Behavioural Economics Archives

Spending Money

Ever since I can remember I’ve had an odd feeling towards spending money. I’m not talking about the day to day items such as food or transport. My oddity has been around spending bigger sums of money: buying myself clothes, purchasing new tech or even buying big household goods.

I remember in 2003 I’d saved up all my money for almost a year to buy a new speaker/radio. I researched the one I wanted for ages. I’d chosen one that had CD/MP3 Disk and radio capability, as well as an alarm setting. While we were in Australia I finally bought it.

And the next day I was really upset.

Not that I didn’t love the device. I used it every day for nearly 4 years after that. I was upset because I felt like I shouldn’t be spending money. That I should rather hoard it and save as much as I can.

Part of this may have been a fear around whether I would get more money, which is something that lingers to this day. And part of it is that money is fungible. In theory, I could have spent my money in many ways, and I got to imagine that. But as soon as I bought the radio, I was locked in.

I’ve since tried to begin adapting this mindset. The idea isn’t to spend more money or be more irrational around spending it. And it doesn’t mean buying everything I want.

Instead, I’ve started to look at my needs and the utility of a purchase.

For example, I went shopping for comfy pants the other day (mine were stolen in the robbery… I mean, who steals a guys pants? That’s just rude. And they took my nachos. And Amarula. And my freaking keys… okay let’s move on).

I found two pairs of pants, both of which I really liked and both of which were on sale.

I initially thought to myself “I should only buy one of these, otherwise I’m wasting money”

But on second thought, I recognized that I would probably wear both of them really often. And when one was in the wash, I’d have the other to wear. It wasn’t a reckless decision, I was fulfilling a need.

Shifting

Recognising these in built quirks about ourselves is important, especially for managing the way we make decisions. I’m trying to learn to look at money differently, and understand that I’m allowed to use it to meet my needs. And I’ll slowly unpack this, one purchase at a time.

Image was taken today in the Greenpoint park while on my run 🙂

Blog: 210/365

Song of the day: Vengaboys – We’re going to Ibiza

Published by rspazzoli on June 4, 2018 | Permalink

I’ll sell that to you

I’ve been helping my mom move in to her new house over the past week or so. And it’s been a tiring but surprisingly enjoyable activity. We’ve managed to get rid of a lot of junk and reminisce through old photos and other memories.

One thing that I have noticed repeatedly is a strong endowment effect whenever we’re deciding whether to keep something or donate/throw it away. The endowment effect is a theory from behavioural economics that says that people value things much more highly when they own them.

The term was developed by nobel prize winning behavioural economists Daniel Kahneman and Richard Thaler. As per the wikipedia page:

[In the study] participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established (“willingness to accept”) was approximately twice as high as the amount they were willing to pay to acquire the mug (“willingness to pay”).

And so, there is a lot of stuff we have come across while moving house that we way over value. These are mostly things that have either:

Have a low replacement value
Will never be used again
Would not be purchased again.

The Endowment Salesman

To get around this bias, I’ve come up with a fairly simple system. And I use it when I find that we’re trying to keep something that fits into one of the three points above.

All I do is tell my mom that if she wants to keep it she has to buy it off me. And any money that is made will be donated. Additionally, I set the price slightly higher than it would be at the shops.

So for example, my mom was trying to decide whether to keep a branded set of glasses she was given at an event. She was very ready to put them back in the cupboard. So I grabbed them from her and said that I’d sell it to her for R80. Otherwise we must get rid of them.

And she said that it wasn’t worth it to buy them.

So we donated them and now have less clutter.

By doing this, I take away the ownership aspect which causes the endowment effect. It is no longer your item. It has been donated by default and you need to buy it back. Additionally, by setting a high replacement cost, it means that the item must be worth more than just it’s replacement value (e.g. if it has some unbelievably special memories attached to it).

And hence, we’re able to get around our biases and achieve a much more streamlined life.

Image is of the boxes we unpacked today. We managed to get the contents of the three boxes on the left there down to just one of the small boxes on the right

Blog: 180/365

Song of the day: Black Betty – Ram Jam

Published by rspazzoli on May 6, 2018 | Permalink

Right where I want to be

I’m absolutely exhausted and have been struggling to find the energy to write my blog post. So instead of writing anything insightful, I’d just like to take a moment to appreciate where I am right now with regards to my work/professional life.

Today I worked in four areas:

Behavioural economics and psychology
Teaching strategic thinking (applied to development outcomes)
Market analysis and strategy formulation for green economic development in Cape Town
Social entrepreneurship

The first was done in relation to my thesis. Despite it not being quite finished yet, some of my preliminary results will be presented at a conference on Monday.

The second was done at UCT when we met to plan the exam for this semester. It’s going to be an incredibly interesting exam.

The third was in relation to my consulting work on my green economic development project.

