How Our Emotions May Lead To Irrational Money Decisions

“People do not buy goods and services. They buy relations, stories, and magic.”

Seth Godin

As consumers, emotions drive our decisions. Neuroscientists tell us that we make our decisions emotionally and intuitively nearly 95% of the time. The forces of marketers and our biases make it almost inevitable that we make irrational money decisions. Marketers embrace unreasonable customers because that is part of their primary goal. Their marching orders are to attract and retain profitable customer relationships. Our biases keep them busy as they collect big data about us, our purchases, and how we spend.

It is no wonder that it is easy to overspend and ramp up our credit card balances. That makes the credit card companies happy as consumers “buy now, pay later” allows them to pay much later at higher interest rates over a more extended period. Do you see what I am getting at? We will discuss some of the marketing tactics and biases we need to overcome with better financial discipline. By understanding more, we may become more rational decision-makers.

Marketing Tactics Can Be Harmful To Our Perceptions

Let me just say that marketers are not bad people and consumers aren’t defenseless. We are bombarded daily by an average of 1,500 ads or brand messages, but we don’t pay it any attention. We tend to screen out most of the information we receive. These perceptual processes, called selection attention, selection distortion, and selection retention, help us screen out the messages or align them with our beliefs and attitudes.

The Invisible Gorilla Experiment

A famous psychology experiment in a 1999 study by Daniel Simons and Chris Chabris that tested selective attention about a gorilla, better visualized here, makes the point about selective attention. For those who don’t mind the spoiler, the experiment showed six people in white shirts and three people in black shirts passing basketballs around. As participants watched, they kept count of the number of passes made by people in white shirts. At some point, a gorilla strolls into the middle of the action, faces the camera, and thumps its chest. It then leaves, spending nine seconds on the screen.

Who saw the gorilla? Half of the people who watched the video counted the right number of passes but missed the gorilla thought to be invisible. Our visual systems have evolved in recent years for the benefit of marketers, and they have worked hard to play with our intuitions. The role of big data plays a crucial role for marketers. A recent infographic from Domo, courtesy of Visual Capitalist, displays mesmerizing 2019 stats on how much data is generated every minute and from which platforms.

A Sampling of Statistics Per Minute:

  • Americans use 4,416,720 GB of Internet data.
  • There are 188 million emails sent and 18,100,000 texts sent.
  • Consumers spend $1 million online.
  • Nearly $240,000 worth of transactions occur on Venmo.
  • 390,030 apps loaded.
  • YouTube users watch 4.5 million videos.
  • Giphy serves 4.8 million gifs. Big Data enables marketers to access:
  • Information about users’ purchasing patterns.
  • A user’s past purchases.
  • Behavioral information from growing history and patterns on a website.
  • Streaming data from millions of users.

Marketers use huge customer relationship systems to find a single user’s behavioral and shopping information more efficiently to make recommendations. As one marketing consultant said, Bias-driven marketing is a no-brainer. As such, marketers can leverage biases to create better user experiences and boost conversion rates.

How They Can Manipulate Shoppers

They use manipulative and subliminal messages convincing us to buy products we may not need. Often prices even on sale days like “Black Friday” are still higher than before, but they use eye-catching “50% off” signs. “Buy More, Pay Less” stimulates our brains into thinking we see a bargain.

Expert Endorsements

Marketers use expert opinions to convince consumers of the safety of their products. I recall my Dad, a heavy Camel smoker, telling me that doctors endorsed smoking when he began this bad habit and many people fell for the ad. It seemed funny at the time, and I dismissed that as a possibility. However, my Dad was right though I never got to tell him as he died of emphysema, no doubt from his cigarette habit.  An old Camel ad, among other ads discussed in this study, “The Doctor’s Choice Is America’s Choice” ran 1930-1953 when smoking became the norm. The use of a doctor’s endorsement was convincing to sell the product.

Tom Selleck And Nellie Young

The strategy of using experts or actors who are credible is common. Tom Selleck, a trustworthy figure to many, has endorsed reverse mortgages to much success for American Advisors Group (AAG). In the ad, Selleck is a voice of reason about reverse mortgages are suitable for those who don’t have enough savings, like Nellie Young. She was among the first to get a reverse mortgage loan in 1961 when she lost her husband. He makes us care about Nellie and others in a similar situation.

Reverse mortgages are loans that enable homeowners, usually at retirement age, to tap into the equity in their homes. There is little discussion in the ad regarding the downside of the upfront costs, variable interest costs, and lack of tax deductibility on interest paid. A significant downside of reverse mortgages is the lowering of the value of your home as an asset. Selleck’s emotional promotion of reverse mortgage must be accompanied by an understanding of the drawbacks for those considering this loan.

