The Behavioral Economics of Holiday Decision Making

Dec 27, 2023

Originally published as The Behavioral Economics of Christmas

Whether you celebrate Christmas, Diwali, Eid, or Onam (for any Mallus reading this, we all know Onam sadhya puts those Christmas dinners to shame! But the impact bias still gets us every time with those banana chips and payasam), holidays tend to mess with our rational economic behavior.

It's interesting what behavioral research reveals about how we make bad economic decisions around holiday celebrations and gift-giving. While this edition is aligned with Christmas, these insights apply broadly across cultures and festivities.

The “Deadweight Loss” (or Simply, Waste) of Gift-Giving

One key aspect is the value of gifts. Economist Joel Waldfogel estimates that gift recipients typically value presents at significantly less than what gift-givers pay for them. In his view, this represents a kind of wealth destruction.

Economically speaking, a large portion of holiday spending does not translate into equivalent value for the recipients — raising uncomfortable questions about the efficiency of gift-giving as a practice.

This waste often arises because most of us (myself included) are pretty terrible at choosing gifts people actually want. We get overly emotional and buy flashy or sentimental items that don’t really align with the recipient’s needs or interests.

It’s a learning process, for sure. But remembering my past gift blunders motivates me to make better choices each holiday season.

The Obligation of Reciprocity

Ever feel forced to buy a gift for someone just because they got one for you? Or give gifts because you anticipate receiving one in return?

You’re not imagining things. Reciprocal gifting is a real economic phenomenon.

We feel socially obligated to maintain relationships through reciprocal exchanges. So if someone gets you a nice gift card, you feel compelled to match that value. These obligations add up quickly when you include family, friends, coworkers, and business relationships.

Researchers link this to evolved psychological mechanisms for detecting cheaters and enforcing cooperation. The norm of reciprocity can lead to gift inflation, where parties feel pressure to match or exceed the value of gifts given to them.

If you’re trying to scale back this year, consider a Secret Santa setup. Sometimes the most rational move is setting healthy boundaries against gift inflation.

When Sales Lead to No Actual Savings

The holiday season often brings out conspicuous consumption — spending to signal status rather than to fulfill real needs. Social comparison amplifies this behavior, as people feel pressure to keep up with peers.

I’ll admit it — I’ve fallen for this before. When I see friends flaunting shiny new gadgets or lavish gifts on social media, something in me wants to keep up with the Joneses.

Which brings us to holiday sales.

50% off this. 75% off that. Irresistible, right?

Here’s the truth: most deals convince us to buy things we never needed or wanted in the first place. Retailers deliberately trigger fear of missing out through limited-time offers and psychological nudges.

Just because you “saved” ₹4,000 doesn’t mean you actually saved anything — especially if you were never planning to buy that item in the first place. Sales often create an illusion of value.

It gets worse when purchases are made on credit. We heavily discount future costs at the moment of purchase, leading to overspending. The post-holiday credit card bill then delivers a reality check we didn’t adequately factor in.

Decision Fatigue and Choice Overload

The holiday season is exhausting — and not just physically.

Think about everything involved: menus, guest lists, gift ideas, travel plans, budgets, schedules. The sheer number of decisions can be mentally draining.

Researchers call this phenomenon decision fatigue. When cognitive bandwidth maxes out, we default to shortcuts — often bad ones.

One way to reduce decision fatigue is simplifying choices. Gift cards help, even if in India they’re still mostly seen as a corporate gifting thing. My bet? They’ll become far more mainstream as people prioritize simplicity over “perfect” gifts.

Wrapping Up

So if you find yourself stress-buying something at 1:37 am because it’s “only today” and “basically free,” congratulations! You’re not bad with money. You’re just human.

Holidays are a perfect storm of emotions, social pressure, shiny discounts, and way too many decisions. Rational economic agents don’t stand a chance, especially after two desserts and one family argument.

The real tradition, it turns out, isn’t gift-giving or sales or even celebrations.

It’s convincing ourselves this year will be different…
right before adding something completely unnecessary to the cart.