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10 biases that make you spend more and how to avoid them

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1. Spotlight Effect

What is it?
If you feel that everybody is observing you and you make a special effort to impress the people you don’t even know, you are suffering from the spotlight effect.

The term was coined by Thomas Gilovich and Kenneth Savitsky, in 1999, and what it effectively means is that you will spend more on vehicles, gadgets, clothes or accessories just because you believe it will impress others.

How to avoid it
Before you go on a buying spree, ask yourself if you would notice the same thing if someone else were to buy it? If the answer is no, do not spend on it.

2. Choice Supportive Bias

What is it?
This bias makes you justify your purchases whether or not these are good choices, or offer value for money. So if you continue to spend more on a particular brand or product even though there are cheaper and better options in the market, you are clearly afflicted by this bias.

How to avoid it
Make it a point to try out new products and buy other brands occasionally. Do not blindly dismiss other options and as long as these don’t upset your budget, purchase other items for they may be better bargains or may offer superior quality.

3. Decoy Effect

What is it?
Retailers use this trick and introduce a decoy item to make the shopper buy an expensive product. If there are two models priced at Rs 300 and Rs 500, one is likely to go for the cheaper one. If, however, a third item is introduced at Rs 450 with fewer features than the Rs 500 product, people are likely to purchase the Rs 450 item.

How to avoid it
Identify your need and budget and do not be swayed or confused by the number of models or prices. Also conduct research before shopping.

4. Anchoring Effect

What is it?
This bias gets you anchored to the first number you come across, forcing you to make your decisions based on it and spending more. So if your budget for buying a watch is Rs 4,500 and the first one you like in a shop is for Rs 6,000, you are unlikely to buy it. But if the shopkeeper offers it at Rs 5,400 (10% discount), you will be more likely to buy it.

How to avoid it
Though it’s hard to avoid this bias, one way to do it is to stick to your budget. Also try to consider the real need for the product and whether it is worth the amount you are paying for it.

5. Confirmation Bias

What is it?
This bias makes you accept ideas that are aligned to your previously held beliefs and affects your shopping and spending decisions. So if an advertisement has reinforced the benefits of a particular product over the years, you are likely to accept a new one only if it focuses on the same benefits. This may mean spending on expensive products even though better items are available.

How to avoid it
The best way to overcome this bias is to try out new products and conduct proper research to understand if you are getting value for money.

6. Post-purchase Rationalisation

What is it?
When it comes to making purchases, people typically refuse to accept that they have made a bad choice. So they rationalise it even though it’s a big-ticket purchase and will not last them long or be of any real use to them. This usually means a lot of money down the drain, though the simple act of exchanging it for a better product may be an option.

How to avoid it
This is simple to overcome. Just exchange the product for a better one instead of losing money and living with a bad decision for the rest of your life.

7. Present Bias

What is it?
As the name suggests, many people make spending decisions based on the present without thinking of the future. This is the reason we are drawn to sales, discount offers and buy now, pay later options, and end up buying stuff we don’t need.

How to avoid it
Don’t buy immediately. Wait for a few hours or a day and then buy it if you really need it. Also think if you will need the item six months or one year later before buying it.

8. Restraint Bias

What is it?
Many people overestimate their self-control when it comes to impulse purchases. So even though they have a budget and go with a list, they often end up buying more than they need or upset their budget.

How to avoid it
The best way to avoid this bias is to carry only the cash you need for the shopping list you have in mind. It’s also a good idea to leave the credit cards at home on such expeditions.

9. Bandwagon Effect

What is it?
This bias makes you follow the norm and do what others are doing. So people typically buy clothes or jewellery that are in vogue, regardless of whether they really need it or whether it suits them. Inevitably, they end up overspending or wasting money.

How to avoid it
Consider your own budget and requirement before buying something, not because everybody else is doing it.

10. Social Desirability Bias

What is it?
This bias makes you want to keep up with the Joneses. In an effort to fit in with the crowd, you end up spending more than you can afford to. From a minor financial irritant like overshooting your budget, this can lead to bigger problems like getting caught in a debt trap.

How to avoid it
The best way out is to either have a social circle that does not make heavy financial demands or not be affected by others’ lifestyle and keep the focus firmly on your own financial limits and budget.
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