Home Finance The Psychology of Consumer Spending and Its Economic Impact

The Psychology of Consumer Spending and Its Economic Impact

Consumers play an essential role in our economy. At its peak during the recent recession, 85.1 million nonagricultural wage and salary jobs involved consumer spending.

Researchers are exploring strategies to assist consumers in making wiser financial decisions. Some studies show that software nudges can boost real savings.


Consumer psychologists specialize in dealing with complex issues like debt, climate change and diet choices; yet they also study how people maximize their spending habits – such as research showing how purchasing experiences rather than material objects makes customers happier.

Inflation, or the sustained rise in prices for goods and services, can significantly alter spending patterns as well as economic growth and stability. Furthermore, inflation erodes value from money while impacting an individual’s perceived purchasing power.

Price increases cause individuals to assess their priorities and spending behaviors; prioritizing essential items while decreasing spending on discretionary ones may become more important than indulging in expensive purchases that they once enjoyed. Consumer beliefs regarding future inflation rates also impact spending behaviors.

Consumers more readily justify costly expenses when they perceive they will bring stress relief or utility benefits from purchasing an extravagant item, while temporary escape or display of wealth are less likely to justify such purchases.


Since February, optimism regarding personal financial situations has surged among Americans; however, that optimism does not extend to their outlook for the economy as a whole. Americans now seem more pessimistic than at any point during all 36 previous surveys conducted by Pew Research Center for their State of the Union series over 36 years; pessimists believe that federal officials are failing to address budget deficits while Social Security and Medicare will deteriorate further in future years.

Opportunists tend to save and invest more, while being more likely than pessimists to place greater weight on desirable outcomes in decision making. Additionally, their longer planning horizon may better enable them to take advantage of economic opportunities when they arise.

Locus of Control

Psycholgist Julian Rotter first proposed the notion of locus of control in 1954. It refers to whether people believe external or internal forces dictate their life outcomes.

An individual with an internal locus of control might believe their failure at work is their own responsibility; when things don’t go their way at work, this might be blamed on not giving enough effort or making the correct choices; someone with an external locus of control might attribute success or failure as being down to luck rather than themselves.

But it’s important to keep in mind that most people do not categorically align themselves as either internal or external; they instead tend to fall somewhere on a continuum between these extremes, leaning more toward one or another as research from academia and Wall Street demonstrates. Money decisions don’t take place in isolation either – an internal locus may take out a loan in order to invest in an exciting venture while someone with an external locus might incur debt in order to create better living conditions.

Behavioral Economics

Behavioral economics is an emerging field that examines how humans make choices, departing from traditional economic theory which assumes humans to be fully rational and self-serving. Behavioral economists investigate what influences people’s decisions as well as the resulting repercussions that these decisions have for consumers, businesses and governments alike.

Behavioral economists argue that humans often rely on mental shortcuts known as heuristics when making decisions, which often favor short-term benefits over long-term effects. Furthermore, behavioral economists assert that people tend to underestimate how much money they actually spend on certain purchases.

Behavioral economists understand that most people have difficulty controlling themselves and being self-controlled, leading them to make hasty decisions and take unnecessary risks. Overconfident in their abilities and more fearful of losing than winning may lead to short-term gains than long-term rewards being pursued; delayed consequences often go ignored, making decisions easier when people join a herd mentality; it makes supporting one team much simpler when others support it too.


Nataniel Snider

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