Identity Economics: How Identity Drives Your Purchases


It is often said at motivational talks and workshops that personal identity is important in determining many choices, including your career, education, lifestyle and relationships. The same goes for financial decisions. Your purchasing habits often hinge on who you are and who you want to be. If you’re not clear about these things, your financial choices tend to be random and spontaneous.


When you know who you are and what you want, it’s easier to practise mindful spending and to be deliberate about the things you buy and own. For example, if you identify yourself as fitness-conscious, you’re less likely to buy sweets at the grocery store.

The Concept of Identity Economics

In the book “Identity Economics,” authors George Akerloff and Rachel Kranton explored how identities determine how people earn a living and spend their money. When you are a parent, you prioritise financial decisions that involve your children. This is starkly different from the spending decisions of a college student whose priority is to make the most out of their budget from their parents’ allowance or from their earnings at a part-time job.

According to the authors, a large portion of identities are shaped by the environment and social standards. When you live in Perth, your cost of living is lower compared to when you live in Sydney. It also makes more sense to hire a financial planner when you’re in your 30s than when you’re just starting in your first job. Financial decisions are likewise linked to ethnic and religious backgrounds.

Akerloff and Kranton mentioned that the choice of identity is also a big influence on purchasing decisions. For example, a woman can shift from being a professional at work and a mother at home, with each role having an impact on her financial decisions. A young professional can see themselves as a collector or an active advocate of issues. Each of these roles affects how they work, save and spend.

Planning for Mindful Spending

Happy woman with shopping bags enjoying in shopping

With identity being critical to financial success, how can you make more mindful financial decisions? With thorough planning.

  • What are you doing right now?

Naturally, you want to start planning based on your current status. Jot your expenses based on your work, daily living and hobbies. This will help you get a clear picture of what your purchasing decisions are at the moment.

  • What are your goals for the future?

List all your plans and estimate how much you’ll need to spend or cut back from your current expenses. For example, if your goal is to get fit, consider getting a gym membership or buying home gym equipment. Look back at your current expenses and see if you can find healthy alternatives for your current diet.

Be careful not to fall into the “aspirational” shopping spree, though. For example, if your goal is to revamp your wardrobe, make sure you use all your new purchases. For lifestyle changes, create a timeline and stick to it so you don’t make a spontaneous purchase.

As you change, your values, your goals and identity should change, too. Remember to check up on your plans regularly to make sure you’re still making sound financial decisions.

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