Behavioural economics is a part of economics that shows individuals reaction to financial issues, research by some group of economics showed that people make a lot of financial mistakes simply because they spend based on their emotions. The concept of people making financial decisions based on their emotions makes it highly difficult for them to make smart ones.
A great economic researcher came up with some packed up research on the behavioural economics and his name is Richard H. Thaler, some of the dump spending habits that we have as humans which he figured out based on his research is what I will be sharing in this post, please read learn and enjoy.
THE ENDOWMENT EFFECT.
This effect proves that the usual human nature would ascribe more value to things that we possess rather than when we are about to purchase it. For instance, if I own a lovely pair of shoe which I am contemplating on giving up I could just assume that the shoe should cost more than $500 and at that point if I get an order for the shoe at that price I might decide to hold unto it until I get a better offer, but if the table was turned and I want to purchase the same pair of shoe in a store I might just conclude that the worth of the shoe is overprized at $500.
SUNK COST FALLACY.
This is another behavioural spending habit that I could very well relate with as a kid and that is because there are days when my Mum would force me to finish an awful meal just because she paid a considerably high amount to get the food fixed, the human nature sometimes have the satisfaction of trying to get the complete value for their money even when it stands as an awful experience.
TRANSACTION UTILITY.
A lot of retail companies are aware of the effect of transactional utility and they make use of simply free items like free shipping and 5% discount to make people buy more of a product that they might not even need.
MENTAL ACCOUNTING.
This mentality make people think of extra cash as a means to get some other things that may not be so necessary, I am smiling right now because I know that I also fall within this category it is very funny how we might not get a good pair of shoe or cloth because we feel it is not necessary or might cost us too much but the moment we get some free cash we go on to immediately purchase those things that we do not need.