Blogs | January 17, 2013

Does listening to Vivaldi make you spend more?

Why aren’t you saving more? There are many good reasons but there are also some that are not so good – the thinking tricks and traps we fall for time and time again.

Among the good reasons not to save is that you might have little left by the time you’ve paid for the essentials. Or perhaps your focus is on building up “consumption capital” – a stock of happy memories, good books and music – rather than financial capital. But there are worse reasons.

One of these is because our spending decisions are shaped not just by our own interests, but by what the people around us do. The more they spend, the more we tend to do.

The neighbourhood trap
The cleanest evidence for this comes from a study of the effects of the Dutch postcode lottery. Researchers found that when a household won a BMW in this, their neighbours were significantly more likely to buy a new car themselves in the following weeks.

You might think this just shows that people want to “keep up with the Joneses”. This is true and important. There’s growing evidence that peer effects – our desire to conform to those around us – shape our behaviour in all sorts of ways: how well we do at school; whether we commit crime or not; and how productive we are at work.

Shopkeepers know the “see it, want it” trap
But there’s something else going on. One thing is something supermarkets know when they put their expensive products on shelves at eye level, and that companies know when they saturate our TVs with adverts. If something seems widely and easily available, we are more likely to want it. Seeing a neighbour with a new car puts into our mind the thought of a trip to the dealership, even if we have no desire to emulate the neighbour.

Dining out? Beware Vivaldi
There’s another effect. Being surrounded by apparent affluence makes us more inclined to spend. Some great evidence for this comes from Market Bosworth, a village in Leicestershire in the United Kingdom. Researchers from the University of Leicester got a local restaurant to vary its background music, sometimes playing pop music, sometimes classical and sometimes nothing. They found that when classical music was played, people spent an average of over £32.50 per head, compared to around £29.50 when pop or nothing was. Handel and Vivaldi are good for business, and Britney Spears is bad.

This, they say, is because classical music creates an upmarket atmosphere and people unconsciously act to fit in with this atmosphere by spending more.

The curious case of rising spending
All this helps explain two curious facts. One is that the famous economist Maynard Keynes was wrong about (at least!) one important thing. He thought that a “greater proportion” of income would be saved as real incomes rose, because once “a margin of comfort” had been attained, our thoughts would turn to saving for the future.

However, this isn't always true: the UK household savings ratio was the same in 2013 as it was 40 years previously. One reason for this was that as incomes rose since the early 1970s, an increased atmosphere of affluence, and others’ increased spending, caused spending to increase.

Recessions add a twist
Our second odd fact is that savings ratios often increase in recession. In theory, the opposite should happen; in hard times, people should run down the money they’ve saved for a rainy day to smooth their spending. Why doesn’t this happen? One reason is that in “good times” the atmosphere of affluence causes us to spend more, but in bad times this atmosphere vanishes and so we spend less.

ING senior economist Ian Bright also blogged about this topic for eZonomics.

Stay alert – for your savings sake
There are two implications here for all of us. One is that moving to a nicer part of town might be more expensive than you think. It won’t just saddle you with a bigger mortgage. Your more affluent surroundings will tempt you to spend more in other ways.

Secondly, and more generally, our spending decisions are shaped by non-rational forces that we barely notice: those Market Bosworth diners didn’t think “ah, Vivaldi! I’ll buy more expensive wine.” But that’s how they acted. Of course, supermarkets and advertisers have known this for years. Shouldn’t we all be alert to it as well?

SpendingSavingIncomePeer effects

Chris Dillow
Chris Dillow

Investors Chronicle writer and economist