Tomorrow is Thanksgiving, which means in 48 hours, your inbox will be flooded with messages about “savings.” However, here's the reality: most of those so-called “savings” are not actual savings at all. Let’s delve into what truly happens in your mind during Black Friday.
Fact #1: You cannot save money by spending it. The 40 percent discount on that Instant Pot you were not planning to purchase? You didn’t “save” anything; you impulsively spent $90 instead. Retailers are aware of this tactic. They present everything as “savings” rather than what it genuinely is: a slight reduction in price per item aimed at increasing overall sales volume.
I have been exploring the psychology behind holiday sales for over ten years. Retailers wouldn’t lower prices if it didn’t significantly increase their sales figures. They rely on these discounts to drive additional purchases, enough to make up for the loss on each item sold. This business model relies on the fact that higher sales volumes also result in increased operating costs (more staff, additional customer service, etc.). Retailers accept both lower profit margins and higher expenses because the surge in volume more than compensates for it.
And it works. Approximately 40% of retail sales occur in the fourth quarter of the year. (If each quarter were to contribute equally, it would only be 25%, so the holiday shopping season is crucial for many retailers.) The interesting aspect of Black Friday and Cyber Monday sales is that they technically contradict the law of supply and demand. When consumer demand spikes during the holidays, basic economics suggests prices should rise, not fall. Yet, retailers reduce prices regardless.
Why? Because lower prices stimulate demand. This creates a self-perpetuating cycle. Discounts trigger a primal instinct in us, tapping into the excitement of the hunt and the thrill of finding a deal. Retailers are wagering that a 20% discount will lead you to purchase far more than you originally intended. The entire economy relies on this gamble being accurate.
Fact #2: The excitement fades much sooner than your credit card bill arrives. Recall the rush from your last impulse purchase? How long did that feeling last? A day? Perhaps a week if you’re fortunate? Psychologists refer to this as “hedonic adaptation.” Essentially, our brains quickly acclimate to new things. Got a new TV? Within two weeks, it’s just a TV. Those designer jeans? By next Tuesday, they’re simply a pair of pants.
This phenomenon explains why lottery winners do not feel significantly happier a year later. Our brains adjust to positive experiences rapidly. However, hedonic adaptation does not apply to debt. That credit card balance? You won't get used to it; it’s a constant reminder every month.
Hedonic adaptation becomes even more pronounced when combined with all the other psychological strategies used by retailers. I discussed these concepts in depth with behavioral economist Jeff Kreisler — there's profound psychology behind holiday shopping. We talked about how sales manipulate us, the difficulty of letting go of items we possess, and much more. (I will be re-airing that episode this Friday, Nov 28, if you'd like the full discussion.)
Be conscious of hedonic adaptation, hidden expenses, and the Diderot Effect. With all of these factors at play, your mind is essentially working against you this Black Friday. We are psychologically inclined to spend more when we spot deals. But once you recognize the psychology of spending, when you decide to buy that Instant Pot, you’ll understand precisely what you’re doing and why. And that’s the essence of “smart shopping.”
Tomorrow is Thanksgiving, which means that in 48 hours, your inbox will be flooded with “savings.”