Moneywise24 Personal Finance

We continuously hear about how people make unwise financial decisions, and how we rely too much on our emotions. We tend to think “this will not happen to me, I am a smart and educated person”. A documentary I saw yesterday demonstrated the exact opposite. Below, I would like to take the opportunity to recap two scenarios of yesterday’s documentary, and the results.

5 Euros now, or 40 Euros in six weeks

Different random people on the streets were offered a 5 Euro bill on the spot, or they had the option to receive 40 Euros in six weeks. Nearly all people chose the 5 Euro bill option. However, taking the 5 Euro bill option is the most unwise decision; 5 Euros is much less than 40 Euros. Even if people would have been offered 5 Euros per week for the next six weeks, the total would be only 30 Euros.

We humans are greedy people, which is largely programmed in our genes. First, shopping or becoming money makes us feel good; yes, our bodies produce endorphine, having a very positive impact on our mood. However, from a survival perspective we also have to take the opportunity when it comes by immediately, as this opportunity might not be available tomorrow. Although we cognitively know, that taking the 5 Euro note now is not the best decision, emotionally it is still the best thing to do.

Absolute vs. comparative amounts

It is very difficult to look at money from an abstract point of view; how much is 10 Dollars worth? For someone earning 4 Dollars per hour it is worth much more than for someone earning ten times as much. And what is 10 Dollars worth in China, or India, or South Africa?

Random people on the street were asked to take a pick from two possible scenarios:

• You are offered an annual salary of 100,000 Dollars per year whereas everyone else earns 50,000 per year.
• You are offered an annual salary of 200,000 Dollars per year whereas everyone else earns 300,000 per year.

Although a 200,000 Dollar salary is clearly higher than a 100,000 Dollar salary, most people still chose the 100,000 Dollar salary. The main motivation of the people asked was that it makes them feel good to earn more than everyone else… people were simply comparing themselves to others, in stead of making an objective decision and go for the higher amount.

The human mind is truly astonishing, and it takes some will and effort to truly make objective decisions, which are best for you. Still, humans are emotional, and probably it will never be entirely possible to turn them off.

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It is not that I don’t like marketing; on the contrary, I studied marketing myself, and I believe it is a great tool for presenting new and innovative products to the crowd.  But the principles of marketing go much further than simply informing the crowd of a product. One of the goals of marketing campaigns is to motivate people to buy the product, to compete with the competition, and basically to get the consumer wanting the product badly.

But we have to be honest to ourselves: how can a marketeer, or a campaign, make consumers want to buy a product? Is it not our own decision to buy or not to buy a product based on our own evaluations and intelligence? Yes, we do make the decision ourselves, but what is our decision based upon? Is it based upon our true, unbiased objective observation, or is it based on what others make us believe is an objective, unbiased observation?

Marketing has many ways of promoting products to consumers in one way or the other. Below, I have listed a few of these methods. The list may not be exhaustive, and I would welcome comments and suggestions on how to expand the list further in detail.

Creating the need for an emotional state of mind

How often do you happy families, women, men, children, laughing and enjoying themselves in commercials? Depending on the product, marketeers aim at associating a special feeling or situation with the product; on a subconscious level, it means that buying that product would lead to that special feeling. The people in commercials are overly good-looking, confident, smiling, and consumers believe they will get all that when they buy the product. Creating that feeling involves the images, but also the colors used, the music and the sounds, the setting and surrounding… nothing is left out.

This association of a state of mind, or emotion, with a particular product might not lead to everyone running to the supermarket and buying the product. However, having seen that commercial 25 times, what is likely to happen when you accidentally see the product somewhere in the store? Exactly, you immediately associate the product with that feeling, and in a sense your unconscious mind has been conditioned to do so; you are likely to buy that product, even if there is a better and less expensive alternative standing right next to it.

Professional recommendations

“This product has been recommended by…”
“Thousands of people have tried this product, and they say…”

Recommendations from specialists, institutions, or simply people on the streets are a powerful tool to creating the illusion that the product must be good and worth buying, since so many people are using it. Personal skepticism is less likely to occur, since we tend to trust recommendations from others.

Making the product scarce

If a product is scarce, it usually implies that it is either extremely valuable or highly wanted. Many commercials and advertisements create a situation, in which the product is characterized as being scarce. Think about the following statement:

“Buy now, only 2,000 samples left!”

Games with wording

Our own language is often used against us. Marketeers have the fine ability to play with words in such a way, that we give a meaning to it that benefits us most. A great example of this is the expression “saving money”, which could  mean any of the below:

• setting money aside for the purpose of not spending it (and usually gaining interest on it)
• spending less money than planned

The first meaning usually earns you money, while the second meaning still means spending money. In a commercial I saw in Germany, the following statement was made:

“Having saved 10 Euros means having earned 10 Euros!”

This is, of course, an illusion, since you could impossibly earn money while you are spending it. Still, hundreds of people line up at major discount events, buying loads of items they probably don’t even need. They feel good, since they believe they have actually saved a lot of money on computers, televisions, or high quality branded clothing. But what they forget, is that they have still spend hundreds of Dollars, which they might have otherwise not spent at all.

Doing the maths

Consumers are very price sensitive, and therefore companies try to make their products as financially beneficial as possible. When it comes to debt, some companies stated monthly interest rate, making them appear extremely low. Other companies promote a very low monthly fee for a service, which comes only with an annual membership and annual payment possibilities. Some stores might increase the price of their products a few weeks before they start promoting major discounts… sometimes the discount price is higher than the original price.

These are only a few examples of how marketing works, and the methods that companies and corporations utilize in order to make their products wanted. As I mentioned before, marketing is a great tool for the purpose of bringing products to the masses. However, we as a consumer need to be conscious of the fact that many marketing campaigns are manipulative in one way or the other, and that only we can make the right decision, that benefits our needs.

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