Traditional patterns of economic behavior imply that people make logical conclusions about their finances in order to achieve better results.
However, in many situations, people make irrational decisions.
Consumer behavior that brings people a sense of happiness does not always coincide with what could be considered logical and reasonable.
Understanding irrational behavior in relation to money can be useful not only to predict the illogical behavior of people, but also to influence their decisions.
Below I will introduce four main models that affect the logic and financial behavior of people.
Effect of ownership
The increase in the price of a product as its value grows seems logical from the point of view of logic, but people, as a rule, consider any increase in prices to be unfair.
Consumers may prefer not to purchase goods at all if they see a price increase.
The ownership effect is the effect when a person is more inclined to value what he already owns. And when he observes a price increase, he believes that he is being deprived of something that he has almost bought.
Therefore, the desire to value what you have more than what you could buy is one of the illogical drivers of behavior with money.
Money can be counted, and a ten-ruble coin costs exactly ten rubles, but in our minds not all coins have the same value.
The term "mental accounting" was introduced by Richard Thaler.
An example is a couple who have accumulated $ 15 thousand for a vacation home, which they had planned to buy for several years. They put this money into a savings account at a rate of 10%.
At the same time, they bought a new car, taking a loan for three years in the amount of $ 11 thousand at 15%.
Simple logic suggests that the couple could use the money accumulated on the house for the rest, to buy a car and save 5%, and not pay them to the bank.
But people, as a rule, try to divide money into different goals and categories, and this is due to the system of mental accounting.
Even a source of money can make people send them for different purposes.
Excessive confidence leads buyers to buy the latest technological innovations at a high price, and investors to buy stocks with confidence at prices that match their assets and earnings.
This is due to the fact that they are too confident that they are able to correctly calculate the “winner” or the best product or asset.
People prefer the state of affairs to remain unchanged or at least more or less stable for a certain time.
They will rather adhere to what they already have, rather than risk failing and changing something.
For example, you are ready to save the current gym membership or current rate, and not connect to a new one, even if in the end the changes turn out to be more profitable for you.
It follows from this that if you change the tariff, you will most likely continue to use it, but the apparent stability discourages you from profitable changes.