I have a friend who buys modern-day electronic gadgets and later regrets his decision! That should seem strange, for he is otherwise intelligent and successful in his professional life. But if you observe closely, all of us suffer from similar problems. It is not unusual for us to splurge while shopping and then regret our buying decisions later. As humans, we are supposed to make rational choices. So, why do we buy stuff and then regret our purchase decisions?

You should understand how the brain works to appreciate your spending decisions. Suppose you are offered Rs 5,000 today or Rs 5,500 a year hence. Which would you accept? If you are like most of us, you would prefer Rs 5,000 today. A bird in the hand is worth two in the bush after all.

But what if someone offers you Rs 5,000 after 9 years or Rs 5,500 after 10 years? Will you still choose Rs 5,000? Chances are you will prefer Rs 5,500 after 10 years! When it is a choice between two dates in the distant future, your brain, perhaps, logically perceives more value in postponing receipt by one year (10, instead of 9 years) to receive the higher reward.

If your brain logically chooses Rs 5,500 for a period in the distant future, why does it behave differently while making short-term decision? It turns out that you use different regions of your brain when you make short-term and long-term decisions.

Emotionally driven

Experiments conducted by researchers have shown that you are more likely to use your mid-brain dopamine system when it comes to making short-term decisions. This means that your emotions will primarily drive your short-term decision making. And you are more likely to use your prefrontal cortex, the area of the brain that is related to logical thinking, when you make long-term decisions.

Now, consider your visit to a mall. Are you likely to engage in short-term or long-term decision when you buy a pair of jeans that is on sale at a 50 per cent discount? Emotions due to dopamine surge will primarily drive your decision at that point in time. It is the same reason why we use credit cards on purchases we cannot afford and buy momentum stocks that are too risky for us! You do not have to be a gambler to waste your money. Periodic surges of dopamine are enough to make you indulge. Your prefrontal cortex may well rationalise your purchase decisions later, leading to regret.

(The author is the founder of Navera Consulting. He can be reached at enhancek@gmail.com)

(This article was published on August 18, 2012)
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