Why do we care what other people are doing; and what are the implications for our personal financial situations? What makes this question so fascinating is that most people claim to march to the beat of their drum, unbowed by social convention. They may think this, but the hard truth is that whether we realize it or not, our decisions are influenced by what other people, our peers, are doing.
In an article entitled, “Behavioral Economics Taps Power of Persuasion for Tax Compliance” by Nanette Byrnes, the author states, “Psychologist Robert Cialdini, a professor at Arizona State University and an expert in persuasion, pioneered the social insight that if people know what their peers are doing, they are more likely to do the same.”
The British Tax agency was able to increase collections by 6.8% by telling delinquent taxpayers that 9 out of 10 taxpayers pay on time and “you are one of the few who have not paid us yet.” On the face of it, you would not think that knowledge of what the faceless masses are doing would influence behavior, but the facts are that we are slaves to much more than just fashion!
When advising clients who have been struggling with their spending we have suggested, half in jest, that they get a new set of friends. Appearances matter because that is unfortunately how many of us judge our success or lack thereof. If you have selected a peer group that is out of your league, financial ruin, or worse, could be just around the corner.
Social and behavioral research tells us we are wired to belong. Knowing this fact can serve as a great reality check on our motivations for spending. Are you buying that vacation home because your friends are moving there? Are you getting plastic surgery because everyone in your group is doing the same? Are you selecting a college based purely on the brand name with little attention given to the cost? Understanding your need to belong can help to keep you solvent.