Mental Math and decision-making

People buy what they want and beg for what they need.

I did some AdWords client training on Friday, which is always a lot of fun. People are eager to learn about online advertising and the model certainly isn’t going away. Often, the conversation veers away from the topic at hand and instead goes to the underlying principles of why we make our buying decisions. One such digression was about mental math or mental accounting.

This is an assessment of value that we make in our minds when making a decision. Some might say that the whole purpose of advertising is to skew this decision-making process and add some weight to one side of the scale and make a consumer more prone to making a decision that is favourable to the retailer or brand. To take it a step further, one could argue that brands themselves are a illogical construct used to make us associate characteristics with a product that the product itself cannot possibly contain. Can a stick of butter be traditional? Can a deodorant be sexy?

How many layers between you and the product?

We make buying decisions based on a whole number of factors that rarely have an anchor in reality. I might add that the value of a dollar rarely plays a part. Instead, we base a decision on opportunity, utility and value.

This week, after reading an article on mental math, I began to think about the decisions we make allocating money. I track my purchases using mint.com, which both removes a veil of blissful ignorance about how my money is spent each month, but it also adds a layer of video game-like competitiveness and subjectivity to my purchases. Thanks to mint.com, I’m not really buying things, I’m filling up a green bar, and aiming to stay in budget.

A dollar is a dollar, no doubt, but creating a budget means that you’re adding another layer to your mental math. I imagine that there are marketers around the world who would like to influence these numbers too. For instance, when you set your monthly budget of $30 for electronics (constraining your spending, adding a layer of decision-making in store), any marketer would love to approach you and say, ‘Why not make it $50?’

(I imagine that Mint will one day provide such suggestions on behalf of its sponsors, if not suggesting specific products that fit within your budget, that you can be linked to directly.)

Saving 25% - what a deal!

The example that was used in the mental math article from earlier this week involved making a car trip across town to save 25% on a $20 household item, like a hairdryer. Gas costing what it does these days, you might spend $2 to get across town to make your purchase. It then posed the question:

Would you go across town to save 2% on a $500 purchase?

Many people would see more value in the 25% savings than in the 2% savings, though the 2% savings on $500 is twice as much money.

Marketers pose these questions to us all the time, and they make every attempt to skew our decision making process to make us see the value or utility of making that trip across town - or enduring some other hardship, like agreeing to the other costs associated with the product like a service cost.

Perhaps buying the hairdryer is a more tangible item than the $500 item, which might be a purchase that you only make once a year like a computer or piece of furniture. But a dollar is a dollar, no doubt, and a meal for your family tomorrow costs the same whether you save 2% or 25% today.

When you make your next purchase decision, think about all the layers that exist between yourself and the product. Factors of brand, value, utility, marketing, opportunity and cost. Is your decision based on your bank account, or your brain?

Further reading: Behavioral economics.