Henry Dowell is a behavioural analyst at Canvas8. He holds a master's degree in behavioural science from LSE, where he looked into how a sense of trust can affect publicly minded behaviours during a crisis setting. Outside of work, he’s either banging on about the latest film he’s seen or taking on an overly ambitious cycling route.

May 2022 began with The Bank of England governor Andrew Bailey painting another gloomy economic picture for many Britons. Announcing another rise in interest rates, he voiced concerns that this historic surge in prices could even be accompanied by negative growth, or as it’s more commonly known, ‘stagflation’. 

Politico

 These economic fears are also being felt across the world – US inflation has reached a 40-year high and Australia’s Reserve Bank interest rate hike has meant that millions of Aussies will face the highest costs on loan repayments for a generation. 

Al Jazeera

 of the war in Ukraine – people are having to adapt to this new reality.

In response, people have felt the need to cut back, with 39% of Britons spending less on their grocery shops, compared to 18% at the beginning of 2022, and more than 200,000 have cancelled their Netflix subscriptions as they look to prioritise their spending. 

The Times

’ campaign, a community-organised effort to turn unused public land into allotments, is an example of how resolute pragmatism is becoming more common. With mounting pressures taking a toll on people’s emotional state – 38% of Britons feel worried about their finances, a figure higher than any point over the pandemic – many are looking to put their trust in 

 and institutions to support them even further. 

But in times of such prolonged economic pessimism, is spending still the 

 we know it can be during a crisis? In ‘

Spending and Happiness: The Role of Perceived Financial Constraints

’, Rodrigo Dias, from the Fuqua School of Business at Duke University in North Carolina, delves into how this feeling of financial constraint can impact people’s happiness when they do decide to shop. Canvas8 spoke to Rodrigo to find out how brands can ensure when people do decide to spend, that they don’t feel any less happy than before.

Why is this topic important to understand?

I’ve always been interested in how financial constraints impact people's emotions and behaviour. I'm from Brazil and I grew up in a worse socio-economic environment than most people experience in the United States. This motivated me to understand how financial constraints affect people’s emotional state and their behaviour.

There’s a lot of work out there about how feeling financially constrained impacts how you spend your money. An interesting fact is that the feeling that money is not enough is ubiquitous across income groups – even millionaires often feel financially constrained.

Feeling financially constrained has significant – and sometimes surprising – effects on people's behaviour. For example, people who feel financially constrained are more likely to spend on high-calorie food, lottery tickets, and material possessions. People have referred to this tendency as 'compensatory consumption'. This kind of behaviour isn't necessarily irrational; it makes sense that without the financial freedom to plan ahead you would focus on maximising your short-term happiness.

Many are tightening their belts as the cost of living crisis becomes a reality

Our primary question was: do people actually get more happiness from their purchases when they feel financially constrained? There are two interesting challenges to address when studying this question. The first is how to test the effects of feeling financially constrained. We did this by measuring people’s financial constraints and statistically accounting for factors that might differ between those who feel financially constrained and those who do not – for example, their age, education level, and the type of purchases they make. In addition to statistically controlling for these potentially confounding factors, we manipulated how salient financial constraints were in people’s mind. This allowed us to examine how people’s emotions and behaviour changed when they felt more or less financially constrained.

The second challenge is how to understand and measure the happiness people get from their purchases. We did that by looking at people’s self-report of happiness when thinking about their purchases – a measure commonly used by other researchers – and also consumer reviews, which allow us to unobtrusively examine purchase happiness.

Pragmatism is becoming more common as people find ways to economise

Our main finding is that people get less happiness from their purchases when they feel financially constrained. Even though past research has shown that people who feel financially constrained often spend their money with the intention of increasing their happiness, our findings show that the exact opposite happens.

Why did this happen? There are multiple factors at play, but one factor that was clearly playing a role is what we call 'opportunity cost consideration'. An opportunity cost is something you could have spent your money on instead. Our data showed that when people who felt financially constrained thought about the purchases they made, they also thought about what other purchases they could’ve spent their money on – that is, the opportunity costs. Because they were more likely to consider the opportunity costs of their purchases, they got less happiness from spending their money.