Emotional Ads

Many ads contain emotional messages to build brands. Through excellent storytelling, music, and entertainment, we can get sucked into the sales pitch unknowingly. Even using words like “Last Chance” may create that fear of missing out or FOMO. I am often in a rush scrolling for a specific email but I see that message or “Time is running out” and I stop to stare at it before I remind myself that I am in a hurry.

Have you ever bought clothes you didn’t need but saw it on someone else in the ad and bought it? I have, and I am sorry to admit it. This is a self-deception buy when you can visualize it with the hope it will look as good on you, and it doesn’t, and you later realize it wasn’t you, so you stop wearing this new garment. Hopefully, as it is barely worn you can give it away to stop who will appreciate it.


Overspending Due To Irrational Decisions

Marketing strategies, if successful, may lead to consumers being profitable customers and happy being so for many consumers that will lead to overspending because of irrational decision-making. They nudge us to buy it even if we don’t need it. Nudge marketing is used to influence consumers’ decisions towards specific options. It refers to deliberately manipulating our choices and stimulating purchases, also known as higher sales for their business.

We, as the buyers, need to take the blame for overspending, recognizing our vulnerability to falling for marketing trickery. Manage your spending better in these ways. It is not only the marketers that are nudging us. Our own biases are at work as well. Wherever we shop, the convenience of having a credit card allows us to spend more. This has been referred to as the “credit card premium” in an MIT study by Drazen Prelec and Duncan Simester.

Biases Add to Our Bad Choices

Biases often result in us spending more than we should, paying off slower or not at all. We need to understand them better to fight off the tendencies to act irrationally regarding money. We focused on just a few here, but we wrote about our many potential biases when we invest or overspend.

Present Bias Allows To Favor Instant Gratification

The present bias values the present when we are planning for the future. Present bias causes us to spend money on the latest shiny object rather than save for retirement or fully pay off our monthly credit card balance. As a result, we favor the present because we favor instant gratification. However, this bias comes at the expense of our financial discipline. Overspending leads to ramping up big bills on our credit cards we can’t pay off properly.

Stephan Meier’s study in 2010 found present-bias minded individuals are more likely to borrow and accumulate higher balances on credit cards. That means your debt is growing at compound rates detrimentally rather than the positive compounding growth you would get in your retirement bucket. As cardholders, we don’t fully internalize the costs that may stay us for years. Instead, we should consider future savings for retirement, investments, and paying down debt. We need to be rational when making purchase decisions that harm our finances.

Who Are The Beneficiaries Of Overspending? Credit Card Issuers

Credit card companies are direct beneficiaries of our overspending habits. Mercator Advisory Corp costs about $250 to acquire each customer, but retention is the long-term goal. To acquire customers, they may offer a host of features and special perks, including introductory offers as low as 0% APR, cashback, points, mileage, discounts on specific retailers, and dollars on dining, hotel, or other travel needs. Many of the offered perks are upfront and short-term or just part of the trial period.  Both the offers and the costs are difficult to understand.

Teaser rates and rewards disproportionately hurt consumers with biases for instant gratification. We use our credit cards more freely than if we were paying with a finite amount of cash. A study by Theresa Kuchler and Michaela Pagel proved present-biased preferences contribute to households’ inability to reduce debt levels associated with credit card use.  The higher the impatience of participants, the more likely they preferred to spend their paychecks rather than lower the debt paydown of the credit card balances.

Hyperbolic Discounting Focuses On What Is Immediately Available

Hyperbolic discounting is a bias that occurs when people will opt for immediately available rather than later on. For example,  People will take $50 right now rather than $100 a month from now. We just don’t want to wait any longer. This happens when we see desirable upfront benefits offered by credit card issuers. Never mind that your teaser rate or points reward is a one-time or one-month period. You may have missed the fine print that lets you know that your APR is set 1%-2% higher for the long term. This is a harmful consequence if you tend to carry big card balances.

The Fine Print Is Hard For Us To Read

Have you seen a credit card contract lately? They are wordy and complex, deliberately so. analyzed the readability finding the average credit card agreement was 4,900 words in 2016 and lacked clarity. Are first-time cardholders, either young or the average person on the street, likely to power through these documents? I don’t think so.

Increasingly, credit card companies are reaching out to subprime users, those with poor credit histories, offering credit for the first time. The US Consumer Finance Protection Bureau published a model credit card agreement 1,188 in length for issuers to emulate for consumers to read. It is not simply the length of words but a lack of clarity in signing up for a card—the high level of complexity of these agreements for most people to understand their responsibilities.

When used properly, cards are convenient tools for toxic financial products for many people. This is concerning as issuers are getting a growing share of this market of people who may be ramping up unaffordable debt. Didn’t that happen when subprime borrowers bought houses with mortgages they couldn’t pay? This is a growing concern and should be for everyone, especially regulators.

 Did The Credit CARD Act of 2009 Help Consumers?

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 provided consumers, not businesses, with more protections and better disclosures regarding hidden fees, interest rate changes, and details on rewards programs. Some improvements were reported in the latest Consumer Finance Protection Bureau report in 2019, but more needs to be done.

