Did you give or receive a gift card during this holiday season? Since 2007, gift cards have been the most requested gift. They even beat out the ever popular request for a pony. According to the National Retail Federation, American retailers issue almost $30 billion in gift cards each year. Allowing friends and loved ones to pick out their own gifts is an attractive option for many people; gift cards are more thoughtful than cash without requiring much work from the giver. I personally love gift cards. I have several burning a hole in my wallet at this very moment.
But, according to recent research, gift cards have an interesting effect on us. They can subtly alter our preferences for certain items.
You see, we all have a behavioral bias called “mental accounting”. Imagining all of your assets in one pool of money and making choices based on that large pool can be difficult. Deciding what you want to spend on groceries would be daunting if you always had to take into consideration your larger financial picture including what you might want to give to charity this year, if you need to take a trip to visit a friend from college this summer, and if you want to buy a new shirt for an upcoming interview. So, naturally, your brain creates a few shortcuts.
We all delineate our assets into smaller mental accounts, and we closely monitor the balance of these more manageable sums so we don’t have to compare every expenditure to our bigger financial picture. You might have separate mental accounts for things like going out on dates, coffees with coworkers, clothing for work, clothing for the weekends, and different types of entertainment.
But, our mental accounts can trigger illogical responses. A good illustration of how mental accounting affects our decisions is represented in a study by Daniel Kahneman and Amos Tversky. Picture two scenarios:
- Scenario 1: you are headed to the movie theater. You’ve already purchased your ticket for $10. When you get to the theater, you realize you’ve misplaced your ticket. You could either pay for a new ticket or skip the movie. What do you do?
- Scenario 2: you are headed to the movie theater again. This time, you haven’t bought a ticket yet. But, on the way to the theater, you accidentally drop $10 somewhere on the street. You get to the theater and you’re $10 short. Do you still buy a ticket to see the movie?
In the two scenarios, the outcomes are exactly the same. But, when asked, most people say they are much more likely to go to the movie in Scenario 2 than in Scenario 1. And, that’s because of our mental accounting. In Scenario 1, a person has already depleted the mental account for movie going. Suddenly, it feels like spending $20 for one ticket instead of $10. In scenario 2, the person hasn’t exhausted the movie going account yet, so she doesn’t feel like she’s buying a replacement movie ticket at all.
Back to gift cards.
Researchers Nicholas Reinholtz, Daniel Bartels, and Jeffrey Parker wanted to see what kind of effect mental accounts might have on purchasing decisions. They speculated that once a person creates a mental account, they will show a preference for items or services most typical of the account’s category. To test this theory, they created a series of studies with both retail specific gift cards (like a gift card to Levi’s) and non-retail-specific gift cards like an American Express gift card.
What they found was that gift cards do in fact change our preferences. Participants who received a retailer-specific card showed a stronger desire to purchase products with high typicality for that brand.
Here’s how it works: You receive a gift card for a specific retailer. Right away, you start planning for using that gift card. You create the goal of spending your gift card along with a new mental account. During this process, you experience a subtle shift in preferences related to your completion of this goal (you want to essentially “win” on your goal, right?) Based on the brand of the retailer-specific gift card, you’ll develop a preference for products that are especially typical of that brand.
For example, even though Barnes and Noble has a selection of games, movies, and magazines, your spending goal will subtly direct you to prefer to buy a book with your gift card. Or, say you get a Gap gift card. Even though the Gap offers shoes, accessories and handbags, you’ll be ever-so-slightly more driven to buy clothing.
Why is this important, you might ask? Well, there are some practical applications. For example, retailers may want to feature their high-end core branded items during high gift card usage periods, like in January. It’s possible that companies could infer some useful cues about their brands from how their shoppers use gift cards.
On an individual level, if you want to manipulate the preferences of the people in your life, you could always do so by buying them gifts to the stores closely associated with things you most want them to enjoy. If you want to steel yourself against this kind of preference manipulation, you can think a little more deeply about how you want to spend your gift cards.
But, possibly most important, this information should help us to reflect on our mental accounting processes, how we earmark funds, and how our spending decisions connect with our larger financial goals. Our retail-specific gift cards might be able to support a deficit in a pre-existing mental account instead of manufacturing a brand new one.
On the other hand, gift cards are meant to be fun. Spending it on something frivolous is half the fun.