 It’s a quiet Sunday afternoon and you’re scrolling through the Lululemon website. The new Scuba Oversized Full-Zip Hoodie jacket catches your eye. It’s sleek and looks extremely comfortable. $148.
You hover for a moment. It’s not outrageous... but it’s enough to give you pause. The price is just a bit too much to stomach. Then, right beneath the price, a soft gray line appears: “Or 4 payments of $37 with Afterpay. Interest-free.” Your mentality shifts. That $148 doesn’t feel like $148 anymore. It feels like $37, a number small enough to slide past your internal budget filter. The hesitation fades. You’re not deciding whether to spend $148; you’re deciding whether to part with $37 today. And that’s easy. Click. Add to Cart.
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 In the 1970s, CEOs were paid well, but not obscenely so (around 36 times as much as the average worker)¹. Compensation was high, but it wasn’t outrageous. Pay packages were opaque, boardrooms benchmarked internally, and the public wasn’t aware of the numbers.
By 1993, however, CEO pay was beginning to balloon, averaging about 131 times as much as the average worker². That year, in an attempt to stop the rise in executive pay, federal securities regulators required firms to begin disclosing this information publicly³. The idea was that once executive compensation was public, boards would be reluctant to give executives outrageous salaries and benefits out of fear of stoking outrage. What happened next was the complete opposite.  This past summer, my wife and I decided to take a trip to Europe. She had never been before, so I was especially excited. While browsing for plane tickets, I spotted what I thought was a steal: a round-trip flight for $617 per person. Score!
But then came United’s dreaded Basic Economy warning. No flexibility, no checked bags, no real seat selection. I couldn’t stomach the restrictions, so I upgraded to the much more ~luxurious~ ‘standard economy’. The squeeze didn’t stop there. Next, I found myself agreeing to pay extra just to sit next to my wife on both legs of the journey. A couple clicks later, I looked at my cart, only to find that the cost had ballooned to $986 per person. What on earth happened?  Mental accounting is one of my favorite concepts in money psychology. It’s the act of automatically assigning different values to our dollars based on context. Traditional economics tells us that a dollar is a dollar. But if you’re human, you know that’s not how it feels.¹
You don’t have to look far to see this concept in action; the proof is in our daily spending quirks. If you’re anything like me, you’ll pat yourself on the back for skipping a 50-cent coffee upgrade… then think nothing of dropping $20 on a ballpark beer that sells for $3 at the grocery store. We grumble at paying a $3 ATM fee, then happily tack on $12 for an app at dinner. We’ll wait in a long line at Costco to save $5 in gas, but pay a premium to board a flight slightly before anyone else. 
If you had to guess, how much money would you say you spend on monthly subscriptions?
...It’s hard to remember without looking at a statement, right? For reference, my household spends $133/month on subscriptions before counting gym memberships, Wi-Fi, or cell phone bills. My point is: the subscription model is so seamlessly woven into our daily lives that it feels normal. Streaming platforms, fitness apps, software tools, meal kits, medical products, even toothbrushes! Behind the convenience lies a system that exploits human psychology. And the financial consequences may be more damaging than you realize. At The New Diligence, I like to explore how subtle behavioral patterns shape financial behavior. Few systems illustrate this better than the modern subscription economy. |
AuthorAndrew Lancaster, CFP® Categories
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