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5 ways our brains trick us into overspending
How "mental accounting" can sabotage our finances
Receiving a bonus right before vacation? That's a recipe for overspending.
Receiving a bonus right before vacation? That's a recipe for overspending. (Thinkstock)
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dollar's value doesn't change based on how we attain it or how it's spent. But study after study show that we often behave irrationally when we handle money, assigning values to it that have nothing to do with its intrinsic worth. We'll spend the money from a paycheck with more caution than an equal amount given to us from our great aunt Susan, for example. And that $20 bill we found on a street corner? We might as well burn it.

Behavioral economists call this type of decision-making "mental accounting." Sometimes it works in our favor. For example, we tend to treat savings accounts attached to long-term goals the way we're supposed to: Like they're sacred monuments, to be viewed and admired but never touched. But other times it causes weird, illogical spending ticks that we don't notice, and that get in the way of our financial goals.

Here, five examples of illogical spending habits to keep in mind:

1. Size matters
When it comes to income outside of our regular paychecks, like a bonus or a tax refund, the way we spend often depends on the size of the check, says Gary Belsky at TIME.

"Research suggests that if you get a $300 refund you're more likely to make a $300 discretionary purchase with it than if you get a $3,000 refund — even though you can afford to splurge more, and still save a lot, in the second instance." Up to a certain point, where the chunk of change is enormous, the bigger the unexpected check, the more likely we are to save the funds.

That's helpful if you just received a few grand, but potentially dangerous if you find yourself with a few hundred. One study showed that people who get teeny windfalls not only tend to spend it like it's radioactive, but also tend to take money out of savings and spend that, too. Here's Belsky's example:

If this sounds unbelievable, consider the following story about about a friend, whose tale I first told in the book referenced in my author’s bio. My friend, “Gideon” (not his real name), worked overseas for a small U.S. company. While on vacation in the U.S., he stopped by his employer’s Manhattan headquarters and, to his surprise, received a $400 bonus. A splendid gift, he thought, until he realized at the end of his trip that he had spent that $400 five times! Basically, every time Gideon went into a store or restaurant, he and his wife used that bonus to justify spending more money, i.e., “What the heck, we have $400 more to spend than we thought we had!” [TIME]

2. Secret freeloading
No one likes to think of themselves as a freeloader, but studies show that people play a weird mental voodoo on themselves (and their friends) at restaurants where they expect to split the bill, says economist Tim Harford. When we know the cost of our meal will be spread among five friends, we're more likely to order from the pricier items — even though we're also paying one fifth of five other meals, probably ordered by people suffering from the same bad logic.

Harford says this comes from two psychological factors: Social pressure (if you're eating lobster, I'm eating lobster), and people's unconscious tendency to freeload whenever possible. If you think you're immune to all shades of stingy habits, consider a study where strangers at a restaurant were observed under three different billing circumstances: Splitting evenly, each paying for what he or she ordered, or "on-the-house." The results:

Homo economicus immediately emerged: Diners ordered, on average, 37 shekels worth of food when paying their own way, 51 shekels when splitting the bill, and 82 shekels when the experimenter picked up the tab for everyone. (A small follow-up experiment hinted that people splitting the bill six ways behave similarly to those paying one-sixth of their own bill.) [Tim Harford]

3. Discount tricks
Sometimes the percentage of the discount feels more important than the dollar amount we're saving, says a 2011 study from the University of Chicago.

In this case, subjects were first asked if they would drive 20 minutes out of their way to save $5 on a calculator, explains Jonathan Becher in Forbes, then asked if they would drive the same distance to save $5 on a $125 leather jacket. The result: "68 percent of respondents would drive to get the calculator but only 29 percent for the leather jacket," Becher says. "The decision seems to be based on the inherent concept of getting a deal. One third off of an inexpensive calculator is a more powerful motivator than 4 percent of a leather jacket."

But that doesn't change the fact that you're saving $5 no matter what, and that $5 has the same spending power, regardless if you're saving it from a calculator, or a leather jacket...or even a car.

4. Crisp cash
People tend to like the feeling of a young, crisp bill over a old, limp one so much that they're reluctant to let those new dollars go.

A 2012 study published in the Journal of Consumer Research found that the physical appearance of money — how clean and green the bills look — has a psychological effect on most spenders. "Consumers tend to infer that worn bills are used and contaminated, whereas crisp bills give them a sense of pride in owning the bills that can be spent around others," say the authors.

In studies, researchers asked the subjects to do some shopping-related tasks with either crisp or worn bills. "Customers tended to spend more with worn bills than with crisp bills," says Phys.org. "They were also more likely to break a worn larger bill than pay the exact amount in crisp lower denominations."

5. Big bills
While we're on the subject of paper money, a 2009 study, also published in the Journal of Consumer Research, found we treat smaller denominations like they're Monopoly money, even if we're dealing with a sum the size of a bigger bill. It's called the "denomination effect."

Citing a 2006 study, the journal says, "[P]eople perceive higher value when money is in the form of a large single denomination because of the greater fluency experienced in processing the large denomination relative to many small denominations. The greater processing fluency translates into positive affect toward the money, which leads people to overvalue the whole, thereby making them less likely to spend it compared to an equivalent amount in smaller parts."

It then goes on to say that new evidence shows there may be more to it. People may see large denominations as being "less fungible," or easier to replace, and are therefore less willing to spend them willy-nilly.

Whatever the case, it might be a wise control strategy to stock your wallet with new $100 bills next time you go to the bank.

Carmel Lobello is the business editor at TheWeek.com. Previously, she was an editor at DeathandTaxesMag.com.

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