofa for $1,000 you might worry about spending another $1,000 because it is increasing your spending by 100%.

The second aspect of spending that is related to your questions has been studied extensively by Uzma Khan of Stanford, Ravi Dhar of Yale, and Joel Huber of Duke who found that for most people, buying that fateful first–and often innocent–item seems to open the purchasing floodgates thereby creating a “shopping momentum.”

For example, in one of their field tests, student subjects were given the opportunity to buy some discounted items from the researchers as compensation for their participation. Some students initially were offered a light bulb (not a very exciting purchase), while others were offered an educational CD that was relevant to their needs (and arguably somewhat more exciting). The idea behind offering two very different items was to create a substantial variance in how likely people were to buy this first item. Naturally, those who were offered a light bulb were less likely to buy it compared to those who were offered the CD. After this initial opportunity, each student had the chance to buy a keychain as a second, unrelated item. The results showed that those who encountered (and purchased) the CD-the more exciting first item-were much more likely to buy the keychain simply because they had already purchased that first item.

But perhaps the most basic problem with spending is the habits we create for ourselves. These habits can begin around something as simple as buying ice cream. Say that you usually buy the large tub of chocolate chip ice cream for $2.49 but one day you decide to try a pint of the gourmet brand from the adjoining freezer for $4.69. After doing this a few more times you stick to this new approach and make the same decision time after time… The idea is that once you get used to spending at a certain level, you create a new way of thinking about it. You don’t think of it from scratch each time so your decisions become more automatic, which can be very dangerous.

Now whether spending behavior carries over from our professional into personal lives is a very interesting question and I don’t know the answer. I suspect that in general, most people are able to remain uninfluenced by their level of spending in the workplace. This isn’t to say though that they are disciplined enough to live completely within their means. But that is another topic altogether.

Irrationally yours,

Dan