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Why We Make Irrational Decisions

Why We Make Bad Money Decisions

Have any of you ever spent more money than you intended when shopping online, just to get free shipping? How about buying a bulk item at the grocery store that you probably won't consume, just because it's on sale? If we're buying things we normally wouldn't and those costs don't outweigh the "free" perk than we're not doing ourselves any favors. According to behavioral economics, we make bad decisions systematically and make the same errors again and again. We choose the free shipping time after time, even though it actually causes us to spend more. To find out what other mistakes we make because we're wired to make them just

.

A recent article in The New Yorker explored these concepts that were the focus of two books, Predictably Irrational: The Hidden Forces That Shape Our Decisions and Nudge: Improving Decisions About Health, Wealth, and Happiness. One experiment outlined in Predictably Irrational suggests that we consistently make the wrong decision because "there's no visible possibility of loss when we choose a free item."

Nudge delves into reasoning why we have so much trouble saving, outside of the explanation that we have trouble acting in our own best interests. It argues that we're loss averse, and can't seem to get past any reduction in our paychecks even though the money is going toward our retirement savings. They suggest that people should be presented with options that would "nudge" us toward making the right choices, like sending credit card holders annual statements of how much money they've wasted in late fees and interest. Seeing the numbers would discourage us from delving into more credit card debt.

Do you think these studies hold any bearing, and are there any "nudge" solutions you can think of that would help veer you away from making unreasonable decisions?

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CupcakeGal10 CupcakeGal10 8 years
Great article, thanks Savvy!
terryt18 terryt18 8 years
I went to Amazon to get these books, but I had to add another item or I wouldn't get free shipping. So I bought another book about saving money. Then I realized I needed this information super fast, so I had it express shipped for a nominal extra fee. I cannot wait to learn how to save money!
Le-Luxe Le-Luxe 8 years
Speaking of...i just spent more money at Sephora so I could get free shipping...haha. I think it would benefit me greatly by seeing this stuff. In fact, I want to buy that Nudge book and put myself into more debt! lol
McCubcakes McCubcakes 8 years
i need to get these books now...i am always the person that says, oh just 15 more dollars and i get free shipping...let's add some socks to the basket. it's a problem. but, i think i have a problem online shopping in general...
LaLaLaurie06 LaLaLaurie06 8 years
I'm interested to read these books now.
hotstuff hotstuff 8 years
Ha, I've done that plenty of times on Amazon gotta get that free shipping! I think it would be great if a lot of our expenses truly showed what we are spending. Those cell phone plans never turn out to be the same costs that they sell you on neither does the cable bill. How many of us ever go to the supermarket and leave with only what we went there for? I think the credit card companies know they would lose a ton of business if people actually tracked what they were wasting in fees!
shanimalcracker shanimalcracker 8 years
I think nudges in the right direction do help. Being at my first full-time job and then going to Law School this fall, all I can think about is money. I'm putting a lot into my 401(k), but it definitely is hard to see what I "could have" made in cash as opposed to what I am saving for the future.
Lovely_1 Lovely_1 8 years
Wow! Incredible! It would probably help me! Seeing numbers always works :P
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