We live in an era of frugality. Splurging on Louboutin heels or Prada purses has become somewhat passé. Tips for saving on everything from groceries to home purchases abound. But what if we've gone too far? What if we should be spending more, not less?

Some intriguing new research from the world of behavioral economics suggests that we might be better off with a slightly looser grip on our cash. Ran Kivetz, a business professor at Columbia University, has identified the concept of "self-control regrets," which describes what people feel if they deny themselves some indulgence that they later wish they had sampled. "People feel guilty about luxuries and it's hard to justify them, so they under-consume them," he explains.

Over time, Kivetz says, guilt over indulgences tends to dissipate, while feelings of "missing out" on a pleasurable experience or purchase remain. That explains why, five years after deciding against taking a wine-soaked cruise to Italy, for example, one might wish he had gone.

Not that his research suggests everyone should indulge every whim. Some people are prone to over-spending, perhaps because they have less self-control or are less driven by guilt. In France, Kivetz points out, people tend to feel less "indulgence guilt," so self-control regrets aren't much of a problem. Some individuals, on the other hand, are especially prone to self-denial, and may be more likely to regret those choices later.

So what is the "right" amount of indulgence? How do we know if we are truly being smart by avoiding a purchase, versus inflicting unnecessary guilt upon ourselves? Kivetz says there's no easy answer, and that not surprisingly, it depends entirely on the individual. In other words, each person has to decide for himself. Kivetz recommends making decisions with the long term in mind. Ask yourself, "How will I feel about this many years down the road? Will I wish I had made the purchase?"

As for what to indulge in, science has something to say about that, too. Gregory Berns, a professor in the psychiatry and behavioral sciences as well as economics at Emory University, found that when people pay more for products that they believe enhance their mental acuity (such as coffee or energy drinks), then they are more likely to work. Berns identifies this as a "placebo" effect. Basically, it works because people believe it works. That means if you believe a $4 coffee will help you ace a test or perform well in an interview, then you should spend $4 on that coffee because it probably will help you.

"We have been conditioned to expect that higher prices equates to higher quality," explains Berns. "Therefore with a product like an energy drink, you expect the more expensive it is, the better it works." But is a $4 coffee really better than a $1 one? It is if you believe it is, says Berns.

A similar concept applies to wine. A study from the Stanford Graduate School of Business and the California Institute of Technology found that when people were given two different bottles of wine and told that one cost $5 and the other $45 (in reality, both bottles were identical), the pleasure-center part of the brain became more active when the participants were drinking what they believed to be the more expensive bottle. They also reported that the wine they believed to be more expensive tasted better.

You can also let a more practical approach influence your splurges by spending less in some areas in order to free up cash for things that will bring you greater pleasure. Alexa von Tobel, founder of LearnVest.com, a new personal finance Web site for women, suggests prioritizing social events that don't break the bank, such as $50 barbecues and $75 dinner parties over pricier ones. She also suggests spending on winter travel and clothing now, when you get more for your money. But skip extra cell phone and air travel expenses, she says, because they won't bring you much happiness.

Other hot splurges this summer include coffee at Starbucks, where Wi-Fi is now free, new laptops (companies from Apple to HP are offering enticing deals), and the new iPhone.

 

 

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Personal Finance - Reasons -- and Ways -- to Splurge This Summer

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