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Holiday Spending Tips

How to spend wisely around the holidays

In case you missed it (and it’s unclear how this would be the case), we are all now in the time of the year that’s no longer known as November or December, but simply “The Holidays.” Aside from eggnog, awkward sweaters, and entirely too much food, this time of year also brings with it some important spending decisions. Two that seem to come up frequently: How much money should you shell out for [you name the person]’s gift? And, if you’re the lucky recipient of a cash gift or a bonus at work, should you spend it or save it? Here are some tips from recent research:

Don’t worry about how much you spend (as in, don’t feel like you need to spend a ton of money to make someone happy). A few years ago, Frank Flynn and Gabe Adams examined the link between how much people spend on a gift and how appreciated that gift is. In one study, Flynn and Adams ran a survey on newly engaged couples and asked the men to report both how much they spent on engagement ring and how much they thought their fiancés appreciated the ring. They also asked the women in the study how much they thought the men spent on the ring, and how much they themselves appreciated the ring. (In case you’re wondering, women were fairly accurate in guessing how much men spent on their rings). Interestingly, for men, there was a significant correlation between ring price and perceived appreciation: they thought that the more they spent on the ring, the more their new fiancés would appreciate the ring. But the same correlation did not exist for women: they saw no relationship between ring price and feelings of appreciation. Flynn and Adams found this basic effect in two more studies: gift-givers regularly assume that a more expensive gift will be more appreciated than a less expensive gift, but gift-receivers don’t feel the same way. Why do gift-givers assume that larger gifts will be more appreciated? Because they assume that larger gifts are linked to greater perceived thoughtfulness. But if you truly want to be thoughtful, one thing to do – as recommended by Flynn and Adams – is to not focus on price, but instead think more specifically about what a gift recipient actually wants.

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If you do get cash, don’t always think about it as a “bonus.” Maybe you’ll be lucky enough to get some extra cash or even a bonus at work. Just like tax rebates, the temptation with extra holiday money like this is to very simply think about it as “extra.” But there’s one problem with such thinking. Nicholas Epley and colleagues found that people are more likely to spend, rather than save money that was framed as a windfall. If that same money was framed as a rebate, however, people were likely to save it. The intuition behind this finding requires a little imagination. Imagine that you had $1000 in your bank account. If you suddenly gained $1000, you’d quite obviously feel $1000 richer. Here, your reference point is the $1000 that you just recently had in your bank account. But there are multiple reference points that you can think about. There may have been a time in the recent past, for example, when you didn’t have $1000 in your bank account. Using this reference point of $0, your newly found $1000 may just feel like a rebate, or like a way to make up for past losses. The same thinking applies to cash gifts or bonuses. Indeed, in another paper, Epley and Ayelet Gneezy found that when a tax return was described as a “windfall” people were more likely to remember spending it. When it was described as a “rebate” people were more likely to remember saving it. The bottom line? When money feels like a bonus, or like an addition to your bank account, we feel as if we don’t need to take account of it, and we can spend it. When it feels like money we’ve gotten back from a previous expenditure, however, then we’re more likely to hold on to it for later. Of course, it’s not always a problem to spend newly found money. If the end of the year is a time to unwind after a stressful year, then by all means, using that cash for something fun isn’t such a bad thing (or, as Parks and Recreation’s Tom Haverford notes, it’s important to “Treat. Yo. Self” ). The problem arises when money gets spent that should otherwise be saved for a later purpose.

Happy Holidays!

Hal E. Hershfield, Ph.D. is an Assistant Professor of Marketing at New York University's Stern School of Business.

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