Born to spend
SOUTH AFRICANS SPEND ALMOST FOUR TIMES MORE ON ALCOHOL THAN ON OUT-OF-POCKET HEALTHCARE, AND ABOUT THE SAME ON DSTV SUBSCRIPTIONS AS ON RETIREMENT ANNUITIES. WHY? BECAUSE “RETIREMENT IS FREE AND RAs ARE NOT AS ENTERTAINING AS DSTV”.
These were some of the findings (and conclusions) that consulting firm Eighty20 released last year in its Conspicuous Consumption report, which drew on data from Statistics SA’s Income and Expenditure Survey and other sources. While some of Eighty20’s sound bite-friendly claims raised eyebrows and caused many to question the validity of the numbers, the report nevertheless drew much-needed attention to our spending habits – and the drivers behind them.
According to Eighty20, households earning up to R3 500 a month spend 8% of it on clothing and footwear, and 2% on education while those with between R3 500 and R10 000 a month spend 7% on clothing and footwear, and 3% on education. The report points out that Edgars sold R25bn worth of merchandise in the 2013 f inancial year; and the retailer has over 3.8m store-card holders. Just over 50% of all sales are on credit.
A recent blog post by 22seven, the Cape Town-based personal financial management service, stated that its users spend about 10 times more money on their cars than on their savings.
If we take our lead from these findings, we can pret t y much assume that, as a nation, we are a bunch of narcissistic spendthrifts.
1. VAIN OR… WELL, JUST HUMAN?
IN ITS REPORT, Eighty20 attributed some of this spending behaviour to ‘status anxiety’, and the need to be seen sporting certain labels and driving the right car. Others, when commenting on the way in which South Africans spend, look to the so-called ‘Black Diamond’ phenomenon and the emerging black middle class’s need to brazenly display its newfound wealth. If you frequent Parkhurst in Johannesburg on a Saturday afternoon, you might well attribute it to pure hubris and a great deal of raging hormones.
However, what if making foolish decisions about how we spend our money, just as we make foolish decisions about what we eat and drink on a daily basis, is simply human nature – part of our genetic makeup?
Instead of pointing the finger at big, bad banks and conniving advertisers who dangle bargains and hot models in our faces, should we not just admit that we are human beings and woefully prone to impulsive, irrational behaviour – even when it comes to our money?
For the growing band of academics, financial professionals, policymakers and entrepreneurs worldwide who are ploughing into the ever widening field of behavioural economics (and one of its ‘subsets’, behavioural finance), getting to grips with our ‘humanness’ is a critical place to start when it comes to money matters.
2. HARDWIRED TO BE HOTHEADED?
PUT SIMPLY, BEHAVIOURAL economics combines the fields of psychology and economics, and many within the financial and public policy realms are using it to figure out how our natural tendencies – or psychological ‘blind spots’ so to speak – prevent us from making sage decisions around our rands and cents, and ultimately, our futures.
For example, behaviourists insist that we are hardwired for immediate, short-term gains (damn that dopamine!) and we are irrationally afraid of loss. In the oft-cited behaviourist experiment, subjects have to choose between a sure-fire R3 000 loss and an 80% chance of losing R4 000; or the 20% chance of losing nothing. The majority of people go for the second option, even though it’s not the mathematically sound choice. ( To spell this out, an 80% chance of losing R4 000 works out to an average loss of R3 200; so it’s better to lose an even R3 000, right?)
Yet the thought of enduring a loss when there’s even a vague chance of avoiding it runs against our caveman tendencies.
These instinctive responses to the ‘real world’ can easily lead us into some pretty hairy financial scenarios, ranging from monstrous credit card debt to, well, hairy debt collectors breaking down our front doors.
3. MAINSTREAM ECONOMICS
FORTUNATELY, THERE ARE some really smart people who are now doing more than just publishing academic papers on the topic. Behavioural economics has undoubtedly progressed from being a cool-sounding concept bandied about in classrooms to a discipline that is attempting to fundamentally alter our approach to personal finance (and much more, like public policy… but let’s stick to finance for now). Since its emergence as a formally recognised and respected field of scholarly inquiry in the Seventies or thereabouts, behavioural economics has firmly entered the mainstream – producing a Nobel Prize, a growing treasure trove of empirical research, and a remarkably consistent record (annoyingly so, for many) of turning traditional or neoclassical approaches to economics very firmly on their heads.
Predictably Irrational, a book written by Dan Ariely, a behavioural economist at Duke University, spent 11 weeks on The
New York Times bestseller list and got many decision-makers worldwide interested in behavioural economics and its potential role in both personal finance and policymaking.