The last area was assisting with the submissions for the Oxford “Map the System” challenge. I’m the organizer of the South African leg of the competition.

I honestly am in awe of how fortunate I am to be working on all these exciting projects at the same time. I’m exactly where I want to be and I couldn’t be happier 🙂

Image was taken at Babylonstoren a few weeks ago 🙂

Song of the day: The Quiet - Roald Velden

Blog 159/365. Read more about my #365of25 journey here

Published by rspazzoli on April 19, 2018 | Permalink

Nostalgia

I experienced multiple waves of nostalgia over the course of today. The morning was spent packing up my childhood room, which involved the rediscovery of many old artefacts, and much time reliving old memories. It took way longer than it should have but I was enjoying the experience so much.

This afternoon I walked around my old school and saw the changes that have taken place since I’ve been gone. I bumped into teachers that taught me geography, life orientation, history, guitar, and biology. I told them about all the work I’m doing and they told me about how different the students are from when I was around. (On a really cool note, I found out my geography teacher occasionally reads this blog!)

Finally, this evening I played garden football with my little brother, finished off with a swim. We used to do this frequently when I was in matric, and it felt like things hadn’t changed a bit (except that he’s bigger than me now, and he’s 13!).

Because of this I’ve been thinking about the value of nostalgia. And there are two realisations I’ve had.

Nostalgia as safety

One element to nostalgia is that of it being a protective mental space. If things aren’t going well in life, we use it as a safe space we can retreat to in our heads. A way of escaping from our present existence.

The problem with this is that we are often selective when it comes to what we are nostalgic about. We polish up the memories, ignore the bad bits and use this “clean” memory as a retreat. In reality, that memory might not have been as good as we remember.

And this makes it more painful. Because you remember it only as having being a better time. For example, high school was a lot less complex than my life is now, and it’s easy to retreat into thinking about those days. But I also experience some really bad downs, particularly in grade 9, and so the memory isn’t all rosy.

So, nostalgia can be used as a safety mechanism and a peaceful reflection, but this needs to be done with the awareness that the past wasn’t all perfect.

Nostalgia as a yardstick

Another use of nostalgia is as a benchmark, which to me is a much more productive exercise. You can reflect on where you were in the past, and how much you have grown since then. This allows you to visualise and unpack your path, and often makes you realise you’ve developed far more than you previously thought.

An example of this was looking through my old matric dance photos. I remembered that at the dances I went to, I was incredibly nervous. Large events like that terrified me, and so did the afterparties. Nowadays, though, I thrive in those sort of environments.

A little more nostalgia

Tomorrow I’ll be doing some more packing and visiting my matric maths teacher. I’ll be served a little more nostalgia, but I’ll aim to put it to use as a yardstick more than using it as safety.

In either case, the reflecting has been a great journey. And it’s so cool to see how far I’ve come.

PS: today is blog number 150!

Image was taken at my old school this afternoon 🙂

Song of the day: Ten feet tall- Afrojack

Blog 150/365. Read more about my #365of25 journey here

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Published by rspazzoli on April 10, 2018 | Permalink

Building strong personal institutions

Building “strong institutions” is an important concept in international development theory. For example, goal 16 of the UN Sustainable Development Goals is “Peace, Justice and Strong Institutions” I heard the term in my one of the first seminars of my masters and was quite perplexed by it. From my understanding, institutions were entities such as universities or governments or NGOs.

A quick google search produces the following quote from wikipedia:

Institutions are “stable, valued, recurring patterns of behavior”. As structures or mechanisms of social order, they govern the behaviour of a set of individuals within a given community. Institutions are identified with a social purpose, transcending individuals and intentions by mediating the rules that govern living behavior.^[1]

After reading this, it becomes clear that institutions aren’t simply entities. Instead, they are a complex set of behaviours that help maintain stability and keep values consistent. Institutions such as the justice system are vital for keeping a society together.

It makes sense then that countries with strong institutions are more stable and that those with weak institutions are susceptible to corruption, dictatorships and civil wars. The stronger the habits and behaviours of a society, the less likely there will be deviation from them.

Our own personal institutions

We can recognise that strong institutions on a societal level help achieve positive outcomes. This is because they influence the behaviours of the individuals.

However, when we look at our own lives, we often see an individual operating in complete isolation. If we fail to achieve a certain outcome, it is exclusively our fault. If we succeed in doing something, it is mostly attributable to our own work.

An example of this is a friend that has recently moved home and is studying for board exams. She has become incredibly frustrated with herself has not achieved the level of studying she feels she should have. And she hasn’t gotten close to the amount of studying she did while at university.

The reality is, however, that she does not have the same institutions around her anymore. Over the last 5 years at university she had built up strong institutions that guided her studying behaviours and patterns. These may have included the friends she surrounded herself with, the people she lived with, the habit of going to campus everyday and the frequent contact with academic staff.