Of course, it’s unlikely that this is the only factor that explains why feeling financially constrained decreases the happiness people get from their purchases. Future research may uncover what these other factors may be. One possibility is that those who feel financially constrained might have higher expectations for their purchases. It’s also possible that ‘rumination’ – thinking repetitively about one’s feelings and problems – might play a role. But more research is needed to uncover the role that these (and other) psychological mechanisms may play in explaining how financial constraints decrease purchase happiness.

While our data showed that financial constraints decreased purchase happiness on average, we also investigated whether this effect varied across different types of purchase. We found that the effect was reduced for purchases that were planned in advance. That is, while feeling financially constrained reduced purchase happiness in general, this effect was attenuated – but not completed eliminated – when consumers planned their purchases in advance.

Brands can tap into the notion of ‘purpose over profit’ to maintain loyalty

The cost of living crisis has quickly become a reality and people are tightening their belts, fast. In fact, 82% of Britons have cut back on non-essential items and more than half have experienced food shortages. 

The Grocer

 But by nudging people into planning their purchases in advance, brands can help overcome the potentially negative effects that come with contemplating opportunity costs. Amazon’s 

 over their products by giving people 24 hours notice before their wishlist items go on sale. Proactive and transparent initiatives that highlight better value for money can have a similar effect like how Co-op is ditching its 

, meanwhile, is ensuring that people feel like their money travels further by offering a free clothing repair service, an initiative that seeks to tackle costs not just for the price conscious but overconsumption for the eco-minded.

Within two days of the UK government launching the 

 scheme, over 130,000 people registered their interest – despite the additional costs this would inevitably have on a household's growing energy bill. 

Sky News

 This reaction is evident in people's in-built community spirit and people can feel good about supporting 

 that align with these moral aspirations. 

, for example, has received plaudits for creating a special fuel offset scheme to help gig economy workers, while 

 has been criticised by its own investors when it was slow to boost employee’s wages in response to rising living costs. Brands that can show they are social entities committed to 

 can build trust over the long-term and expect loyalty when times feel more free.

On 31st of March, Ofgem increased its energy price cap by 54%, meaning that families would see their yearly bills rise to an average of £1,971 a year. 

Ofgem

 In response, the money saving expert, Martin Lewis, called on Britons to submit energy readings to providers before the hike went into effect, and took to social media to label it #MetreReadingDay. It caused a furore as many firms, including British Gas, E.ON, and EDG saw their websites crash due to demand – with provider Octopus energy reporting an increase in caller query demand by over 1,500%. 

 The incident points to two things: firstly, the lack of trust people can have in traditional organisations to guide them through difficult economic times, and secondly, it shows how people are turning to figures who can provide empathetic and relatable advice instead. Lewis and food campaigner 

, whose food price index many are looking to demystify, point to the growing class of non-judgmental, jargon-free ‘

’ who can speak with authentic and trusted voices during such uncertainty.

 can be a difficult subject – 39% of UK adults say a lack of money is the primary cause of stress, whereas for Americans, 65% say that money is a significant source of stress. 

CIPHR

 Brands have a role to play in helping ease the feeling of financial constraint through innovative ways of managing their money. 

 focuses on highly customisable money management plans, while 

 provides its users with simplified and hassle-free debt refinancing tools – both of which are utilising fintech solutions to ease the financial pressure valve.

 of Britons reported spending less on their grocery shopping

 of Britons are feeling worried about their finances – more than at any point during the pandemic

 of Americans say that money is a significant source of stress

When feeling like money is tight, people tend to make impulsive purchases that maximise their short-term happiness over longer-term gains

This pattern of spending, which can be observed across income groups, does not in-fact lead to any greater happiness

Brands have a role to play in alleviating these negative emotional outcomes by encouraging more intentional spending or through strong commitments to social values

Rodrigo Dias is a PhD candidate at Duke University’s Fuqua School of Business in North Carolina. His research interests are found at the intersection of consumer finances, decision making, and wellbeing.

Global

Money

Office for National Statistics

University College London

American Psychological Association

The cost of living crisis is making people cut down, alter their routines, and look for greater support. But since spending can be stressful when times are tight, what can brands do to ensure people’s purchases make them feel better, not worse? Canvas8 spoke to Rodrigo Dias to find out.

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