The holiday season is a time of joy, celebration, and gift-giving (yes, love and hugs are gifts). However, behind the cheerful decorations and festive spirit comes the human behavior of spending money, also known as behavioral finance. Behavioral finance combines psychology and economics and provides valuable insights into understanding our shopping behaviors during this time of the year.
Here are a few things to know:
1. The Influence of Social Proof:
We all know the pressure to show your love through gift-giving increases during the holiday season. Behavioral finance recognizes the impact of social proof, the tendency to rely on the actions of others when making decisions. There's a natural tendency for influence when viewing others shopping for gifts. It creates a sense of urgency and major FOMO (fear of missing out). This fear can lead one to make impulsive decisions and overspend to keep up with others.
2. Loss Aversion and the Fear of Regret:
As humans, we are more motivated by avoiding losses than by achieving gains, known as "loss aversion". Retailers often employ limited-time offers, flash sales, and even Cyber Monday deals to create a sense of urgency and capitalize on "missing out" on a good deal. We may feel compelled to purchase items even if we don't necessarily need them.
Anchoring is a cognitive bias that heavily relies on the initial information we see when making decisions. When holiday shopping, anchoring is apparent when we encounter deeply discounted items. Retailers use "doorbuster" sales and eye-catching advertisements to anchor our idea of value.
4. Emotional Decision-Making:
The holiday season will have many emotional experiences that can impact our shopping behavior. Behavioral finance recognizes the role of emotions in decision-making, emphasizing that we are not purely rational beings. During holiday shopping, companies capitalize on emotional states by creating heartwarming advertisements, invoking nostalgia, and fostering a sense of generosity. Our emotional responses can create impulsive purchases or spending beyond our means (we like to buy our love).
5. Mental Accounting and Budgeting:
We may create a mental account for gift shopping during the holiday season, separating it from our regular budget. This mental accounting can lead to overspending, as we focus on meeting the demands of the occasion rather than sticking to our financial goals.
Understanding behavioral finance principles can provide valuable insights into our shopping behaviors during the holiday season by being aware of the psychology behind advertisements. So, as you embark on your holiday shopping adventures, remember to consider the influence of behavioral finance and shop wisely.