Do you hear that? Off in the distance? The faint but jolly jangle of jingle bells headed our way? Or wait ... is that actually just loose change jingling in your pocket, because a few coins are all that's left after your holiday shopping? It's time to face the facts -- the holiday season is upon us … and it's always one of the most expensive times of the year.
It turns out that the same good advice that leads to smart investments can lead to smart shopping. Essentially, that's what investments are, right? Purchases.
Holiday shopping, meet behavioral finance!
Let's kick off the season by taking some tips from the Wall Street Survivor Behavioral Finance Course. The following lessons on how to invest "rationally" can help us approach our seasonal shopping with a rational mind-set as well.
Don't get emotional
"Emotionless investing" is a common refrain in behavioral finance, and it's particularly important to remember during the holidays, one of the most inherently emotional times of year.
This is not to say that your gifts shouldn't be thoughtful. But we all need to be mindful of avoiding those emotions that cause us to buy things unnecessarily, such as:
- Succumbing to peer pressure from aggressively cheerful sales people;
- Adding something to your digital shopping cart just because Amazon "really nailed it" with its recommendation;
- Trying to keep up with the Jones' or celebrities spotted shopping in US Weekly;
- Treating yourself to astronomically overpriced treats from the food court because "omgallthisshoppingissoexhausting"
Beware of over-(trading) shopping
One frequent effect of irrational investing is over-trading, or becoming so caught up in a frenzied market that you make unnecessary, and ultimately detrimental, trades. The same thing can happen to your shopping cart.
We're all getting bombarded with advertising stimuli, so brace yourself -- every item in every storefront is about to become shiny, adorable, and on sale. Remember! Just because something is on sale doesn't make it a good deal. Spending $0 is still less than saving 50%.
Santa Claus was on to something here. This holiday season, take a cue from Mr. C: make a list and stick to it. Don't make purchases just because they are on sale.
Biases can be particularly detrimental to one's investments, especially because it can be hard to recognize that they even exist. Here are some different ways they might present themselves while holiday shopping... good investors and shoppers should do their best to avoid them.
- Availability bias: The Behavioral Finance course describes this bias as "when your brain uses the information that it has handy and weighs it more heavily than information that it has to seek out." This can happen in investing when you hear a stock tip from a friend, or see an article on your Internet homepage then take the information as gospel. The information that's most easily available to us isn't necessarily wrong, but it is far from the only game in town. The best investments, and shopping deals, take research, so in both cases try not to succumb to the laziness of availability bias. This holiday season, don't limit yourself to just shopping at the stores on your block or the websites in your browser's favorites. A better deal might be just around the corner.
- Anchoring bias: Or is there something specific you want to buy? Don't buy it the first place you see it ... just because it's in front of you doesn't mean it's the best deal. Especially because so much shopping is done online these days, there's no excuse for not doing your research and ensuring that you get the lowest price. This bias is common in investments as well -- because there are so many types of investments to choose from, it is easy to convince ourselves that the first one we hear about is the "right" one for us, or that our company-sponsored investment plan is the only investment we need. Instead, to properly ensure that our investments match up with our financial goals and strategy, we should all remind ourselves to explore multiple investment options before making a decision. Research the possibilities first, make your investments second.
- Confirmation bias: Similarly, don't make up your mind about where to make a purchase before examining all options. This is dangerous in investing, when you seek out and/or retain only information that supports a decision you have already made, or "cherry pick" data that confirms your prior beliefs. Remember, when investing, thorough and honest research is absolutely key. (Are you noticing the theme here? Research your purchases!)
On the shopping front, beware of committing the confirmation bias of only seeking out deals for places you already shop. If you shop at Whole Foods every Sunday, don't automatically throw away your coupons to the grocery store down the street. Its turkeys are probably just as tasty.
Get started now
There's a reason this post is going upon the middle of November: the earlier you start looking for deals, the more likely you'll be able to find them. And by the way, this tenet works for saving as well. The earlier you start saving for holiday gifts, the better. Just like investments, savings are most valuable when practiced long-term.
In a previous post on Wall Street Survivor, we recommended making travel a "fixed expense" in your budget, and dedicating a portion of each paycheck to travel savings. Why not use this same technique for the holidays? If you know in January that once December hits, you are going to have to fly somewhere, buy a bunch of presents, and cook a four-course feast for all of your relatives … why not start saving for those expenses right away? What better way to make the holiday spirit last all year than by saving for it all year?