Classical economic theory held that humans were basically rational actors. Behavioral economists blew that theory out of the water.

According to behavioral economics, “irrationality is the real invisible hand that drives human decision making,” as Duke professor and prominent behavioral economist Dan Ariely wrote in the aftermath of the 2008 financial crisis.

Our innate irrationality leads us to do things like surround our homes with security cameras even though crime has never been lower (the availability heuristic) and overvalue items we had a hand in building (the IKEA effect.)

Subscription services are one of the places where the irrationality of human behavior is most on display.

We sign up for services we never use. We avoid canceling things for no good reason. And yet people are signing up for more and more new products and services every year as more of the world gets on the subscription model.

There’s a lot of science behind why we subscribe, why we love to pay via subscription, and why we avoid hitting the cancel button.  And while you ultimately can’t change your psychology, you can at least equip yourself with the awareness to know when you’re being irrational.

1. The pain of paying: Why Apple Pay feels so much better than cash

Have you ever noticed how paying in cash feels a lot more painful than paying with your credit card?

It's easy to swipe your card, pay $100, and not even think about it. But parting with that same $100 as a paper bill? It's a lot more painful.

The term for this phenomenon is ‘the pain of paying,’ and it was first theorized by Ofer Zelermayer in 1996.

The pain of paying is rooted in our tendency toward loss-aversion: we fear losing more than we appreciate gaining.

Our brains are wired in a way that makes us associate negative emotions with the physical sight of money changing hands. But if we don’t see that money disappearing, we don’t feel the pain as much.

A big example of this from the world of subscription services is the so-called “free” trials that ask you to input your credit card information at the point of signup, so they can start charging you once the trial period ends.

Inputting your credit card for a free trial doesn’t feel like spending money, so you do it. The pain of paying doesn’t kick in until, for example, you’ve overdrafted your bank account because LinkedIn went ahead and charged you $750 for a year’s worth of LinkedIn Premium once your free trial expired.

Here's what happens in our brain during this "free" trial process:

Drazen Prelec, professor of management science and economics at the Massachusetts Institute of Technology's Sloan School of Management, is an expert in the field of neuroeconomics.

Through comprehensive studies, Drazen found that cash payments trigger activity in the insula, a brain region that's associated with negative feelings of pain.

A free trial reduces this activity in the insula—where the pain only begins much later when we realize the true cost of our avoidance to pay.

Want to curb your habit of delaying your psychological pain with free trials? Here are 3 tips to keep you safe:

1. Use a virtual payment card to set spending limits on how much companies can charge you.
2. Set your virtual card to expire before the free trial period ends—this way you won’t get pulled into paying for a subscription.
3. And, if you forget to set an expiration date, you can always lock your virtual card at any time to avoid being charged a subscription rate.

2. Mental accounting: How subscription services short-circuit our system

Anyone who's signed up for a subscription box product or meal-delivery service knows that the best part is often the anticipation you feel before it arrives in the mail.

It's like prepaying for an expensive trip a long time in advance. By the time you actually leave, the amount of distance you've put between you and the cost makes it almost feel free.

This is an example of mental accounting, which refers to the ways our brain tries to come to terms with spending. The term was first introduced by economist Richard Thaler, who paved the way for a lot of the research in behavioral economics and consumer behavior.

Professors George Loewenstein and Drazen Prelec expanded on this idea in their paper, "The Red and Black: Mental Accounting of Savings and Debt."

Loewenstein and Prelec found that we maintain a kind of mental double-entry accounting each time we make a purchase. On one side, there’s the enjoyment we expect to get out of the purchase. On the other side, there are the drawbacks — like the cost.

The trick is that this “double-entry” mental accounting isn’t always 100% balanced. As Thaler found, the way we assess the benefits and drawbacks of purchases can get thrown out of whack for all kinds of reasons — for example: when we have to wait for something for a long time, we enjoy the payoff when that thing arrives. In behavioral economics terms, this is called “prospective accounting” — and subscription businesses lean into it all the time.

Consider the subscription fashion service Stitch Fix, which delivers “fixes” of five clothing items to subscribers. Every few weeks or each month, subscribers get billed $20, which tells them that their “fix” is on its way.

That anticipation builds and builds until the box finally gets to the customer’s doorstep, and they get to discover what their stylist chose for them. Are the clothes better because of the anticipation? No — but our irrational brains don’t think that way.

Another place where you can see our tendency to inflate the value of things when we’ve had to wait for them is in the phenomenon of “unboxing videos,” which has become a massively successful genre on YouTube.

For subscription services, this prospective accounting can be a powerful force—something that can't just bring in new customers, but keep them in anticipation for their rewards month after month. For consumers, it's something to be conscious of— especially if you notice a company using it to get you to check out.

Here’s our advice: Consider pausing your spending. Do you really need five clothing items every few weeks? And will your dog be alright without a few Bark Boxes? Probably so.

Pausing a subscription can help you assess whether or not it’s worth the price.

3. Anchoring bias: Why you opt into the subscription package

You're ready to buy a home, so you contact your real estate agent and trust that she'll show you the house of your dreams.

