In the 80s, shoulder pads were all the rage; in the 90s, family cars were in; and, in the 2000s, smartphones and scores of other things took off. Trends are nothing new and can say a lot about what gets us going and how we spend our money. We explain the bandwagon effect and its impact on our consumption and financial health.
What is the bandwagon effect?
The bandwagon effect is when people do something because everyone else is doing it. This falls under behavioural psychology, which explains precisely how humans behave and make decisions. Under the bandwagon effect, the more people do something, the more likely others will do it too, without thinking twice about if they really should.Thus, it’s our natural tendency to follow what others do without considering what we believe or want, and can determine how we spend our money, whom we vote for in elections and what music we listen to. It’s a concept that originated in the mid-20th century from wagons in election campaigns that carried bands the electoral candidates hired to get their voters’ attention when they gave speeches. Ultimately, the music created the bandwagon effect, causing more people to "jump on the bandwagon".
Why does the bandwagon effect move us?
To understand why the bandwagon effect can make our decisions for us, we must look to behavioural psychology. Because human beings feel a natural need to belong and adapt to a group, acting like most people might work to our advantage.
How does the bandwagon effect impact on our household finances?
The bandwagon effect can help us understand the factors and the psychology behind financial decisions. If we always get the same products at the supermarket, it might be because they’re the most well-known brands on the shelves that everyone buys without even wondering if it’s the right choice. Also, the restaurants we usually choose are the ones with the most people inside because they feel like a safe bet. This is the bandwagon effect turning into a pull effect, a factor that determines popularity often without concerns for affordability or proximity. Overall, the bandwagon effect can help increase the demand for what we consume on the market and drive brand growth (just like advertising).
Learning to limit the bandwagon effect is important so it won’t hurt our savings and make us spend more than we need, and the advice from Santander Consumer Finance could help us. We can also use the savings simulator recommended by Tuiio, or budget our monthly expenses according to Santander Consumer Spain.
What about our long-term finances?
While the bandwagon effect may influence minor purchases we make, like some trendy trainers, it can also determine major decisions with considerable, long-lasting consequences for our personal finances. It could incline us to buy a home rather than rent, or even where to buy property (which will have a great impact on cost). To learn more, look at these recommendations from Santander Consumer Spain.
What is the bandwagon effect on investing?
The bandwagon effect also has an impact on how we invest our savings. This is clear with cryptocurrencies or in share price spikes (precisely because the pull effect occurs). Therefore, we should focus on the profitability and maturity dates of the financial products we choose to invest in and not be swayed by the most purchased or most popular products in a given year.
Are discounts good for our financial health?
In general, a discount is a price reduction for a good or service and, thus, can benefit our financial health. For example, Finanzas para Mortales (Finance for mortals) gives us a highly illustrative example you can see here.
We must follow a few guidelines to make sure we’re getting a good deal. First, we mustn’t lose sight of our savings and budget goals to keep everything according to the plan we’ve made. Second, we should compare prices, as described here in Finanzas para Mortales. It is also a good idea to stop and think if it’s something in our budget, something we’re getting to cover a need or buying on a whim, and, above all, if it’s something we can afford.
Black Friday: a practical case
The bandwagon effect has a major impact on discounts and falling prices, like during sales. A practical case of this is Black Friday, a special day each year with lower prices that results in higher consumption. A common behavioural economics question this raises is: on those days, do we consume more out of need or because of the bandwagon effect?
How can we prevent the bandwagon effect hurting our financial health?
We should also ask ourselves: Are discounts worthwhile? Do I actually need what I’m going to buy? Are my savings in good shape, and can I afford it now? Have I compared prices to find the best deal? Is now the time to buy it? Will buying something cause me to amass too much frill? Organization, anticipation and responsibility can be our best friends, for which you can try kakebo, the six-envelope system and other innovative saving techniques.
When it comes to consuming extra goods and services, choosing the best time and weighing the need to buy it is always key. If the time’s not right, we should hold off on any unnecessary expenses until our financial health improves.