How setting a budget can unhelpfully influence your decisions

It is generally accepted that, when you go out shopping for something, having a budget in mind is a very good idea. It’s not the amount you’re absolutely, stringently limited to – not like your limit is $50 because you only have $50 in your bank account – but it’s the amount that you are willing to pay for what you want, various factors considered. It might be an absolute maximum (e.g. nothing above $100) or it might be a general target range (e.g. something around $20-30), but either way, you’re using a self-imposed price restraint to limit what you spend.

Counter-intuitively, it seems that that sort of approach actually seems to increase what you spend. In the paper ‘When budgeting backfires: How self-imposed price restraints can increase spending’ (2012), authors Larson and Hamilton report that across six experiments they consistently found that self-imposing a budget when making a purchase decision caused people to have an increased preference for higher-priced items, regardless of whether the budget was an absolute maximum or a general target range.

It seems that imposing a price restraint draws your attention to that general price range and you tend to ignore items whose prices are too far away from the value you’ve decided on. For example, you might say you don’t want to pay more than $100 for a pair of jeans. However, setting that maximum price restraint causes you to ignore the options with considerably lower prices, so you might ignore a $60 pair of jeans, whereas if you hadn’t set a budget you might have considered the $60 pair (and they might have turned out to be exactly what you wanted). Just by setting a budget, you’re putting blinkers on and only paying attention to a restricted range of items that are reasonably close to your price restraint. Unfortunately, this restricted range of items then goes on to warp your judgement of the items’ prices and quality.

The experiments showed that there was a scaling effect on perceived quality of that more restricted range of items, because when you restrict your appraisal to a smaller range with less context, it makes the differences between the items in that small range seem bigger. The consequence of this is that the lowest quality item suddenly seems much more low quality than it otherwise would have, and that in turn leads you to prefer the higher quality items in your small range. And what does higher quality mean? Somewhat loosely and generally, it means higher prices. (And it is rather loosely and generally true, if that graph I’ve previously posted is anything to go by).

The selection of that small range of items also means that prices become less meaningful. If you’ve set your budget to $100, and you’ve ended up with several pairs of jeans to choose from that are all in the $90-100 price range, then the price isn’t going to make much difference. You’re going to be paying around $100, give or take a bit, so price isn’t particularly informative for making that decision – no single price is that radically different from your initial budget of $100. As a result, you go back to making a decision, as best you can, based on quality. And as I said above, the differences in quality seem greater in that restricted range of items, and you end up preferring the better quality items, which on average means higher prices.

As always, there are a lot of other factors to consider (how well a person can evaluate quality, how much emphasis a person places on quality vs. aesthetic value, how well quality and price correlate in different groups of consumable goods such as clothes or food or electronics or furniture, etc). Still, it seems like a pretty robust finding – price restraints unfortunately seem to draw your attention to a higher price range and then distort it while it’s there.

But how do you counteract the apparent “costs” of having a budget? Not having a budget doesn’t seem like a better alternative to having a budget, but as the authors of the paper speculate, there’s a wider context of budgeting that’s more encouraging. If you plan your spending in general, keep track of your earnings and expenditures, and engage in some thoughtful and practical budget-planning and monitoring, you’ll probably still come out on top, regardless of a pair of slightly-more-expensive-than-necessary-or-intended jeans. Need some motivation/inspiration? Check out what Lin has to say about her approach to budgeting.

22 Thoughts on “How setting a budget can unhelpfully influence your decisions

  1. Ah, that’s a very interesting finding, I woud never have imagined that a budget restriction could actually increase spending. Then again, the more I read about brain biases, the more I think our “intuition” is wrong, most of the times. There is a TED PLaylist called “How does my brain work?” (I think) with about 10 talks about various brain functions and biases, it’s quite incredible how unrational we are in the end.

