Young Investor

When a suit becomes an investment

B. Venkatesh | Updated on August 27, 2011

How much would you be willing to spend on a suit?

Suppose you have been toying with the idea of buying an LED TV and the cost has been a dampening factor so far. And then you find one at a 15 per cent discount. How will you convince yourself to buy the TV, given its high price tag?

Let us first look at how we approach a typical buying decision. Suppose you want to buy a dress shirt or a top for Rs 2,000. You would most likely buy the product if you believe the fabric is good and you like the colour and the design.

But what if you want to buy a suit that costs Rs 1 lakh? It is most likely that you would consider your suit as an “investment”, and not a normal expenditure on clothing. Why? Because the suit is too expensive to be justified as normal expenditure. Classifying your purchase as an “investment” makes it an attractive buying proposition for we understand “investment” to mean long-term. And because you intend to use the suit for the long-term, the present value of future benefit derived from the suit will be higher, justifying your current purchase.

Buy now, enjoy later

There is, of course, a behavioural angle to it as well. Spending causes pain; while the pleasure comes from consuming the product. By treating the expenditure as an investment, we are sending signals to our brain that the pleasure derived from the product is far higher than the pain of paying for it today. We also simulate the pleasure by visualising ourselves wearing the expensive suit. Needless to say, all of this moderates the pain and overestimates the pleasure, prompting us to buy the suit.

It is the same with expensive goods that we buy including LED TV. We tend to use the same strategy when we buy stocks that subsequently decline in value. We conveniently call it “investment” to ignore short-term price declines. In essence, calling high-value expenditure “investment” helps us trick the brain and moderate the pain of paying for it.

Published on August 27, 2011

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