By Ruth Steinhardt
It can be hard to make good financial choices around the holidays, especially with companies doing all they can to lure customers into a frenzy of spending.
Vanessa Perry, associate professor of marketing at the George Washington University School of Business and GW’s interim vice provost for diversity and inclusion, is an expert on consumer financial decisions. She spoke to GW Today about common traps to avoid and how to make it through the holidays with your budget—and bank account—intact.
Q: What decisions do you see holiday consumers making that could be better?
A: Well, definitely this is a time of year where people may suspend their regular budgeting practices in favor of all sorts of unplanned purchases. Not all unplanned purchases are necessarily bad, but routine helps people stick to their budgets. So a lot of overspending occurs because people are off that routine.
It’s not just gifts. During the holiday season, people’s social lives are ramping up—there are all these parties and celebrations going on. Almost every organization you can think of is holding an event in honor of some holiday, and there is lots of spending going on around those that people don’t account for. They may not think about how many times they go out for a holiday lunch, or about the stuff they’ve bought to bring to holiday parties or to work or to church or other outside activities that they’re involved with. A lot of these things cost money, but we don’t think about them because they don’t fit into the categories that we have for the rest of the year. And then we look at our bills in January and go “what happened?”
Q: So how do we keep ourselves from losing control like that—other than refusing all invitations?
A: This is going to sound like a cliché, but budgeting really works. Even going through just the mental exercise of deciding exactly what you’re going to buy and how much you’re willing to spend will affect your behavior.
Research has shown that budgeting often starts with this kind of informal mental categorization. This is called mental accounting. It’s not ideal from a rational economic perspective, but it does help people organize and plan. People like to be consistent with themselves: if you make a promise to yourself you’re more likely to stick to it than if you made no promise at all.
If you’re new to budgeting, there are a ton of expense tracking apps to help. In general it’s great to be able to use your smartphone to set up a budget. It’s always going to be accessible, it’s always right there.
It also helps to partner with someone. Our spending behavior is so heavily influenced by the presence of others—even people we don’t know. For example, people are more likely to spend money when there are other people shopping in the same place, though that’s kind of more relevant to a traditional brick and mortar store than, say, the Internet.
But if you shop with a friend, you’re accountable to them. One thing you can do is agree to a budget and get your friend to help you and remind you of it. That’s helpful because then you have a commitment, not just to yourself, but also to another person.
Q: Are there segments of the consumer population that are particularly susceptible to overspending?
A: Well, that’s kind of a loaded question. People always worry about millenials, first of all, because they’re the first generation not to have the financial wherewithal of the previous generation. Not only that, but millenials have really high usage of, and high expectations for, technology and technological advancement. The stereotype is that they always have to have the latest gadget. So that kind of perspective lends itself to a lot of spending.
That said, it’s also the case that baby boomers—who now have grown children and may be retired—have to think more about budgeting than perhaps people their age did in the past. They may have more disposable income than previous cohorts of retirees, but since they’re healthier, they also live longer.
Q: What tricks do marketers use to get people to spend more?
A: One of the most important is something called an “endowment effect.” That occurs when you form a cognitive emotional bond with an object because it belongs to you: Your own pink cashmere sweater, say, is more valuable to you than a pink cashmere sweater that doesn’t belong to you.
And marketers are really good at using imagery to make that endowment effect kick in before you’ve actually made a purchase. Especially with big-ticket items. They find ways to get you to imagine yourself driving the car, living in the house, wearing the coat or the jewelry. Then it becomes really hard to walk away from the purchase, because you’ve already kind of connected with it as if it were yours.
Another thing to be on the look out for is “sale” pricing. Remember that companies set prices based on what the item is likely to be worth to consumers. So that “sale price” versus the non-sale price is often an illusion.
People should realize that marketers understand the psychology of consumer pricing very well. They should be careful to determine how much they think an item is worth to them, and not to spend more than that—at any time, not just around the holidays. Then they won’t be susceptible to these illusory “sales.”
Q: How can you fight off the endowment effect? And how can you figure out if a sale is worth it?
A: I don’t know specific ways to offset endowment effects, but I always go back to budgeting. Plan what you’re going to spend and put some checks and balances in place to be sure you do that, whether it’s establishing other priorities or having someone to be accountable to or whatever.
As for developing a sense of the value of things: The best tool is comparison. That’s one great thing about having shopping apps that we can access from our smartphones. It’s really easy to comparison shop now. And with lots of companies offering free delivery or price matching or other incentives, you can often negotiate with companies to get the price you want.