Thursday, May 1, 2008

Wants vs. Needs

One of the first things taught in financial literacy courses is budgeting. And in constructing the budget, we tell students start with income; only then should they move to spending. Once the students are addressing the spending side of their budgets, it's important to get them to differentiate between wants and needs. There are a number of ways of differentiating. One of my favorite rules of thumb is "needs are general (clothing, food), wants are specific (Nike, steak)." But another aspect of building the expense side is learning how to control spending. And a key part of that can be controlling what some people call "emotional spending." That is spending that we do that is mood-related: depressed, disenchanted, ecstatic, etc. Emotional spending almost always falls under the category of want as opposed to need. And while you may claim that your emotional state needs to seek release by spending; there are usually other ways that won't mess up your financial plan.

There is a good article on Investopedia.com on this topic. It has a good explanation of what constitutes emotional spending, as well as offering some good suggestions on how to control it. For those of us teaching a basic personal finance course or a unit on personal finance within another course. It's worth a look. What do you think?

4 comments:

Andrew H. said...

Tim,

You have touched on a long-standing controversy in the field of economic educators. Within economic theory there are no theoretical underpinnings to support the concept of needs versus wants. When one looks at demand theory's origins in preference relations (See Mas-Colell, Whinston, and Green, Microeconomic Theory or Jehle and Reny, Microeconomic Theory), one sees that individuals prefer one thing over another or they are indifferent between the two items. This is at the core of rationality. Therefore, we, as economic beings, have wants. Some wants are stronger than others. My wants for food are stronger than my wants for an iPod nano. I will satisfy my wants for food before I satisfy my wants for the iPod.

When teachers identify for their students some items as wants and other items as needs, they are imposing their own value judgments on their students. Furthermore, when they assess whether students can identify which items in a list are needs and which are wants, they are holding students accountable for teachers' value judgments. Different teachers say that different items are needs and different items are wants. Teachers who believe that hamburgers are junk food will tell students that a hamburger is a want, but a glass of milk is a need. While I'm not opposed to an individual thinking to herself, "Is this something I really need or is it just a want?" as part of their own decision making, I'm very much opposed to teachers imposing their own views of what is a need and what is a want on students. If we teach our students how to be good decision makers (see Intersections, Spring 2006) they will be able to make their own decisions that will allow each of them to live vibrant economic lives of their own choosing rather than the lives their teachers think they should live.

I was recently at a conference where another presenter decided to give students a needs versus wants problem to solve. She asked those students who thought that a cellphone was a need to go to one side of the stage and those who thought a cellphone was a want to go to the other side of the stage. The group of 50 students erupted into hundreds of questions. "Does the person have a job?" "What kind of job do they have? "Do they have to drive long distances through rural areas?" etc. The result was that most students couldn't decide and just stood in the middle of the stage perplexed until the speaker announced that a cellphone was a want. I was aghast.

Andrew

Tim Schilling said...

I understand your view on the wants/needs issue and I think your points are valid. Teachers need to be careful not to interject values into the process. Although, that brings the importance of institutions - the rules (formal and informal) and organizations of society that influence choice - in decision-making. Are peer influenced tastes part a valid part of institutional study? Some researchers would say "yes," others would say "no."

Regardless, that's why I tend to use the general/specific differentiater. In the example you cite, the "need" may be communication ability. Then we need to ask questions about utility - form, place, time - of different modes of communication.

The students raised valid questions for which the presenter was unprepared. In some cases the cell phone may be a "need." But it clearly is a want. It's just a matter of how strong, as you correctly point out.

mary s said...

As soon as you ask your students to differentiate needs from wants you have interjected values. If you paid $60 for your jeans they are a want, only $30 a need. Who gets to decide?
The cell phone discussion is a perfect example of what a waste of classroom time this effort to categorize needs versus wants really is.
Higher-order thinking involves recognition that we can't have everything we want, and therefore, we must prioritize. And make informed decisions.

Tim Schilling said...

Mary,

I agree that one has to be careful not to inject value judgments. That's why there is value in categorzing "needs" as general in nature - food, clothing, shelter - and "wants" as specifics. The priortization of wants is ultimately decided by our preferences and perceived utility for items - and the willingness to recognize and accept the opportunity cost.

The needs/wants discussion ultimately goes back to just what you and Andrew said: "they're all wants." But getting the student to recognize that different people priortize differently is an equally valuable lesson. (I think that helps them overcome peer pressure on many decisions - "It's all right if I think differently.)

Choices are not bad if the decision-maker realizes and accepts the opportunity cost and the long-run implications. Wouldn't you agree?