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“People do not buy goods and services. They buy relations, stories, and magic.”
As consumers, we are often driven by our emotions. Neuroscientists have learned that nearly 95% of all our decisions are made emotionally and intuitively. The forces of marketers and our biases make it nearly inevitable that we make irrational purchase decisions. Marketers embrace irrational 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 longer period of time. 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, most of which we don’t really pay attention to. Our tendencies are to screen most of the information we are exposed to. These perceptual processes, called selection attention, selection distortion, and selection retention, help us to either 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 6 people- three 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. 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 occurs 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 more efficiently find a single user’s behavioral and shopping information 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 are seeing a bargain.
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 used today. 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 good for those who don’t have enough savings like Nellie Young. She is 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.
Many ads contain emotional messages to build brands. Through nice 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. Many times I am 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 buy 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. 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 even if we don’t need it. Nudge marketing is used to influence consumers’ decisions towards certain 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 better understand them to fight off the tendencies to act irrationally when it comes to money. We focused on just a few here, but we wrote about many potential biases we have 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 many of us to spend money on the latest new shiny object rather than save for retirement or paying off our monthly credit card balance fully. 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 the 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. According to Mercator Advisory Corp, it 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 certain retailers, and dollars on dining, hotel, or other travel needs. Many of the perks are offered 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 bad consequence if you have a tendency 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. CreditCards.com 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 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 that was 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 of signing up for a card. The high level of complexity of these agreements for most people to really understand their responsibilities.
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, better disclosures when it comes to hidden fees, interest rate changes, and details on rewards programs. Some improvements have been noted 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 full–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 teen 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. They make money on fees besides the monthly finance charges on consumers’ hefty balances after the credit card’s grace period. Unless there a change in behavior, 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, in a range of $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 since 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 discussed in the fine print. However, many of these fees may be hidden more than glaringly obvious. You need to really understand what the credit card offer means regarding your responsibility. Take the time to shop for a card and take control of your spending and paying off your bills fully.
The Credit Card Industry Is Evolving
The credit card industry is evolving. 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.
With increased scrutiny, better credit card agreements, increased competition, and advanced tools, consumers can control their finances. 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, 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:
- Shop wisely for a credit card understanding the hidden fees that may not be worth the perks.
- Read the fine print– terms and conditions– carefully even after you made your selection.
- Pay your credit card bill in full so you don’t carry a balance.
- Spend below your means always.
- Pay with alternatives to credit cards if you are carrying large balances.
- Don’t close any credit card. Instead, cut your card in a million pieces or simply put it in a drawer.
- If you have multiple cards, decide how to use them for different categories and don’t max out their limits.
- Avoid cards with annual fees unless they have important features you will use.
- Don’t get addicted to credit cards. Limit the number of cards you have.
- When it comes to paying your card bills, automate and don’t procrastinate. The penalty rates are punitive for a reason.
- If your child is an authorized user of your credit card, teach them about how to use the card wisely and safely.
- Be aware of behavioral biases of spending more when using your credit card instead of cash.
- Review your credit card bills for errors, poor judgment on your part, or to correct impulsive spending.
- Once COVID goes away, hopefully soon, use cash for some of your discretionary purchases.
- 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
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 important. Be aware of your emotions and stop and think when making money decisions. You are not defenseless but may need to work on how to avoid 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 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.
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.