Analysis: The pressure to spend money at this time of year is enormous and there are many reasons why our spending decisions are not rational
It's the most wonderful time of the year, but it comes with a hefty price tag. Recent research suggests that the average spend for Christmas this year will be almost €1,200, with three in five Irish consumers dipping into their savings and one in five borrowing to cover the cost of the festive season.
Behavioural economists could point to many reasons why our spending decisions are not rational this time of year. Marketers often exploit our biases, nudging us to spend more, to the extent that you might be forgiven for agreeing with Scrooge that Christmas is 'A poor excuse for picking a man's pocket every twenty-fifth of December’. Economists might argue increased seasonal spending boosts the economy, but do the substantial costs of the holiday season outweigh the benefits for the individual?
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From RTÉ Radio 1's Brendan O'Connor Show, cost of living writer Caitríona Redmond on why you shouldn't blow the budget on Christmas
The pressure to spend money on gifts this time of year is enormous and we are all heavily influenced by so called injunctive social norms, socially shared views about who we should buy gifts for and how much we should spend. We are therefore inclined to conform to norms and simply contribute the amount suggested on the class WhatsApp group for the teacher’s present. Receiving a gift also elicits reciprocity. If your neighbour drops over a gift, you feel obliged to reciprocate and give them one back, even if you weren't planning to give them one.
These social pressures can lead us to buy more gifts for more people than we would otherwise. Additionally, most people tend to be regret averse; in other words, they would rather buy too many gifts than end up not having a gift to reciprocate and experience regret.
Regret aversion can also increase spending on our own consumption over Christmas. We buy more food and drink than we need because we’d rather not run out and don’t want to regret not having purchased enough. In general, we can also be subject to present bias, whereby we value instant reward more than larger rewards in the future. This bias is even more prevalent at this time of year where ‘sure it’s Christmas’ is a valid reason to overindulge.
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From RTÉ Radio 1's Today with Claire Byrne, do you get Christmas presents for your dog or cat?
We also think about money differently in the festive season. Feeling nostalgic has been shown to decrease people’s desire for money, and so we part with it more easily. We also engage in mental accounting whereby we think about the value of money differently, depending on the situation and what we are spending the money on.
Rather than thinking rationally about how much money we can afford to spend and what we need to buy at Christmas time, we think about our spending in relative terms using a reference point; we look at what other people are spending and think that we should spend a similar amount. Framing effects, how goods are presented, also come into play this time of year. Most people will be willing to spend much more on a ‘festive coffee’ than they would for a regular cup, even though the coffee is probably more or less the same.
An unfortunate additional downside to Christmas spending is that people are generally not great at choosing presents for others. One famous economics paper estimated the deadweight loss of Christmas presents, that is the lost value that occurs because the giver pays more for the gift than the receiver would have been willing to pay for it had they bought it themselves. This lost value can be up to a third of the cost of the gift.
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From RTÉ Radio 1's Today with Claire Byrne, National Lottery Regulator warns people should stop giving lottery tickets to children as gifts
Part of this loss might result from ego-centricity bias, our misperception that others are more like us than they actually are. This leads us to buy gifts for others that we would like ourselves, rather than buying something for them that they themselves would like.
We also tend to believe that the more we pay for a gift, the more the recipient will appreciate it, but multiple studies show that this is not in fact the case. Instead, it really is the thought that counts, and gifts that are customised or experiential are preferred to expensive impersonal ones. Of course it is also hard to measure the sentimental value of gifts, and although for example a loved one might pay more for a gift than I would have paid for it myself, simply because they gave it to me I might consider it priceless.
There is a positive side to Christmas spending too. People are much more generous and altruistic this time of year. Studies have found that there is a significant increase in charitable donations in December and into January, and people tend to tip more during the holiday season.
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From RTÉ 2fm's Laura Fox Show, RTÉ Lifestyle editor Sínann Fetherson on experience gifts to give for Christmas
The real value of Christmas, however, is not monetary, but rather the rituals and traditions of the season. In a world where it seems we are all faced with increasingly more demands on our time, it is very easy to have decision fatigue. Traditions can help reduce this, because many of us simply do the same thing every year rather than having to choose what to eat or do on Christmas day.
As a parent of young children, I also very much appreciate the tradition of Santa Claus as an incentive device to at least limit bad behaviour at the most exciting sugar fuelled time of the year. Engaging in these rituals with family is additionally important as it leads to a more enjoyable holiday. Spending time with family, especially when the experience is particularly memorable, is predictive of a happier Christmas, while focusing on spending money is associated with lower levels of well being.
If like me you haven’t yet managed to get your Christmas shopping done, don’t stress too much and overspend panic shopping. It’s hard to overcome our biases, but what matters most for a happy Christmas is not how much you spend, but who you spent it with.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
