Free money: Why marketers should use the ‘mental accounting’ approach after tax time

Originally by Smart Company June 22nd

There is something exhilarating in the moments after purchasing a lottery ticket. For a second, you suspend all reality and set your mind free to dream up exactly how you’d spend your millions. Whether it’s inviting your twenty nearest and dearest to a Bondvillian-esque villa on the Caribbean island of Mustique, a two-kilometre luxury shopping spree along the Paris’ Champs Elysee, or a Porsche Taycan with a charging station in the quadruple car garage of your newly purchased mansion, the possibilities of spending up big are endless.

But you’re going to blow only some of it, right? Of course, you’ll stash a significant portion of your winnings into untouchable super-smart long-term investments, so you’re never enslaved by the man again.

Or, maybe not, as studies demonstrate lottery winnings can often make a person financially worse off than they were before. There are numerous cautionary tales of lottery winners blowing the lot. However, in a 2001 paper on unearned income on earnings, consumption, and savings, economists Imbens and Sacerdote and statistician Rubin demonstrated that people tend to spend unexpected windfalls. Looking at lottery winners approximately 10 years after winning showed they saved just 16 cents of every dollar won.

Mental accounting explained

You can’t entirely blame it on stupidity, but rather, a weird psychological, behavioural quirk known as mental accounting, something we are all prone to. The concept was introduced in 1999 by American economist Richard Thaler, who won the 2017 Nobel Memorial Prize in Economic Sciences for his work identifying irrational behaviour in economic decisions. His paper “Mental Accounting Matters” theorised that people treat money differently, depending on its origin and intended use, rather than considering it in terms of fungibility.

Mental accounting is behind our tendency to mentally file money into different categories based on how it arrived in our bank accounts in the first place. When we receive cash that we haven’t had to graft our butts off to earn, our brains are inclined to perceive it as ‘free money’, making it much easier to spend. Unless you’re a lottery winner, you’re probably more likely to recognise this behaviour from blowing through the money left to you in your great aunt’s will, splurging following a big win at the Black Jack table, or immediately spending a fifty you found in the pocket of an old pair of jeans.

When it comes to ‘free money’, we often permit ourselves to do things we ordinarily wouldn’t. I know I’m guilty. One year I received an unexpected tax return of around $6,000, which made dropping $3,000 on a new pair of carbon wheels for my bike seem like a no-brainer. Ordinary me, preoccupied with the mortgage, school fees, and ‘rainy days’ would never do something so frivolous. Me with an unanticipated tax return? That’s a different story.

According to the ATO Commissioner of Taxation Annual Report 2021/2022, 19.8 million income tax lodgments were finalised, and $41.9 billion in refunds were issued. That means that, on average, we’ve each got around $2,100 that’ll be heading our way shortly after EOFY.

Add the licensing effect, a cognitive bias that refers to our core desire to balance our indulgent and virtuous selves and vice versa, into the equation, and it’s a free for all. You may recognise this bias in your own life. It’s the ‘because I did X, I deserve Y’ mentality. If you’ve cranked out an early morning session at the gym, you’re probably more susceptible to having a burger for lunch or a cheeky beer or wine after work. It also encompasses treating a tax return as a reward for working hard and paying taxes, even though it’s your hard-earned money. It allows people to spend it on something they wouldn’t ordinarily buy.

Why marketers should focus on post-June 30

It is not a given. With the cost of living crunch, many Australians will use their tax return to keep the wolves away from the door. Comparison website Finder surveyed 1000 respondents and found that 14% will use their refund for household bills, while a further five percent will put it towards their mortgage. Yet, for many, tax return time will mean open season.

Despite this, marketers tend to look to the end of the financial year as the time to really crank things up. With June 30 in the rearview mirror, many take a well-deserved moment to regroup and catch their breath before loading up again for the back half of the calendar year. This can see them dropping out of the market at the precise moment consumers are flush with guilt-free, tax-return cash.

Therefore, those selling more indulgent products and services might feel inclined to hold back until tax returns hit bank accounts. It’s not a magic pill. If they’ve never wanted one, people won’t spend money on an electric scooter or in-home sauna. However, if they’ve had their eye on one (or both), they may be tempted to fulfil that desire with their ‘free’ money.

Comms post-EOFY should allude to treating or rewarding yourself, and don’t hold back on pushing the higher specced, optioned-out versions of whatever you’re selling. It’ll be more likely to strike a chord than at other times of the year.