First, she shows you a house that's within your stated budget — but the location is terrible and the layout is all wrong and it's in horrible disrepair.

Then, she shows you a second house —  slightly more expensive, but you're feeling a better about the amenities.

Finally, she shows you a third house — a bit north of your original price point, but the location is to die for and it has everything you ever wanted. Next thing you know, you’re signing on the dotted line — even though the house is over your original budget.

That real estate agent is taking advantage of anchoring bias — our tendency to evaluate options based on the information we get first. That first house being so completely wrong makes the third one seem that much more perfect. If she’d shown you the third one first, you might have said, “Too expensive,” and decided to keep looking.

Subscription businesses make use of anchoring bias in a similar way: they present us with a series of options, and arrange the information in a way that steers us toward a certain preferred outcome.

Take Bean Box, a coffee subscription service, advertises two subscription plans, and automatically suggests the "best" option which is a 6-month prepay of $19 per month.

To the right, we see the anchor — the  more expensive $24/month option. This makes us think this is what the product is really worth, and that by going with the $19/month pricing, we’re getting a better deal.

This anchoring bias is incredibly difficult for us to shake. Studies have shown that our brains continue to show preference toward original anchor information even after we’ve been told that the original information is wrong.  

To correct for anchoring bias, try creating a checklist as a way to get a more objective valuation of your choices.

Determine exactly what you're looking for, and jot down some deal breakers. Then measure each option according to your checklist. Set all emotions aside.

4. Optimism bias: How subscriptions sell you a better future

Nobody signs up for a credit card planning on paying late. When we shop for a new card, we focus on the rewards — the points, the miles, the fancy dining options — and we completely skip over the potential risks, like the interest fee.

But the reality is, life happens — sometimes we do wind up paying late. And when that happens, we wish our past selves had paid a bit closer attention to the fine print.

This tendency to assume the best when making decisions is called  optimism bias, and it tells us that we are less likely to experience a negative event.

When optimism bias is in play, our brain deliberately chooses to ignore information that we don't want to see —  like those lengthy documents full of terms and conditions you receive in the mail after opening a new credit card.

Tali Sharot, a professor of cognitive neuroscience at University College London, conducted research showing what happens in our minds when optimism bias is in play.

In her studies, participants were asked to predict how likely a variety of events —  receiving a gift, burning dinner, getting stuck in traffic, getting a raise — were to happen to them in the next month.

Participants with optimism bias over-estimated the likelihood of the positive events, despite the likelihood of the positive, negative, and neutral events all being the same.

American Express taps into our optimism bias by promoting their Platinum card, which offers effortless travel. You get all of these rewards points, the largest being 60,000 — but only after you use your card to make $5,000 in purchases in the first 3 months.

Here’s where optimism bias kicks in: we assume that we’ll be able to hit that minimum required to obtain 60,000 rewards points. American Express makes us feel as though our lifestyle will accommodate our quest for rewards.

To reduce this bias, we recommend always reading the fine print. Be realistic about risk factors such as failure to cancel a subscription on time, making a late credit card payment, or even credit card fraud—no one wants that.  

In 2019, a total of 7,098 reported breaches exposed 15.1 billion records—the worst year on record, according to Risk Based Security, a company that provides cybersecurity breach data and risk ratings. Unfortunately, our optimism bias distracts us from this risk.

You can prepare yourself by using a unique card number—and it’s more secure. You can turn off or limit credit card purchases in real-time, with just a few clicks.

While we don't suggest getting into a habit of negative thinking, being prepared for out of control spending or fraud can certainly strengthen your brain and save your wallet.

5. The law of least effort: How subscriptions remove friction

Humans are lazy. Given the choice between doing more work, and doing less work, we generally prefer to do less. It’s called the law of least effort.

The theory was discovered by French philosopher Guillaume Ferrero in 1894, who argued that people, across a variety of domains and contexts, tend to travel the path of least resistance.

This isn’t a bad thing, necessarily — why exert more effort when you can exert less? But it can get us into trouble when it comes to making purchasing decisions and businesses going out of their way to make spending money as easy as possible.

Dollar Shave Club, for example, gets us to subscribe by making the registration process easy and personalized. It plays to our inherent laziness and distracts us from the cost involved—like recurring payments for items we may not need.

Customers simply enter their name and then answer a few questions about their shaving routines and issues. The company removes the effort of having to decide whether or not to join.

And at the end of the questioning process, you'll be presented with a personalized recommendation, justifying why you should join--all of the mental legwork was already done without having to use your skeptical cognitive guard. Price is not even a factor at this point.

Take control of your wallet

There are a lot of amazing companies and products available via subscription. But the subscription economy is also built on some very pernicious quirks of human psychology, including many that take advantage of our inherent irrationality.

What can you do about it? Understand your biases. Don’t let anyone short-circuit your mental accounting.

Privacy can help. Our software comes with features to help you avoid spending more than you plan to spend:

• Pause your card between transactions, so unwanted charges don’t sneak through unnoticed
• Set spending limits for each vendor, so you don’t get charged more than you planned to spend
• Close your card when you know you’re done spending with a particular vendor.

It’s time to unsubscribe from overspending on subscriptions. Give it a try. Sign up for Privacy!