Psychology of Spending
Objective: To understand the different motivations behind why our customers spend their money, including the key concepts of System 1 and System 2 thinking.
Key Concepts
People spend money for two main reasons: to acquire things they need for living and things they want to make life more enjoyable. Needs are non-negotiable for survival, while wants improve our quality of life and reflect our aspirations.
Understanding the factors that influence spending is crucial for effective nudging. These factors include:
Scarcity
When something is perceived to be in short supply, like a limited-time offer, it becomes more desirable.
Social or Peer Pressure
We are social creatures who often buy things to fit in or be part of a group.
Delayed Reward
This is the preference for immediate satisfaction, even if a larger reward is available later on.
Two Systems of Thinking
To understand why nudges are so powerful in sales, we need to look at how our brains make buying decisions. There are two key systems:
System 1 Thinking
This is our fast, emotional, and often unconscious brain. It handles impulse buys and familiar choices.
- Fast and automatic
- Emotional and intuitive
- Requires little effort
- Influenced by nudges
System 2 Thinking
This is our deliberate, analytical, and effortful brain. We use it for big, important purchases that require real thought.
- Slow and deliberate
- Logical and analytical
- Requires conscious effort
- Used for major decisions
💡 The crucial insight: Most everyday buying decisions are driven by the fast, emotional System 1. Nudges are designed to appeal directly to System 1, making the desired purchase feel easy, natural, or emotionally appealing.
Activity: Test Your Understanding
For each of the following examples, decide whether the decision is an example of System 1 or System 2 thinking:
