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”.

Finweek English Edition - - FRONT PAGE - BY JES­SICA HUB­BARD

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.

Dan Ariely

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