Behavioral vs Economic Rationality

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NOVA: Mind Over Money
I was watching this PBS special called Mind Over Money the other night. year. Yes, it’s still applicable.

It was about the economy. And how everyday people’s spending habits factor into economics itself.  It focused a lot on the stock market, but it was really interesting on a smaller scale, too.

PBS’ Mind Over Money Overview

The show presented two different views on economics:  rational economics and behavioral economics. Rational economics is the system we’ve been using for a while…at least 50 years. You could also say we’ve been using it since the days of Adam Smith.

It assumes that before anyone buys anything, they weigh the outcome of their purchase carefully. Quality, utility, and desire are all factored into these crazy long and complicated equations subconsciously in our heads, meaning we always think about how long the product will last, how useful it will be to us, and how much we really want it vs. need it.

This economic rationality theology assumes that we are all rational spenders. Always. Economics as we know it depends on it.

Behavioral economics says that the populous is mostly made up of emotional spenders.  Things like competition, want to be of a higher social class than we actually are, and the desire for immediate gratification factor into our decisions when we buy.

In this model, there are some rational spenders, but the majority of the market is made up of emotional spenders via the behavioral rationality model.

The documentary  talks about how back in the day (like up until 25 years ago,)  the people on the floor of the stock exchange would be yelling, screaming, and competing. These professionals would more often be emotional spenders than the people who work there today.

With the internet and programs that allow us  to major in the pseudo-new field of economics, more of these professionals do research using complex equations which they learned in school while studying economic rationality than in the past.

That means that the people who handle stocks today are more rational spenders than their predecessors.

The film comments on how that effect(s)/(ed) the stock market in recent years. I’m not going to get into that aspect of it. I took one economics class in college that I pretty much slept through.

Not proud.

But I’m not going to pretend like I know it all now just because I watched one PBS special.

What I would like to get into is a reflection on my own spending habits. I’d also like to invite you to join me.

Do we operate from a place of behavioral or economic rationality?

I tend to believe more in the behavioral model than economic rationality.

I also feel like I am one of the few who is anal-retentive about my money. I want to know where every penny is going. If I see a really cute dress, I don’t just buy it. I look around the whole rest of the mall and then decide if it’s still something I need.

If it is, is it worth the money I’d have to fork over to pay for it?

Most usually it’s not. That being said, I have a very western/American sickness. I get this huge high from buying new stuff. Every once in a while, I give in to the behavioral model.

When I say once in a while I mean like once a  year–maybe.

But when I do, I get so happy. I feel like it should bother me. I know it’s wrong. But in that moment, I don’t even care that I’m being an emotional consumer. It feels too good to care.

Typically, when I participate in this indulgence, I later experience buyers’ remorse. It’s been rare few occasions when the spending guilt didn’t lead me to return the items I didn’t truly need.

That being said, I know I’m one of the few that waits to remove tags from my emotionally-charged retail purchases, and one of the fewer who actually returns them within return policy windows.

I truly believe that’s why the stock market is doing well, today, in 2017. The uncertainty of our country’s future has so many people stressed TF out that they’re engaging in emotional spending–providing a temporary boost to retail profits.

Am I an emotional or rational spender?

My spending profile:  Rational consumer with the extremely rare emotional shopping trip thrown in. Typically resolved by buyers’ remorse.
Your spending profile:  ?????

I’d love to hear your answer in the comments! Remember that Femme Frugality is a judgement-free platform. Whatever your answer, we’re interested in exploring your why–without condemning you in any way, shape or form.



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12 thoughts on “Behavioral vs Economic Rationality

  1. Well Heeled Blog

    I’m probably 50/50 – most of the time I am rational, but part of the joy of shopping, I contend, is having those emotional moments. As long as you don’t let them get the best of you, I say a indulgence once in a while is OK.

  2. Anonymous

    I like to think that I’m a rational spender. Basically, what I do is when I see something that I think I want in a store — I don’t buy it. I figure that I will come back in 48 hours if I really think I need/want to purchase. 48 hours gives me time to research my options and to decided if purchasing said item is a really good idea, or just an irrational desire of mine. Sometimes I end up kicking myself for losing out on a good deal — but usually, I just don’t end up buying the thing that I thought I would buy.

    Also, I hate to shop. That saves LOTS of money!


  3. femmefrugality

    We’re defying the behavioral model! I do the same thing. Once I got Beatles rock band for $120…but I felt so guilty I returned it. Kicked myself later. But oh well. I don’t really need video games.

    I hate shopping too! I get all this angst if I can’t just check items off a list and get out. We’re birds of a feather.

  4. Emily @ JohnJaneDoe

    I think I’m rational most of the time…except at the grocery store. There, I’m much more indulgent, but as long as I can limit it to one area, I’m much more accepting of the consequences. After all, there’s still only so much damage I can do, and I’ve budgeted for the excess and stay within it.

    That said, I had to work pretty hard to get it contained within that one area.

  5. Jax

    I think that I am rational most of the time. If I am going to a store there is a reason for it, and I don’t often impulse purchase. Even when I go to the mall I go with a purpose-usually just to walk around. I like to really evaluate what I need and what a good price is and whether it is something I should spend money on for better quality (a good winter jacket and hiking boots) or if cheaper is better (mostly, underwear).

    Where this breaks down is eating meals out. I KNOW cooking at home is cheaper, probably better for me healthwise and definitely better for my wallet. But I love it and will look for any excuse to do it.

  6. Gary @ Super Saving Tips

    I’m probably rational most of the time, but Emily brings up a good point…it depends where I am. In the grocery store I am much more likely to impulse buy something that is not on my list than anywhere else. But for most purchases, I carefully consider the need/want, research deals, and think about it for awhile before acting.

  7. Fruclassity (Ruth)

    No question here: I’m an emotional spender – but I’ve been gaining awareness of my spending triggers over the past five years, and I act like a rational spender most of the time now. Emotional eating – usually at restaurants or coffee shops – is still a big one for me. Once I conquer that, I’ll be full-on rational : )

  8. Kalie @ Pretend to Be Poor

    Very interesting about the history of the typical broker approaches. I think my profile matches yours exactly. I tend to over-think even small purchases, but every one in a while I just buy something I want, based on emotion. I have to believe that many Americans fall in line with the behavioral model. I just don’t think much of what’s available could even sell if we were dominated by rationality.

  9. Done by Forty

    I love this stuff, as you know. I also subscribe to the notion that behavioral economics does a lot better job explaining our behavior (and helping us improve it) rather than just assuming everything we do is rational. We’re a basket of biases or, as another author put it, we are predictably irrational.

    The home we are in the process of purchasing is, primarily, an emotional choice: we want it, and we get a lot of pride from it, and it’s an outward expression of how well we’re doing (if I’m being honest). It’s a chance to brag, because it’s so freaking pretty. Our current house, not so much…but it’s completely, 100% fine and it houses us without any real problems.

    Still, emotions matter. So, we’re a buying.

  10. Pingback: Getting Control of Your Money is a Cinch | Femme Frugality

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