    Back to the question of budgeting, it is true that the years I have imposed a specific budget on clothes (for sale for example) I spent more on clothing in general. However like you say, not budgeting could have other inconvenients. How about keeping a general budget – removing fixed expenses and having a global flexible amount, but without assigning that flexible amount to a particular spending? That way we don’t associate the sum to an item in particular…

    • Jess on April 7, 2013 at 1:44 pm said:

      Those sorts of cognitive biases were partly the reason why I adjusted my undergrad degree in my first year to be about half neuroscience, half psychology – I did a first year introductory psychology unit which covered a huge range of those crazy brain biases (plus a lot of other astounding psychological/mental effects and phenomena), and I loved it because it was just so fascinating to realise how unreasonable our “reasoning” can be. At the very broadest level, the message is basically: your brain doesn’t work logically, but it doesn’t work illogically either – it’s just a matter of figuring out which way it’s acting, and when, and to what extent.

      Yeah, I think if a person’s aim is to be aware of their spending and to not spend too much (however that might be individually defined), then just general budgeting for all their income and expenditures is the way to go – not just applying a price restriction to individual purchases.

  2. I recently bought some glasses and before I went shopping I had an idea of how much I would be comfortable spending. In the shop, I noticed I paid less attention to items that were on the lower end of my budget because I figured, “no need to be so thrifty because I have XX to spend!” So I wholeheartedly identify with this study!

    I am convinced that I picked the right pair for me – the sales assistant tried to find cheaper versions of the frames I liked best but nothing in the shop came close in terms of shape, fit and colour – but who knows for sure? Haha.

    Clothing-wise, I rarely set a budget – I just pay whatever I’m comfortable with at the time, and make sure it’s something I can afford. This is because clothing for me involves a lot of wildly irrational elements – like my loyalty to a brand. I put something down when my brain says “this is too much”, and that’s it.

    I think a budget doesn’t ensure that you always get the most value for money, but it does keep you from overspending, and that’s a good goal to start with.

    • Jess on April 7, 2013 at 1:52 pm said:

      Haha, I did the same thing when I bought a pair of glasses last year. I haven’t really had to wear glasses before, so this was my first time shopping for them, and I set what I thought was a pretty generous budget because (1) I was kind of clueless about glasses but I know there’s a bit of a cartel going on with glasses pricing so everything is much more expensive than it needs to be and (2) I was going to need the pair a lot while writing my thesis, so I wanted to make sure I could fulfill all the criteria I had in terms of the way they looked and how comfortable they were. And with that budget set – I then walked into an expensive boutique (the type of place that stocks Cutler & Gross and Oliver Peoples and those sorts of brands) and then didn’t even bother looking in any other shops that might have had other options at cheaper prices! So I was kind of physically restricting myself to higher prices, which is really not a great approach. Oh well, at least I have a pair of glasses that I’m very happy with and that serve me well.

  3. Eudoxia on April 5, 2013 at 6:20 pm said:

    I think that it’s very tempting to aim for “the absolute best X that I can afford” rather than “an X that is good enough (that I can afford)” (or even “an X that is amazing-but-not-necessarily-the-ABSOLUTE-BEST (that I can afford)”). I’m trying to reprogram myself to think in terms of the latter – that makes it easier for me to think “oh hey, I can get what I wanted for less than I thought! Neat!” rather than ignoring lower-price items.

    A friend of mine is getting married this year, had found a fabulous dress she loved (within her budget) and had another trip dress shopping to look at other wedding dresses planned. She mentioned she was worried that she’d find other dresses she also loved and then would be in an awkward situation. I tried to encourage her to see it as “if there are multiple amazing wedding dresses, and I get married in one of them … I win”. If item A is 95.5% exactly what you wanted, there’s no real benefit in stressing out about whether it’s the BEST and whether if you just looked for another few weeks and spent a bit more money, maybe you’d find something 96.1% ideal … advertising tries to make me think that I want to buy the best, shiniest, newest, most expensive thing, but no, I don’t. I want to buy something good enough (since that, by definition, is good enough).

    • Jess on April 7, 2013 at 1:57 pm said:

      I think it’s also difficult to factor in how your preferences might change over time, so even if you do find something that you think is that ultimately absolutely perfect item and is everything you’ve ever wanted, there’s still a change that your preferences will change over time (sometimes over quite a short period of time too) and suddenly the item is not as perfect as you first thought – so aiming for “good enough” in the first place certainly takes a lot of stress out of the situation (especially for wedding dresses, I would imagine!).

