Why Discounts Are Making You Poor

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October's rolled around and thus began the final quarter of the year. Or as I like to call "3 months of unabashed consumerism". Unless you live under a rock, you've probably seen Christmas products hit the shelves, Amazon Prime Day deals happening, and more "sales" than ever before. How can our brains go without spending too much and saving on these deals?!

You might think it's easy. Simple, don't fall victim. But it's easier said than done. Every business out there knows human behavior and the psychology behind purchases like the back of their hands. In this week's post, let me try to break down holiday spending so you don't end up in the red.

It's all Marketing. 

Obviously. But are you familiar with the following concepts that companies employ against you?

• The Anchoring Effect

• Shiny Object Syndrome

• Social Proof

• Price Discrimination

Let's take a brief, high-level look into how these four concepts can affect your personal finances and how you can be aware of them.

You Didn't Save Any Money. You Spent Less.

Ha! I love this saying. It's 100% true. I always think of Kohl's on this one. They convince you when you get to the checkout that your $50 pair of pants were on sale for $25. And on top of that, they hand you Kohl's cash to get you to spend even more in the future. Smart for them. Sounds like a con to me. 

That, my friends, is called the anchoring bias. Retailers will "anchor" their initial price way high, discount it heavily, then rope you into thinking you scored a deal. Even though you didn't. You just paid a regular price for a pair of $25 pants. Something to be wary of when you see a deal.

Teslas, iPhones, and Louis Vuitton

They're shiny. They're objects. There's a syndrome named after it. Perhaps you know someone who always is going out of the way to get the latest phone, car, or Dior x Jordan collab. This one is very self-explanatory, but also probably the most powerful. New products and features are always a must-have, or are they? Try giving yourself 24-48 hours before contemplating a new non-essential purchase. You may become self-aware that are you falling victim to Shiny Object Syndrome. Most people can't resist.

Also, think about why you want the next new thing. Trying to impress yourself? Others? Did your current thing just magically stop working? I think I have the opposite of Shiny Object Syndrome. I recently downgraded my phone plan to a $10/mo option with a new carrier. Not very shiny, eh? 

The Illusion of Choice

Let's say I'm at a grocery store and I'm going to buy some chickpeas to make hummus. (I literally did this yesterday so yes I'm using this as an example.) There are two options: Name Brand and Store Brand. I'm thinking Store Brand because I'm cheap, but as I stand there deciding, I see a bunch of people come and grab Name Brand off the shelf and leave. Do they know something I don't? Am I missing out? They must be hummus connoisseurs. Name Brand it is. Play it safe. 

This is called "Wisdom of the Crowds Social Proof". The passing shoppers gave me social proof of believing that Name Brand would be the better choice. Even though it wasn't really a choice, now was it? There are 5 different types of social proof that give us the illusion of us making a rational purchase, but in fact, we may be convinced into it without even realizing it. Something to ponder.

Discriminating on Price? Is This Legal?

Yes. The premise here is that businesses can charge different prices to consumers in different markets. Hence why military discounts exist. There are two different degrees of price discrimination you are likely to see regularly:

• 2nd Degree: Different price for different quantity (Costco, bulk shopping)

• 3rd Degree: Different prices to different groups (Military, seniors, etc)

This isn't so much of a mental model here, but rather a framework that's used to target specific markets — ones that you may be a part of.

Some Abstract Closing Thoughts

Pretty easy to see how a perceived discount can turn into you spending more money, huh? Hopefully, you were able to gain a new perspective through some of these concepts. 

I once read somewhere that the real benefit of wealth is having the choice/opportunity to do something, but not necessarily doing it. I think the person in question was saying how he could afford a new car, but he didn't need it. Everything already worked great for him, even though he could go buy it today. Let your cash do better things than be something you don't need. 

To keep the hip-hop references going, C.R.E.A.M. by Wu-Tang said it best.

Stay Frosty out there, 

Andrew