What your spending reveals about you

Oct 15, 2023

A colleague is a coffee aficionado. He set his heart on a home espresso machine, and after tremendous narrowed down on the gold standard. The two Italian models were Lelit Bianca 2.21 and La Marzocco Linea Micra. The first would set him back by Rs 2.21 lakh, and the other was going for Rs 3.41 lakh.

My friend is passionate about baking and coffee. I suspect that he surreptitiously nurtures the dream of running his own café, or a coffee bar.

So what was holding him that he kept wavering on this decision for the past year? Well, the tug of war between his heart and mind was because he could not justify the cost to himself. Somewhere in his mind, he believed that it was not right to spend so much on a “want”.

This black-and-white classification of need and want is where he erred.

I answered him based on the tremendous research and brilliant insights of author and behavioural finance expert Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University. Statman suggests that we need to view our preferences, wants and errors though the prism of benefits. And this helps individuals choose wisely.

What do people want? They want three benefits: Utilitarian, Expressive, Emotional.

  • Utilitarian
  • Q) What does it do for me?

A watch has the utilitarian benefit of informing you what the time is. The utilitarian benefits of a car are in ferrying us from one place to another. The utilitarian benefit of a restaurant is in feeding us when we are hungry or have not cooked sufficiently to feed our guests. The utilitarian benefits of investments are to create wealth so that one day we don’t have to work.

  • Expressive
  • Q) What does it say about me?

What is the image I want to create for myself? What is this saying about me to others? These expressive benefits convey to us and to others our values, tastes, and status.

So it is not just about eating out, but the restaurants you frequent. Where do you want people to see you? Which locations will tempt you to post a picture on social media?

Along the similar lines, it is not just any car. A TATA Nexon EV Prime will tell the world that I am conscious about the environment and I take responsibility for my consumption. On the other hand, the Jaguar I-Pace conveys the same while simultaneously screaming status.

  • Emotional
  • Q) How does it make me feel?

An insurance policy will make me feel secure. A huge corpus will make me feel safe. A lottery gives me hope. Investing in a Portfolio Management Scheme (PMS) makes me proud. An electric vehicle makes me feel virtuous and responsible. A Jaguar gives me confidence like no other.

All your decisions will rest on the confluence of the above.

Humans are designed in a such a way that we aspire for much more than just meeting our basic needs for survival. People express themselves in the houses they own, the cars they drive, the clothes they wear, the restaurants they frequent, the accessories they buy, the gadgets they own, where they holiday, and so on and so forth. We can argue about how money is being spent and which is the “right way”, and which is a “good” investment or bad. But these are futile discussions because it never stops at utility.

We want to make a statement. To ourselves and to the world. What we buy and own has expressive and emotional benefits too. And they must never be ignored.

Why do we save and invest and grow our wealth? Yes, because don’t want to work in our old age or be dependent on anyone. But it is more than that. It is because we fear poverty and detest the social stigma it carries. We want to experience the freedom and liberty to walk away, that only a monetary safety net can provide. We want to express gratitude to our parents by offering them a lifestyle that they could never envisage. We want our parents to feel proud of us.

All these utilitarian, expressive and emotional benefits go way beyond the need vs. want categorization. It speaks of our values, our identify, our insecurities, our desire for social status, of playing games and winning, and more.

I love how Statman says it; We are neither computer-like rational, nor bumbling irrational. We are all normal: having wants such as not to be poor and to be rich, and making our way towards them. And yes, because we are human, we will make mistakes along the way.

Owning a house is different from renting a house, even though in both cases you'll have shelter. Some seek the emotional and expressive benefit in ownership – pride. “Yeah, I own the place. I might have a mortgage on it, but I own the place. I'm a homeowner.” That status is dear to many. On the other hand, some may be most comfortable living in a lovely neighbourhood where they cannot afford to buy a home. But living there and paying the rent satisfies them in a way that can’t be accounted for in an excel sheet.

Statman even talks about financial investments within this paradigm.

Ask someone why they invest in hedge funds, and they will tell you about the potential for high returns and strategies not available to lesser mortals. They probably believe that even if evidence suggests otherwise.

But it is also the case that in a gathering, it is socially unacceptable to introduce yourself as a rich man if you cannot state that you are invested in a hedge fund. That, of course, will indicate that you are a reasonably rich man, because not everyone is eligible to be a qualified investor who is allowed to buy those hedge funds. That is the expressive benefit – you can hint that you are a rich man without saying that. In India, the equivalent would be a PMS where the entry point is minimum Rs 50 lakh.

A young person investing bulk of her money in fixed deposits (FD) will satisfy her want of tranquillity. The volatile stock market won’t affect her. She can break the FD when she wants. And she is smug knowing that her money is not getting “wasted” in a savings account. But eventually she will have to reconsider its utility if she wants the chance to have a reasonable amount of money that will sustain her in retirement.

Another example is a target-date fund. There is an emotional benefit because this approach boasts simplicity. The individual investing doesn’t have to worry about adjusting the asset allocation. With a target-date fund they gain utilitarian benefits and at the same time, they have a sense of calm and comfort that they are doing the right thing and on their way to achieving their goal.

Similarly, investing in index funds says that I'm going to get higher utilitarian benefits and higher returns because very few can beat the market. And I am too smart to think I can do otherwise.

This is important!

Human beings are not robots. Everything is not about a number or spreadsheets or chart. It is much more than a listing of Do’s and Don’ts, Needs and Wants.

We have desires, hopes, fears, insecurities and obligations. And how they play out is shaped by our circumstances, life experiences, gender, age, personalities, and cultures.

Don’t judge another’s decision. Walk in your lane.

So what has he decided?

It doesn’t matter. Based on the decision matrix that I presented him with, he will do what he believes is best for him.

Larissa Fernand is an Investment Specialist. Follow her on Twitter

A version of this appeared in Outlook Money
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