  4. All I can say is amen. I do this all the time, especially when I travel, because then I will be more likely to have a budget for my trip. The budget more often than not turns into “the magical amount of money that I have to spend during this trip”. When I am home my goal is to shop as little as possible but to get what I need/desperately want, and I usually end up spending less in a month staying at home than I do on a long weekend away. It is so silly.

    • Jess on April 7, 2013 at 2:02 pm said:

      Oh yes, I do the same thing, especially since I somehow get the notion in my head that I need to buy mementos to remind me of the trip – like the experiences and memories and the hundreds of photos aren’t sufficient. I mean, I still kind of like that approach of being able to tie an item back to a nice memory, and the story behind it kind of makes me more attached to the item (e.g. “I bought this skirt when I was on holiday in San Francisco” is a fonder memory than “I bought this skirt in the shopping centre down the road”) but I have definitely let that get out of control before and drive me to spend all of my budget. Oh, and beyond my budget on one trip. *eye-roll*

  5. Yup, I can relate to the findings, too, and it doesn’t seem to matter if the budget is about money or, say, number of items. If I tell myself that I can buy 2 new items this month, I will buy two or more, but never fewer. Ugh.

    • Jess on April 7, 2013 at 2:04 pm said:

      Yeah, I find that if I am aiming to spend less then I need to take a different approach altogether rather than imposing any sort of limit. If I just don’t go into shops or browse online stores, then I know I will spend less than if I said “Right, I am not allowed to buy more than one item this month!”.

  6. I think I approach my budget slightly differently. I do have sub-accounts for everything (vacation, cats’ vetting, clothing, hair/nails, donations, gifts, annual/one-off misc expenses) and while the cap is clearly the amount I’ve saved to-date, I find that I look at the sub-accounts as a pool I can pull from if needed but since all sorts of other things are going to be weighed against that pool, I need to be conservative.

    Recently I was looking for a very sturdy, very big, hopefully not tragic-looking backpack for weekend travel and found every price point out there…but my buying parameters were to find a bag that hit all of my value concerns — sturdy, big, not-ugly/sporty, made in the US or with labor standard claims abroad, vegan, preferably made of salvaged materials. I didn’t get the salvaged materials aspect but the rest I was able to match up. The price was what it was – and then I had to figure out if I had enough to buy it, if I was going to save for it or if I wanted to take money out of savings in addition to my clothing budget to buy it now so I could use it for an upcoming trip.

    I think when you add in using ethical standards as a strategy screen, the options vary so widely (or are so limited) that you end up with a very different subset than you’d be weighing at a conventional retail set of stores. I think that does help me snap out of this relative-cost budget issue for the most part.

    • Jess on April 7, 2013 at 2:14 pm said:

      Wow, that’s great that you managed to fulfill so many criteria in your search for a backpack. I had to buy a backpack recently too (due to having to walk to work now rather than catch a bus) and found that my options were severely limited as soon as I had the criteria of “ethically produced” and “comfortable straps”.

      Ethical standards certainly do act well as a screen, but I think a lot of people just aren’t used to having such a limited choice and they end up giving up with ethical standards because it’s just so much easier to not worry and to focus on other criteria. Plus the vast majority of companies/brands basically obscure that sort of information (e.g. when an online store says that a particular item of clothing is “imported” rather than stating which country it was manufactured in), so it really is a battle to get the basic information you need to be able to make an informed choice.

  7. Abby on April 6, 2013 at 9:26 pm said:

    I am not sure if I actually do this all that often – perhaps being a lifelong second hand shopper has something to do with it? I’m sure I do to some extent, though. I think my over-spending as a result of budgeting challenges have a lot more to do with “rebelling” against having a budget and blowing it completely, than with ignoring lower-cost possibilities.

    I also often like having some parameters when I shop – be it price range, brand, ethics, etc., because otherwise the choice is overwhelming.

