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How To Avoid Over-Spending This Holiday Season

A young graduate student was hired as a professor prior to completing his Ph.D. We’ll call him David. The university hired David with the condition that he would finish his degree before starting his new job or at the very least before the end of the year.

As his first semester rolled along, the young professor struggled to complete his thesis. He encountered so many interesting distractions in his new teaching position that he began to procrastinate.

Interestingly, David had a financial incentive to finish his thesis. The university withheld his 401K matching until his Ph.D. was finished. That matching amounted to thousands of dollars. Yet, the incentive wasn’t enough to compel young David to complete his studies.

One day a colleague came to the rescue. Nobel laureate behavioral economist Richard Thaler offered David a deal. Thaler had David write several checks for $100. Each check was dated for one of the next few months. At the end of each month, if David hadn’t given Thaler a new chapter of his thesis, the behavioral economist would cash the check dated for that month. Additionally, Thaler declared that the money would fund a party to which David would not be invited. Ouch!

Do you think David finished his thesis?

Of course. The thesis was completed in four months and David never missed a monthly deadline. What’s fascinating is that the $100 potential penalties were far less than the thousands of dollars in potential rewards David was leaving on the table from his forfeited 401K matching contributions. While it was far greater, the reward incentive didn’t work to influence David’s behavior; however, the threat of monetary penalties did.

Why did Thaler’s influence tactic work? Because, for human beings, the pain of losing far outweighs the perceived benefits of gain. In David’s example, the tactic was amplified because the money he lost (the penalty) came out of his monthly discretionary spending. On the flip side, he wouldn’t have access to the 401K contribution (the reward) for decades. The money he would lose was more “real” in that it affected his lifestyle right now. It would hurt. Whereas, 401K contributions almost seemed conceptual. Losing them wouldn’t hurt… at least in the near-term.

So, how does this help you to avoid over-spending this holiday season?

Unlike David, most of us don’t have a Nobel laureate behavioral economics professor nudging us in the right direction, so here’s a tip to help you nudge yourself: If you are really serious about sticking to your budget, pay with cash. That’s right, put your budgeted holiday cash in an envelope and every time you want to make a purchase, you must take the amount out of the envelope. When the money’s gone, it’s gone.

This approach forces you to make better decisions because you have to take into account the trade-off of spending each dollar. You can either spend it on this or that, but not both.

The envelope system sounds archaic, but it works for the same reason Richard Thaler’s approach worked on David. Physically taking money out of your budget envelope in order to make a purchase hurts. You feel the loss. Conversely, paying with a credit card is more abstract, like David’s 401K contribution match.

Studies show that we spend more when using credit or debit cards versus cash. Credit card users also buy more unhealthy products (impulse purchases) and enjoy their relationship with their purchases less than cash buyers. I’m not saying credit cards are bad, but they can affect our buying behavior. It’s far too easy to make an irrational decision when there are no immediate consequences. The pain of potential loss can activate our rational, analytical thinking mode (this is what Daniel Kahneman called our System 2 cognitive processor).

If you really need to stick to a deadline or budget… the penalty has to hurt.

No pain, no gain.


David’s story is a paraphrased version of the story written by Richard Thaler and Cass Sunstein in their wonderful book, Nudge. I highly encourage you to pick up a copy.



by the Seven Deadly Sins of Decision Making & Influence

Available Here


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