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June 23, 2020

This Is Your Brain On Spending

Author: Kristopher W. Carroll, CFA®, CFP®


There is evidence all around that many people spend money irrationally oftentimes to make them feel better, to satisfy their mid-life crises or to show off a lifestyle they really cannot afford in order to “keep up with the Joneses.”  All of these behaviors are rooted in our brains.


So why does spending money feel good?  This question is especially timely given the recent pandemic-related layoffs, market declines and the growing needs of bored people to find recreation in spending when they should probably be hoarding their financial resources.


The science website Gizmodo recently posed this question to several researchers and their answers were interestingly diverse.  One pointed to “acquisition utility,” which many of us experience when we see something we want priced below what we expect the price to be.  This could be renamed the bargain hunting syndrome.  This satisfaction of finding or negotiating a bargain and the pleasure it creates seems to be hardwired into the human mind.


The researcher also explained “retail therapy,” which occurs when depressed people go on a shopping spree to cheer themselves up.  Buying and making purchase choices helps restore a sense of control over our lives when it feels as if the outside world is robbing us of it.


Another researcher addressed the “keeping up with the Joneses” behavior by contending that paying for an expensive bottle of wine or a high-end brand item can send out positive social signals. It boosts other people’s opinions about our wealth and therefore reflects positively on our personal social esteem.


An additional respondent dug deeper into the human mind, noting that the reward centers of our brains are tightly connected.  If you want something, these regions begin secreting dopamine and you experience a “gotta have it” feeling.  The same brain centers are closely linked to our memory banks and our minds recall that we felt good the last time we made a purchase.


“Present bias” was also noted, which is the simplest explanation of all.  When you buy something with your credit card, you are immediately rewarded with the acquisition of something you want.  The commensurate pain of losing the money you paid is deferred into the future when the bill comes.  Research shows that the immediate gratification is far more likely to win out over the delayed discomfort of making the payment.


Toward the end of the study, another researcher noted that individual human psychology and culture play a role in all of this.  Some people are natural misers and prefer to hide their money under the mattress than part with it through a purchase.  Others seem to be more likely to succumb to the various brain patterns that encourage spending.  It just depends on who we are.


I do not believe I work with very many unreasonable spenders.  However, I found this information interesting and think it provides some good context about why some people spend so much.


Bottom Line: Pay attention to your spending and if it changes, let’s talk about why.




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