As the South African summer emerges, it ushers many reasons to loosen the purse strings. Better weather prompts us to dine out more and invite friends over for a “braai”, vacationing gets underway and shopping malls start seeing forward planners wanting to skip mid-December festive season queues. Shop fronts are covered in tinsel and spending season is in the air.

Instead of closing our eyes and swiping away, it’s a good time to be cognisant of our spending habits and behaviours. Behavioural finance is a field of study that explores how psychological influences and biases affect financial decisions. While most people believe they make decisions by and for themselves, most of us are susceptible to being influenced and driven by unconscious biases, which can lead to irrational spending.

Below, we explore a few behavioural finance concepts that often arise during this time of year.

1. Framing and Anchoring: The Hype Machine

Retailers are masters of creating urgency. Framing is the practice of presenting an event in a way that influences decision-making, often inflating its importance. The festive season and November’s Black Friday specials are a good example – marketed as a “once-in-a-year” event – deals are advertised to be so good they can’t be missed. Many of these discounts aren’t unique, and similar sales pop up throughout the year. The event is framed to make consumers feel they are missing out if they don’t act now.

Anchoring plays into this urgency, with retailers limiting stock and purchase windows to create a sense of scarcity. Limited availability often triggers the fear of missing out (FOMO), nudging shoppers toward impulsive purchases. For example, in South Africa, between 8 a.m. and 9 a.m. on Black Friday in 2023, online transactions increased by 124% from the previous day1 – likely driven by the fear of stock running out.

2. The Sunk Cost Fallacy

The sunk cost fallacy refers to the tendency of individuals to continue investing in something (time, effort, or money) because they’ve already committed resources to it. Customers often queue for hours or load up online shopping carts during the festive season. When their desired items sell out, they still buy something else to justify the effort.

The idea is that leaving without making a purchase feels like a wasted opportunity, even if the alternative items were not originally on their list. This might also look like “if you spend R100 more” you qualify for free delivery and more often than not, much more is spent than R100 to catch the “free delivery” dangling carrot.

3. Herding Behaviour

Humans are social creatures, and we often mimic the actions of those around us, especially in crowded environments. Seeing others rush to get deals can create a sense of competition, pushing shoppers to spend more than they intended simply because “everyone else is doing it.” This is particularly true during the festive season as everyone rushes to shopping malls to fill festive stockings.

4. Loss Aversion: The Fear of Missing Out (FOMO)

Loss aversion is the psychological phenomenon where the pain of losing something is greater than the pleasure of gaining something of equal value. During festive season shopping, this can manifest as shoppers being more concerned about missing out on a deal than considering whether they need the product. The media and retailers leverage this bias by pushing limited-time offers and advertising “last chance” deals to make consumers feel they could lose out if they don’t act fast.

5. Regret and Decision Fatigue

Regret, both of action and inaction, plays a big role in spending behaviour. People often fear regretting not making a purchase, which is why they give in to the pressure of festive deals. On the other hand, decision fatigue — when the brain becomes overloaded with making decisions — can lead to less rational thinking as the day progresses. A shopper might start with a budget and list but become overwhelmed by choices and opt to buy items they didn’t initially want, just to end the mental strain.

Spending consciously and mindfully, this festive season

Understanding these psychological factors is the first step in avoiding irrational spending. While it’s easy to get caught up in the hype, a few practical tips can help:

•Set a budget and stick to it: Don’t let the fear of missing out derail your financial plans.
•Make a list beforehand: Know what you actually need, and avoid impulse buying.
•Compare prices: Not all festive deals are as good as they seem. Do your homework beforehand.

By being mindful of these biases, you can avoid the post-festive season regret that often comes with overspending.

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Sources:

[1] Source: BusinessTech “This is how South Africans spent their money on Black Friday” published 28 November 2023.