December

Season of Giving, Holiday Spending, and Scarcity Bias

Introduction

As December approaches, so do the Christmas festivities for Singaporeans around the country who celebrate this annual event with family and friends. However, with Christmas’s inevitable arrival, so does holiday spending where gifts are bought for our loved ones to preserve the Christmas spirit and show our care and appreciation for one another.

However, with this increase in household and consumer spending, comes biases that may misguide us to spend more money on items we do not need than what is rational. This can be attributed to Scarcity Bias.

What is the Scarcity Bias?

Scarcity bias in behavioral economics is the assumption made by humans that items that are scarce are more valuable than items that are not. In other words, if an item is running low on stock, we would have greater demand for it.

Study: Weston et al. (2018)

A study conducted by Weston et al in 2018 finds that when the availability of a product decreases, it becomes more desirable. As a result, retailers can demonstrate the popularity of the product due to its limited quantity. Furthermore, the use of biases in retail stores can urge many to spend. For example, if shops use mental shortcuts to identify key characteristics of products. many would be more determined to spend more money if it is not necessary. Furthermore, the study finds that individuals with higher neuroticism and tend to spend less during the holidays. Neurotic individuals may be less inclined to spend due to stress and anxiety. Conversely, extraversion and is positively associated with holiday spending. With this in mind, consumers should take a longer time to think about what they are truly purchasing and its purpose instead of faltering under these pressures. Free incentives such as perks also may encourage consumers to buy products they do not need.

Key Takeaway: Mental shortcuts used by retail shops during holiday seasons such as the employment of scarcity bias can often misguide customers into spending more than they anticipate or is necessary. Therefore, it is important to be aware of these methods employed by retail firms and of your own tendencies to avoid faltering to these cognitive biases.

Risk Management Strategies

1. Create a holiday budget

  • Create a budget before spending money on holiday gifts. Whether the budget or small or big, it can make a big difference to limiting your gift expenses. However, the key point is to stick to the budget. If the budget is strictly followed, consumers are most likely not going to be spending excess savings on unnecessary items and falling victim to scarcity bias.

2. Gifts based on recipient needs rather than price or scarcity

  • Purchasing gifts during the holiday seasons based on recipient needs or practicality rather than price or perceived rarity helps solve both the issue of not perpetrating the false believe that more expensive items are more rare and more scarce items are more coveted. Instead, it allows for consumers to clearly consider what their goal of their purchase is and how it can satisfy the demands of the recipient.

3. Be calm and explore your options

  • Staying calm and exploring your options helps counteract scarcity bias by allowing you to think more rationally and clearly. This approach reduces the emotional pressure to make impulsive decisions driven by fear of missing out. Ultimately, this leads to more informed, deliberate decisions based on actual value rather than perceived urgency.

Additional Resources