The Why #48: Why do we go on spending sprees with our tax returns?
By Dan Monheit, 12.08.22
Question submitted by Amber, Malvern
Ah yes, tax return time. The most wonderful time of the year. In a way it’s like Christmas. In July. For adults. And Santa has actually been taking things away from you all year before deciding to re-gift a tiny percentage back…
Once you get done Googling the big things, like ‘maximum deduction for dry cleaning without receipts’ ($150), working out where to lodge the damn thing and letting out a sigh of relief when you conclude that you haven't accidentally committed tax fraud, you get to enjoy the sweet anticipation of that magical monetary reward (aka your tax return) hitting your bank account.
And when it does, look out world!
We all know that high interest savings accounts, extra super contributions and paying down credit card debt are no place for tax return dollars. No Sirree. We’re hitting the stores, going large and treating this cash like it’s burning a hole in our soon to be upgraded designer pockets.
But why?
Mental Accounting
Refers to our tendency to treat money differently, even though objectively, it’s all the same. The way we think about, feel about and indeed spend money tends to shift based on factors like how we earned it and what we intend to spend it on.
The godfathers of behavioural science, Daniel Kahneman and Amos Tversky, designed a number of experiments to help us better understand the phenomenon of Mental Accounting. In one such experiment, a group of participants were asked to imagine they were about to purchase a jacket for $125 as well as a calculator for $15 at a local store. They were then told that the calculator was on sale for $10 at a different store, just a short drive away. Would they travel to save $5 off the $15 calculator? In this scenario, 68% of respondents said ‘yes’, they would be willing to make the trip.
A second group of participants had the script flipped and instead were told that they were about to purchase a new calculator for $125, along with a jacket for $15. Again, they were informed that by making a short drive to another store they could save $5 off the calculator, reducing it from $125 to $120. Now how many would make the trip?
Despite the total spend being the same, the drive being the same and the $5 saving being the same, the uptake was vastly different. In the second group, less than half (in fact, only 29%) were willing to make the detour.
Clearly, not all $5 discounts are created equal. The mental folder we slot a discount into (‘huge bargain’ vs ‘minor saving’) causes a major difference in our likelihood to respond, even if objectively, the benefit is identical.
The same mental gymnastics are at play when we earn money in different ways. While income gained through our normal work is treated with appropriate care, ‘windfall money’ (a one time bonus, a win at the casino, an unexpected tax return) has a funny way of bypassing our normal, stringent, self imposed rules. Windfall money feels free, and we tend to spend it accordingly.
For brands, consider that when it comes to spending cash, categorisation matters. For example, if you’re a zoo targeting families, positioning yourself as an educational experience (rather than a fun or leisure based experience) may open up a whole new level of spend. Similarly, if you’re an online retailer, selling $90 sheets with free shipping may be a winner, while selling the same sheets for $60 with $30 shipping might be a tough slog.
Behaviourally Yours,
PS If you missed the last edition, you can still check out why this feels like the longest, coldest winter ever here.
Bad Decisions Podcast
Learn more about Mental Accounting in episode 13 of the Bad Decisions podcast.
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