Is AI manipulating us into spending more?

Christmas represents a significant portion of people's annual expenditures, with the typical American spending around $1,000 on the festive season. However, data shows that many overspend considerably during the Christmas period, with around 8% of us going into debt to cover our spending.

What's more, around a quarter of us have to cut back on normal spending in order to afford Christmas. With those who intend to use their flexible friend, around a fifth report that they expect to spend the next year paying off that debt, the issue of overspending is all too real.

A recent paper from Wharton suggests that the latest generative AI tools might be encouraging such overspending. The researchers found that AI can actually encourage poorer financial decision-making, due in large part to its ability to reduce the friction we often experience when we spend online.

“We have to think about who is implementing the technology. By and large, that’s going to be businesses and retailers whose incentive is to get smarter, faster, and better at getting us to part with our money,” the researchers explain.

“When you think of individual human beings trying to fight against hundreds, if not thousands, of companies now equipped with artificial intelligence technology, there’s room for concern.”

The researchers focused on the so-called "pain of payment," a term used by behavioral economists to refer to the various negative emotions we can experience whenever we spend money. This phenomenon has been well documented and explains why buying things with cash typically requires more thought and deliberation than buying things with our credit cards.

Reducing friction

Digital tools tend to try to reduce that friction and have often made buying things as simple as clicking a button or tapping our devices.

“All of a sudden, we’re disassociating this loss of monetary resources from the act of paying, which reduces that pain of payment,” the researchers explain.

“When we reduce that pain of payment, we tend to spend more, and our likelihood of purchasing increases.”

The researchers found four particular ways in which AI is changing the way we shop and reducing the friction associated with buying things.

Algorithms offer both opportunities and risks when it comes to consumer financial behavior, affecting areas like access, personalization, flexibility, and automation. When applied effectively, they can reduce bias and discrimination, increasing access to credit for underserved populations. However, if poorly designed, they may amplify bias, making financial inclusion even harder for marginalized groups.

Personalization is another double-edged sword. AI allows companies to offer tailored choices to consumers, potentially lowering prices for preferred customers. While this may appear beneficial, the increased personalization can lead to greater overall consumer spending, potentially diminishing financial well-being.

AI also introduces flexibility in how firms price their products, provide payment options, and offer points of sale. This increased flexibility reduces barriers to spending, making it easier for consumers to make purchases, though it may encourage impulsive or excessive spending.

Finally, AI’s ability to automate spending and investing decisions can simplify personal finance management. However, by handing over decision-making to algorithms, consumers may lose financial literacy over time. On a broader scale, increased automation could result in job losses, negatively impacting incomes and reducing overall spending power.

“When you think of individual human beings trying to fight against hundreds, if not thousands, of companies now equipped with artificial intelligence technology, there’s room for concern.”

Wired to adapt

The researchers say humans are usually excellent at adapting to our environments, but AI-automated shopping experiences can create cause for concern. They worry that AI will permanently change how we approach money and think about how we spend it.

For instance, there is a growing trend towards so-called "financial mindfulness," with books such as “Mindful Money” and “The Mindful Millionaire” offering to help people achieve peace and prosperity through money management.

While technology might prove useful in supporting this trend, it could also nudge us away from healthy financial habits and into reckless spending and personal debt.

“I don’t know that we have a silver bullet or answer, because clearly no one is going to go to industry and say, ‘Hey, you need to be less profitable,’ or ‘You need to focus on less technological advancements that are going to increase consumer spending,’” the researcher concludes.