Card issuers prosper in many ways. When we cannot pay our card balances in total–and 58% of Americans do not– it is profitable for the companies. By paying the minimum amount, we incur finance charges at high interest rates in the high teens, which are carried over month-to-month at huge costs. Please read our views on the pros and cons of credit cards here.

Credit card issuers earn money in a lot of different ways. Besides the monthly finance charges on consumers’ hefty balances, they make money on fees after the credit card’s grace period. Unless there a behavior change, the compounding effects are huge for issuers. They also take a processing fee that is somewhere around 1%-3% of the transaction from merchants.

Here are typical fees consumers pay:

  • Annual fees that average about $80 range from $20 to more than $200.
  • Penalty or late fees if you don’t pay the minimum monthly amount of about $30 initially, but the amount rises if it recurs though are capped based on inflation changes per the Credit Card Act.
  • Over-limit fees for when you go over your credit limit. You still have this feature, but you need to opt-in under the Credit CARD Act.
  • Balance transfer fees on the amount you are moving from one credit card to another because you found a better deal.
  • Card replacement fee if you lost your card.

As noted, there have been some reductions since the Credit Card Act of 2009. These amounts may differ between companies and individual consumers based on their credit scores, discipline, and behavior. These fees are usually in the fine print. However, companies may hide many of these fees rather than make it more than glaringly obvious. You need to understand what the credit card offer means regarding your responsibility. Take the time to shop for a card and fully control your spending and pay off your bills.

The Credit Card Industry Is Evolving

The credit card industry is evolving, and the growing competition of new payment providers is good news for consumers. Recognizing that issuers have come under scrutiny since the Great Recession has resulted in the CFPB issuing reports on credit card issuers disclosing how they are faring with the Credit Cardholders’ Bill of Rights. Advancing digital technologies can provide more tools for users to pay bills promptly, get balance notifications when they are close to their credit availability, and spending trackers for consumers.

Consumers can control their finances with increased scrutiny, better credit card agreements, increased competition, and advanced tools. That said, it may not be easy. However, it is essential to control what you can at the point where you may be at your weakest. Be a more discernable customer. That may be shopping more carefully, planning for the future rather than acting out of a need for instant gratification. Whatever your weakness, offset it with strength. Be aware of these marketing tactics and biases that may encourage irrational decision-making.

Financial Discipline Is Your Responsibility

There are a lot of forces that are collaborating to get you to spend money. While some people excel in financial management better than others, most of us have blind spots. The following list may be something you already know, and other rules may resonate with you. Of course, you may have suggestions that work for you, and you are willing to share. Having better discipline over your money will give a better feeling over the long term.

Use These Rules For Better Money Habits:

  1. Shop wisely for a credit card, understanding the hidden fees that may not be worth the perks.
  2. Read the fine print– terms and conditions– carefully even after you have made your selection.
  3. Pay your credit card bill in full, so you don’t carry a  balance.
  4. Spend below your means always.
  5. Pay with alternatives to credit cards if you are carrying significant balances.
  6. Don’t close any credit cards. Instead, cut your card into a million pieces or simply put it in a drawer.
  7. If you have multiple cards, decide how to use them for different categories and don’t max out their limits.
  8. Avoid cards with annual fees unless they have essential features you will use.
  9. Don’t get addicted to credit cards. Limit the number of cards you have.
  10. When it comes to paying your card bills, automate and don’t procrastinate. The penalty rates are punitive for a reason.
  11. If your child is an authorized user of your credit card, teach them about how to use the card wisely and safely.
  12. Be aware of behavioral biases of spending more when using your credit card instead of cash.
  13. Review your credit card bills for errors, poor judgment on your part, or to correct impulsive spending.
  14.  Once COVID goes away, hopefully soon, use cash for some of your discretionary purchases.
  15. Find a credit card that gives you alerts when payments are due, balance notifications when you are near 30% of the credit available, and automate paying your credit balances by your paycheck.


Final Thoughts

Marketers appeal to our emotions so that we will be better customers. Their tactics are a fact of life likely to continue if not rise in the future. How you react to these efforts and your own biases is critical. Be aware of your emotions and stop and think when making money decisions. You are not defenseless but may need to work on avoiding temptations to overspend and have too much debt. Delay your shopping when and how you can.  Manage your spending, so you do not overspend and ramp up high-cost credit card debt.

Thank you for reading! Please let us know what works for you. We would appreciate your comments. Please share this post if you found something of value and consider subscribing to The Cents of Money and receive our weekly newsletter and other goodies.



2 thoughts on “How Our Emotions May Lead To Irrational Money Decisions”

  1. re: reverse mortgage

    I’ve had a reverse mortgage since 2016 and haven’t noticed the value of my home lowered. Please explain how a reverse mortgage lowers the value of your home.


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