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Abstract
Our spending behaviours are not as rational as previously thought, has been known for some time. How irrational is our irrationality when it comes to finance is still being figured out, this week we try to fathom it.
My colleague Khushi and I have looked at how the internet has revolutionized our online shopping experience, making it hassle-free and presenting numerous choices. Nevertheless, there is a trade-off for this convenience. We investigated how digital platforms manipulate their design to influence our actions. By utilizing tactics like displaying pop-up messages that claim scarcity or time-sensitive deals, they create a sense of urgency and encourage us to make purchases. In this week's newsletter, we delve into the consequences of these manipulative tactics and if behaviour economics can aid us to overcome such deceptive tactics.
Research shows that online markets like physical markets thrive on aesthetics(or first impressions), 50 milliseconds to be exact. The work of Bonnardel et al., 2011 and Yang & Shen, 2019 shows that our online purchasing behaviour is directly affected by how a website looks.
The above video mentions the infamous Fyre Festival. The organizers heavily marketed the music festival on social media platforms, advertising an extravagant and elite event for those who attended. Yet, it turned out to be a train wreck. This example highlights how we may fall victim to the halo effect – a cognitive bias that leads us to form broad opinions of individuals or entities based on limited information or one positive characteristic. It reveals how easily we can be influenced by carefully crafted imagery presented online and celebrity endorsements.
Exploring the Factors That Affect Our Spending:
We live vicariously through social media influencers, immersed in their exciting narratives of beauty and success. These narratives frequently present an opulent lifestyle that can trigger our aspirations. Consider instances when you were swayed into making purchases by these accounts. We are often influenced by various factors online to conform to certain patterns of behaviour and make purchases that we may not have made otherwise. This can make us overlook future consequences.
Moreover, social media-induced hedonic adaptation is another challenge many faces when trying to emulate what they see online. The phenomenon occurs as our brains adapt quickly to positive experiences leading us toward greater consumption and diminishing returns over time, causing individuals to seek out more extreme experiences or purchases just to maintain the same level of happiness. Therefore, while indulging in excessive spending or retail therapy may provide temporary happiness or relief from stress, it does little to address underlying issues that may be causing such feelings in the first place.
Overconsumption, Financial strain, and Environmental impact:
Our hedonic tendencies, coupled with the influence of social media and targeted advertising, can lead to overconsumption. Recent research indicates that online impulsive buying is not influenced by our financial circumstances, which contradicts earlier studies suggesting situational factors like disposable income and available funds limit such purchases (Zhao et al., 2021). This finding suggests that personal resources do not seem to constrain impulsive consumption in the digital marketplace. Consequently, it raises queries about whether broader credit accessibility has transformed consumption patterns by diminishing the effect of discretionary income.
However, beyond personal finance management lies another aspect that must not be ignored - our impact on the environment through impulsive buying habits. With an increasing number of distractions vying for our attention every day, we are often lured into making purchases without considering their environmental consequences.
The fast fashion industry stands out as a prominent example in this regard - its extensive use of raw materials coupled with poor waste management practices contribute significantly to water contamination and greenhouse gas emissions worldwide. Shockingly enough, discarded clothes alone account for 17 million tons worth of waste globally each year!
The issue of unsustainable consumption is one that cannot be ignored, and the statistics clearly highlight this problem. While developed nations are currently leading in terms of consumption rates, it's important to note that developing countries will likely follow suit as their economies continue to grow. However, simply focusing on individual changes alone won't solve the issue at hand - we need more comprehensive solutions that target the root cause of overconsumption.
So how can we overcome the impulse to purchase brought on by our hedonic tendencies, web design, and targeted advertising? We have no answers for now but behaviour economics offers insights.
Digital Nudging: A Solution?
Excessive consumption has traditionally been associated with production, but recent research indicates that digital intermediaries also contribute to this phenomenon. Iyer et al.'s study emphasizes the importance of examining how these intermediaries facilitate unsustainable behaviour through targeted advertising and persuasive design features on online shopping interfaces.
With this in mind, the concept of "digital nudging" presents itself as an innovative approach that can effectively guide us towards making more sustainable choices while using digital interfaces such as websites or social media platforms. By utilizing subtle prompts and cues like personalized recommendations, informative labels or interactive tools, these nudges aim to create informed decision-makers who would minimize their negative consequences. However, achieving this goal is easier said than done - resisting temptation is hard enough in our regular lives!
As we are consistently exposed to persuasive marketing tactics through digital devices, it is essential to research and comprehends the reasons behind our consumption behaviour. This requires continued study into how effectively can digital nudges impact our behaviour in the modern era.
We are launching PRISM
To this end, the behavioural is launching its first and a long term economic research in partnership with FinMin (Ministry of Finance), digital banks, and with a large banking partner. This study will be co-led by Ms. Sandhya Vasudevan, former MD & CEO of Deutsche Bank, currently part of ASIA (Advanced Study Institute of Asia) Professor Atul K Shah, Economist & Auditor currently with the City University, London, and Professor Amogh Rai, ED, Sanrachna. The study has its own board which has academics, but also policymakers, and venture capitalists to review the progress and direction of PRISM.
We are thrilled to introduce you to "PRISM" (People's Response to Investment, Saving, and Money). It is one of the first of its kind longitudinal research that aims at gaining an improved comprehension regarding financial decision-making patterns along with their alteration over time as influenced by different factors. Our intention is not only limited to uncovering the aspects that impact people's savings and investment habits but also utilising these findings for promoting responsible financial behaviour and encouraging sustainable financial practices using behavioural economics, and other insights from
The launch of this project also aims to foster partnerships with financial services providers, policymakers, and other relevant stakeholders. These partnerships will help develop policies and interventions that promote financial inclusion and education, ensuring that all individuals have the necessary tools and knowledge to make informed financial decisions for a sustainable future. We believe that this project will contribute to the global efforts aimed at promoting sustainable consumption and production patterns, ultimately supporting the achievement of the United Nations' Sustainable Development Goals (SDGs).
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