There are many milestones that mark the transition from youth into adulthood, but personally, I think a person truly comes of age when they find out how much cheese costs. (Doubly so if you're in Canada.) I still remember my first trip to the grocery store after moving out, when I picked up an unassuming brick of cheddar cheese, looked at the price tag, and felt myself undergoing the loss of innocence in real time.
Now, as prices soar, I feel like I'm reliving that pain all over again. At the time of writing, theU.S. inflation rate is at 8.5%, and experts are warning that prices are unlikely to come back down for months. Almost overnight, it’s become significantly harder to make ends meet, and globally, it's those who were already vulnerable who are likely to be hit the worst.
What are some unexpected ways that inflation might impact our decision-making, and how can we manage its psychological impacts? We’re sharing some perspectives below. In these unprecedented times, we know that behavioral science can only get you so far — but at the very least, we hope you find it an interesting read.
Until next time, Katie and the team @ TDL
Big thanks to Summer Interns Lindsey Turk and Janessa Pong for all their help with this newsletter!
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Today’s topics 👀
🤑 Deep Dive: Your Brain on Inflation
📝 Field Notes: Breaking the Cycle of Financial Stress
This crisis is undermining institutional trust. Last month, Gallup found that trust and confidence in U.S. institutions are at all-time lows. This finding goes far beyond the economy, but it’s safe to say that the failure to control inflation is a major contributor — as is the revelation that some corporations are using inflation as a cover for profiteering.
Our instinctive responses to inflation could prolong it. Our fear of more inflation could propel us to buy even more stuff now, while our money is relatively more powerful. We also may buy more in times of uncertainty to help ourselves feel more secure. Unfortunately, both of these tendencies could lead to higher prices and even more inflation.
It feels worse to spend more — even if you’re making more. With unemployment at low rates, you may be making better money than you were a year ago — but you're also losing a lot of it to inflation. Loss aversion makes this situation all the more painful: we dislike increased spending more than we like increased wages.
📝 FIELD NOTES: Breaking the Cycle of Financial Stress
Financial stress sets us up to be trapped in a vicious cycle: anxiety spurs us to less-than-optimal financial decision-making, which makes our financial situation worse — and makes us feel even more stressed. TDL partnered with Capital One to empower consumers to take back control of their money. We designed a simple nudge that helped trial participants interrupt the cycle of financial stress, and our work was covered by hundreds of outlets, including Forbes and Bloomberg. Read the case study or reach out to sekoul@thedecisionlab.com to learn more about this project.
VIEWPOINTS
💆♀️ Navigating Inflation
We at TDL cannot, unfortunately, stop inflation. What we can do is offer a few evidence-based pieces of advice to help you weather this storm.
Embrace uncertainty. Amidst this chaos, you may feel the need to take action in one way or another. While you should certainly take steps to mitigate risk, it’s important to accept that this situation is largely out of our control — and panic rarely leads to sound decision-making. If you’re struggling to step back, try designating a time to read the news, or committing to a schedule for checking on your investments.
Focus on what you can control. The simple act of revisiting your financial plan can make this situation seem more concrete and less overwhelming. We at TDL are not financial planners (even though we technically wrote the book on financial planning in Canada) so we can’t say exactly what you should do. But it may include steps like adjusting your monthly budget, diversifying your investment portfolio, or diverting a little more cash towards an emergency fund that will give you some peace of mind.
Remember that this, too, shall pass. When we’re in the thick of things, it can be hard to zoom out and remember the big picture. Biases like the availability heuristic mean that recent events loom large in our decisions and predictions about the future. But rest assured that things will level out — both our actual economic situation, and our perceptions of that situation. People tend to underestimate their own resilience and adaptability, but research shows that our “psychological immune system” is stronger than we expect it to be.
Data from the Consumer Confidence Survey®. Shaded areas represent recessions.
Anchoring
The pain of inflation is exacerbated by the anchoring effect. Prices went up so quickly that we’re still using the old baselines as a reference point, making us all the more aware of how much they’ve risen.
Opportunities in Behavioral Science
TDL is hiring! We are currently looking to hire for a number of roles, including UX Designers and Consultants. Visit our careers portal for details.
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