With the introduction of new technologies and the growth of business in the new millenium has come a rush by major companies to get a hold of your hard-earned money. The unfortunate part is that they are exceedingly good at it, mostly because they’re smarter than you think. They invest huge amounts of money and countless hours of research into figuring out the most effective ways to separate you from your cash, because that is the fundamental way that their businesses can thrive and be successful. In keeping with the theme of flaws within the design of the human brain, I’ll outline two ways that companies take advantage of the biology and psychology of your mind, and how you can avoid them.
Credit Cards: A 2008 New York Times column by David Brooks outlined the critical financial situation in America:
-Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.
-Fifty-six percent of students in their final year of college carry four or more credit cards.
The bottom line is this: as Jonah Lehrer put it, “We’ve spent our way into a deep financial hole.” But why would people do this? Why spend beyond your means and knowingly put yourself into debt? Most people say, “Oh, I’m smarter than that!” but it’s easier to fall into the trap than you think.
When you pay with cash, you are experiencing a physical loss. You have to hand over money that you earned through work. When this happens, an area of your brain called the insula, which is responsible for negative feelings, is very active. Basically, your brain associates a negative feeling with giving up money, discouraging you from spending.
However, when you charge a purchase, there is no physical loss. You give the cashier a credit card, and they give you the credit card back. You don’t have to give up anything, at least not tangibly. When this happens, as researchers have found by using brain imaging, the insula becomes significantly less active. In other words, there is no real negative feeling associated with spending with a credit card, because your brain doesn’t register that you’ve lost something. As a result, you’re not discouraged from spending. In fact, you’re encouraged to spend more, because you get the good feeling of being rewarded with a purchase without the negative feeling of losing money.
In this way, credit card companies take advantage of you, and use your brain against you. Obviously, the best way to avoid this trap is to avoid using credit cards whenever possible and pay with cash.
Reciprocity: One of the most basic pillars of social interaction among humans is the Golden Rule, or “One should treat others the way one would want to be treated.” This is no accident; researchers have found through countless experiments that humans have an innate reciprocity reflex; that is, people naturally return the kind of behavior that others express towards them. This, of course, is a wonderful thing. It is evolution’s way of telling you that if you are a good person, you’ll be really cool, have lots of friends, and be very successful. However, as is usually the case in life, it’s not that simple. In his book The Happiness Hypothesis, Jonathan Haidt describes how this reciprocity reflex can, and is, used against you.
Take on look through your house or residence and try to count how many free calendars, fridge magnets, fliers, pens, cards, and other items you have from various companies and businesses. Chances are, you have a fair amount. This is because, as I said in the previous blurb about credit cards, these companies are a lot smarter than you think. When they give you these free items, they are activating your reciprocity reflex: because they gave something free to you, you naturally feel inclined to give something back, whether you realize it or not. In Haidt’s book, he talks about the Hare Krishnas, a Hindu religious organization. They were known for giving strangers flowers and things of that nature, and only then would they ask for
donations. Knowing that the flowers would inevitably be thrown away, they would go around to trash cans and recycle the flowers, knowing that they would more often that not help them get donations from unsuspecting passersby.
In another study, a psychologist from Arizona State sent Christmas cards to complete strangers at random. According to the psychologist, Robert Cialdini, the great majority of people sent him cards in return, even though they had never met him and didn’t know who he was. This is only one among a number of studies that show that humans have a natural reciprocity reflex, and that it can be used against you. How do you avoid it? Simply be aware of it. If you know that salesmen and solicitors are going to give you free stuff to try to get a donation from you, you can simply take their gift and keep on walking, knowing that they were only trying to take advantage of you. This eliminates any feeling of guilt that you might feel by unknowingly rejecting their offer.
As you can see, there are many simple, yet effective ways that people can take advantage of the biology of your brain. In my next article, I’ll give you a way that you can reverse the process and take advantage of them via similar techniques. Stay tuned!