The Psychology of Spending

There are two types of products that people purchase: needs and wants. Needs are defined as the things that we need to survive, like water and food. While wants are the things that we buy regardless of their necessity. This brings us to spending. While most of our purchases account for our needs, which don’t require much thinking, the things we buy simply because we want them are controlled by several other factors, like emotions, cognitive biases, and social influences.

Dopamine Reward Loop

Our brains are hardwired to reward behaviors that feel good. When you buy something, dopamine is released in the reward centers of the brain, giving you a rush I’m certain you’ve felt before. The problem is that once the excitement from the initial buy fades, you feel the need to buy more and more and more, creating something called the dopamine reward loop. This loop explains why shopping is almost addictive. Purchases must be made over and over in order to maintain the dopamine rush. That rush can encourage impulsive spending.

Cognitive Biases

Our spending decisions are also shaped by cognitive biases that help our brains make quick judgments. A cognitive bias is a mental shortcut that can often lead to irrational behavior.

• Loss aversion is a cognitive bias that occurs when individuals feel the pain of a loss more intensely than the pleasure of an equivalent gain. This can lead to people choosing to avoid losses over acquiring gains. Loss aversion makes us fear losing money more than we value gaining it, which can make us overly cautious or hesitant to invest.

• Picture winning the lottery. Now, picture what you’d do with the money. Maybe you’d buy a car or a house in front of the beach. Mental accounting leads us to treat money differently depending on where it comes from, like spending birthday cash more freely than our salary. Cognitive biases make us reluctant to spend large bills, even when they’re worth the same as several smaller ones. These biases change the way we make financial decisions when it comes to spending, often without us realizing.

Emotional Spending

Emotions play an equally important role in spending. People shop not because they need something, but because it helps them cope with sadness, boredom, or stress. This is called emotional spending. The problem is that emotional purchases don’t always bring long-lasting pleasure like other purchases do. The happiness that you receive from goods or services bought from emotional spending causes temporary pleasure. Social factors also add to this complexity. When you see a friend or influencer spend money on expensive and luxurious things, you end up comparing yourself to them, leading you to spend extra money on products you don’t want or need, rather than genuinely wanting them.

Psychologically speaking, some items are necessary, and some items really aren’t. It’s important to think before purchasing something you’re thinking about. Understanding the psychology behind spending allows us to make decisions that bring not only financial stability but also emotional satisfaction. Money might just be a tool, but how we use it can define the rest of our lives.