However, at home, none of these exist. Her behaviours are now governed by an entirely different institution which was not purpose built for studying. In fact, her behaviours there developed over holiday periods when she was most likely to be home. And what results is a much worse pattern of work and much lower output.

It’s not only about you

This friend cannot attribute the poor work level exclusively to herself. In truth, she doesn’t have as much power as she thinks over the situation.

This holds an important lesson. If we start understanding that institutions influence our behaviours, we can start focusing on building them. They can be built permanently, for longer term outcomes, or temporarily, to achieve a specific goal.

Building these can be challenging but it is possible. In this case, they might include scheduling a regular time to go to the library, forming a study group or having a mentor to help guide you through a process.

It is important to recognise that we exist as individuals, but mostly operate as a collective. And that the people, common habits, behaviours and patterns that we surround ourselves with will ultimately influence our outcomes more than we realise.

We must focus on developing ourselves as individuals. But we must also make sure that we develop our personal institutions. It is the combination of both that will ultimately determine what we achieve

Image was taken in February 2016 outside South African parliament. As finalist in the Nedbank/Old Mutual Economics Essay Competitions we got to go into parliament to watch the Budget Speech.

Thesis update: submitted progress report, got intention to submit sorted

Blog 73/365. Read more about my #365of25 journey here

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Published by rspazzoli on January 17, 2018 | Permalink

Five years forward, five years back

Humans are generally quite bad at predicting and visualising the future, particularly over longer periods. We lack the ability to imagine the vast changes both on a personal and global level.

What we usually do is see the future as a slight variation of the present , with minor improvements. It’s a type of heuristic or bias where we use today’s state as our basis of prediction instead of building up the future from first principles.

This came up in a discussion with a close friend yesterday. We were talking about how she doesn’t ever think she’ll achieve certain goals of hers. That they’re too far out of her reach. And at the same time, she was worried that she hadn’t achieved enough to date.

Into the past

A tool that I like to use to overcome this feeling is to pretend to have a discussion with myself from 5 years ago. I try imagine what he’d feel if I told him what I was doing today. And I realise that, in this case, 2012 Rowan would be blown away by 2017 Rowan. The stuff that I am doing now would be entirely inconceivable to him then, and he would not understand how it happened.

In fact, I recently read a blog post from 2012 Rowan that outlined some things that he would like to achieve in 10 years time. And I’ve already achieved almost all of them.

Back to the future

Using this same logic, I imagine myself from 5 years time coming back and telling me all the stuff that he is doing in 2022. I imagine having my mind completely blown, in the same way 2012 me would have his mind blown by 2017 me.

This is quite reassuring in a way. Because I don’t know what 2022 me will be doing. But I know that it’ll probably be something completely out of my realm of possibility today.

Not linear but not the point

This tool uses a linear approach to prediction, meaning that my expected growth is estimated to be the same as my past growth. Of course, it may not be linear and could be tapering off or even become exponential.

The point of the exercise isn’t the predicting. The idea is to find comfort in understanding that we cannot know the future. However, what I do know is that it will almost certainly be different to what I can imagine. And I know for sure that current me will definitely be proud of what I’ve achieved going into 2023.

Image was taken almost exactly five years ago. If you look carefully, you can see my little brother lying face down in the middle of the field. I think he was running across the field and then just got over it and dropped down in a pile.

Blog 43/365. Read more about my #365of25 journey here

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Published by rspazzoli on December 19, 2017 | Permalink

My Big Juggling Act

I’m often asked how I’m able to handle so many different projects at the same time. For example, over the last few months I’ve been lecturing on two courses and doing my masters at UCT. I’m also working on two startups, undertaking a big economic impact evaluation and planning a major entrepreneurship event for next year.

The secret is that I only juggle two or three projects at any one time. Often some will remain on standby until a slot opens up. Switching between them happens on a week by week basis, depending on what is important and urgent.

An Opening in the Juggling

After signing off on the two courses last week, a bit of space has opened up. And I’m going to fill this with my Masters thesis. I’d been hoping to free up this space about two months ago, but a delay in the economic impact evaluation meant I couldn’t. So I’m left with quite a short space of time to write it.

Over the next two months or so, my blog is likely to have reflections on my thesis. My topic is centred on the relationship between mental health and economic outcomes (though it’s going to evolve as I go). I’ll also make the final thesis available on the blog for everyone to see

It’s going to be the biggest project I’ve ever worked on. And I can’t wait to pick it up and start juggling.

Image was taken at the University of Oxford earlier this year. We were staying in this street during the Oxford Global Challenge. We were runners up in the event (I’ll post a blog about this soon).

Blog 41/365. Read more about my #365of25 journey here

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Published by rspazzoli on December 17, 2017 | Permalink