From self-help books to popular gurus preaching the rules of financial literacy – they all seem to have piece of advice in common: budgeting. Presumably, budgeting is the core ingredient of a healthy financial life. It just makes sense to determine in advance what you are going to buy and for what cost. But is it actually true?
If our brains would be perfectly rational, budgeting makes sense. And in many cases, budgeting tends to work in our favor. After finding out we overspend on dining out or buying new clothing, it wouldn’t hurt to set a purchase limit for the next months. Unfortunately, when we put on the goggles of a behavioral scientist and measure the intricacies of what actually happens when people set budgets, some surprisingly irrational patterns emerge.
To put it bluntly: under specific circumstances, setting prior budgets will predictably make you spend more. Period. So, let’s dive into the data on the surprising psychology behind budgeting.
Imagine that you are a retail store manager who has an oversupply of hot dogs. To boost sales, you decide to create an 'outdoor barbeque' display by placing a variety of complements (e.g. condiments, buns, napkins, plastic forks, and beer) on top of the case containing the hot dogs.
Would such a strategy be successful at attracting shoppers to view the hot dogs? If so, how should you design the display of complements to maximize shopper attention?
Would you have recognized the hit-potential of Dua Lipa before it was cool? Or Drake?
Most probably, you won’t. As you know, there’s a lot of money going round in the music industry. But the question remains how much is invested efficiently, as this can only be addressed when the song is a few weeks in the air. But what if we would have the power to predict what song will be in the charts for weeks, which everyone will be humming and thus which song is the blockbuster of the month and the cash cow of the record label?
Recent research by Unravel Research has done exactly this. But first, let’s explain the theory behind the story.