    • Jess on April 7, 2013 at 2:17 pm said:

      I think I should look through the literature to see what research has investigated whether self-imposed restrictions in general kind of incite people to rebel against them! It certainly seems like it could be the case.

  8. Noooooo T^T i’m sorry if there is not more of an eloquent response. i’ll make it up to you next time.

  9. An interesting article, and one that has me glad that I don’t shop with a budget (although that doesn’t do me very well!) but rather I do sometimes think to myself when browsing oh that is too much to spend, but I think this is different altogether.

    I think that it shouldn’t matter either way, if you have budgeted that much, then whether or not you spend the whole, it’s still money set aside for that particular item. I doubt that this is something that would happen with every purchase, and I also have to wonder what type of people were included in the test group.

    Either way, I think that having a budget is probably better than not having one, because in most cases I would assume these people to be limiting the purchases that they made, rather than those without one who may spend more frivolously and on more items..?

    • Jess on April 7, 2013 at 2:32 pm said:

      True, it’s not as if people are blowing their budgets in these experiments, but they are spending more than they otherwise would have. I guess it depends on an individual’s ultimate goal – if they want to save as much as possible, then having this price restriction approach is a bad idea, but if they’ve already figured out their budget and simply want to shop within it, then there aren’t any downsides to the approach.

      As for the participants, unfortunately this paper doesn’t provide many details at all – usually you’d get at least a breakdown by age and gender, but all this paper reports is that some experiments used students (presumably university students) and some experiments used adults (who may or may not have been university students). But yeah, I wouldn’t be surprised if there were slightly different effects for, say, different age groups (or income groups) who have more or less incentive to adhere to budgets or to minimise spending as much as possible.

  10. Elizabeth Ann on April 7, 2013 at 10:20 pm said:

    The study finding is fascinating. One thing that struck me as strange is that setting a budget and then finding a suitable item at a lower price point wouldn’t produce its own kind of satisfaction. Perhaps this is a rare joy that few experience, but I love the feeling of expecting that I will have to pay $xx and then realizing that I can find something perfectly suitable for a lower price. This might intersect to some degree with the concern jesse.anne.o expressed about looking for ethically manufactured goods. I hate that I have to spend more (sometimes considerably more) in order to buy something that’s made it a way I feel comfortable supporting. I look around and have a good idea of what I’m going to have to spend. If I happen to find something that meets my standards at a lower price point, I’m thrilled. The most recent case I’ve encountered was looking at dress shirts. I assumed finding one under $100 would be difficult, but when I discovered a shirt that met all my criteria for under $50 I was so excited that I lost all interest in the more expensive shirts.

    • Jess on April 9, 2013 at 8:45 pm said:

      I guess it depends on the extent to which each person can kind of ignore the blinkering effect where they only look at items near their budget limit – maybe some people just get really focused on that restricted range of higher price items, whereas other people are a bit more flexible and are more likely to notice when a cheaper item fulfills their criteria. And I suppose it might also depend on people’s motivations – they might set a price restriction so they don’t go over the top, but at the same time they might not care that much about saving money, so they kind of wouldn’t care if there was an item out there that could fill their criteria for cheaper. It seems like a bit of a careless attitude to spending, but I’m sure some people’s brains just switch into that sort of mode unconsciously!

  11. These findings tie in neatly with the general psychological effect that any type of restrictions have on the perceived desirability of an item. you always want what you can’t have and the act of setting a budget makes you become aware of the (self-imposed) restriction which makes you crave the higher-priced item. That’s why diets don’t work: Once I make a point not to eat cupcakes, I want them every minute of every day :)

    • Jess on April 9, 2013 at 8:39 pm said:

      Ah, yes, reactance! I guess that’s maybe why setting a more general budget might be a better thing to do – then there isn’t such a clear restriction to potentially rebel against. I suppose it’s the same with eating – if your aim is to eat more healthily, it’s best to do so in general rather than explicitly forbidding specific things, because then you can still have the odd cupcake and there’s nothing too specific to rebel against!

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