How behavioral economics has changed my financial decision making (Part 1)

It was my first job and I had just moved to Mumbai. Living away from home with a sizable dispensable income for the first time meant that all my eating and drinking choices were now completely autonomous! Which, in turn, meant that my lunch, dinner, and breakfast exclusively consisted of pizzas, burgers and rolls (burritos and such)!

After a couple of months or so I realised that my body had started taking a new shape – one that strangely resembled a football (American), especially around the middle.

I realised that I had work really hard to keep in shape (now, considering that round isn’t one!) I located a gym near my house and went to make an inquiry about the membership fees. I was told that it will cost me 200 rupees a day for using the gym without a membership. If I bought a monthly membership it will cost me 3000 and a 6-month membership will cost me only 8400.

Being a typical Indian, I quickly calculated which deal ‘sounded’ the best. In the first case I would have to pay 200 rupees a day, in the second case, assuming that I went to gym everyday, I would have to pay around 100 rupees per day and in the third case, again assuming that I went to the gym every day, it would cost me only around 35 rupees a day! Hence I signed up for the best sounding deal – a 6-month membership.

I went to the gym piously – every day – for the first 2 weeks. Then I realised maybe I should relax on the weekends so for the next two weeks I went to the gym 5 days a week. After that 3 days a week, alternate days, for the next two weeks and finally I simply gave up!

So, all in all, I went to the gym for about 30 days. Which meant I ended up paying 260 rupees per day. Which if you go back and check was worse than what I would have paid had I not taken the membership and used the gym on a per day basis – 200 per day! Had I paid on a per day basis I would have paid around 6,000 rupees, but I ended up paying 2,400 more.

Still, in this case, my loss wasn’t huge. My next mistake, however, cost me big money. A few months later a salesperson from a timeshare company approached me offering a 7 day per year timeshare holiday deal with one of India’s largest timeshare companies – Club Mahindra.

In his calculations, he showed me how a 7 day holiday in a 5 star would cost me around 10,000 per day and with Club Mahindra, it would cost me less than 3,000 per night!

[Calculation – INR 2,00,000 for the membership and a small ASF of INR 10,000 per year (which increases by 10% every year – historically) for a 25-year membership


25 x 7 = 175 holidays for 2,00,000 (membership fees) + 3,00,000 (approx ASF for 25 years)]

It was obviously a wonderful deal and only a fool will not sign up for it – or so I thought.

What that has resulted in is a loss of over 2,25,000 with only 4 days spent in the actual resort – costing me a whopping – 56,250 per night!

Now, the next question one would ask is how is this related to behavioral economics?

This particular phenomenon is called hyperbolic discounting – it sounds complicated, but I will try to explain it as simply as I can. This phenomenon refers to how we behave when we invest now and the ‘reward’ for the investment is delayed over a period of time. What happens is as the reward is delayed further and further the value of the reward is ‘discounted’.

In even simpler terms what happens is that we end up paying first and then using the services over a period of time. As period goes by our motivation to use the services goes down. E.g. When we are planning to invest in such a service – say a gym membership or a club membership, we often overestimate our ability to use these services. Like in the first case I assumed that I would use the gym every day – for 6 months or 180 days – but my actual usage was around 30-50 days. This also happens because we often ‘discount’ the effort it takes to utilize these services to their optimum level.

To answer the question – how this understanding of behavioral economics has helped me make better financial decisions?

  1. Memberships: A few months back me and my wife started swimming. The charges for the pool were INR 50/day on a per day basis or 1,000 for a monthly membership. The INR 50/day meant that if I used the pool every day for the next month I would end up paying 1,500 at the end of the month. However, this time around, I was aware of how hyperbolic discounting works and instead of taking a full month membership I paid on a per day basis. We ended up going to the pool for 22 days – which meant I spent 1100/- in total. While the loss wasn’t much, what it did was it gave me an actual estimate of what my usage would be and next month onwards it would be justifiable for me to take a monthly membership for the pool. Similarly for gym membership recently we did not pay for a 6 month membership (INR 7,500 which comes to 40/- per day) but decided to use it on a per day basis (50 per day). We ended up going to the gym hardly 25-30 days and paid only 1500. Had we not done that we would have ended up losing around 6,000! This is the rule I follow for all membership-based – delayed rewards – offers. I first check what my actual usage as of today is, take an average if you will of how much your usage will be – sample the service for a month or a use per pay basis, see how many times you used the service, calculate if it comes out cheaper or more expensive than the membership fees and then decide whether or not to invest in the membership.
  2. Investments: If you were to go out on the street and ask people if they would like to have 1000 rupees now or 1500 rupees one month later most people will pick the former option because in the second case the reward is far off in the future! One of the key reasons for many people not investing in SIP’s or any other investments is that the reward is delayed. Most people would go out and have a lunch worth 1,000 today than invest it to reap rewards later. From behavioral economics – hyperbolic discounting – I have understood that it is okay for the rewards to be delayed, instead of going for a fancy meal today we invest the same for a bigger reward tomorrow. At times let’s say we go for a fine dining experience and the bill is around 2,000 we have a pact that we will invest the same amount with a reliable MF the next day.

*This purpose of this article is not to throw shade on any companies offering memberships, in many cases – like in the swimming pool case – taking the membership was actually the better decision. For many people taking a Club Mahindra membership might actually have been the better decision – for me, it certainly was not. The purpose of this article is to guide readers and consumers as to how they can use behavioral economics to make better financial decisions.

The writer of this article, Dnyanesh Bodhe, is a blogger, author, speaker and a facilitator in the areas of Innovation, Creativity and Change. He works on several cutting-edge management concepts like behavioral economics, gamification, scenario planning, net promoter score, innovation jamming, etc. 


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