The Behavioral Economics of Holiday Happiness
Why winter cheer matters from an economic perspective
In behavioral economics, the concept of loss aversion contends that people feel losses more than gains. Losing $100 feels worse than gaining $100 feels good. This means that the best time to give a person a $100 gift is when they have suffered a $100 loss. It’s a weird concept, and in laboratory experiments, test subjects, on average, behave as if they feel loss aversion. That doesn’t mean everyone feels loss aversion all of the time, but in general, it seems like loss aversion impacts how people make decisions.
One time of year you can see loss aversion is around the holidays. As fall turns into winter, the days get shorter, and the temperature drops. The dry air cracks the skin on your fingers and lips. Outdoor activities like hiking, jogging, and biking become less appealing, and they require more time layering clothes and adorning cold-weather accessories. And on top of that, more days are spent in bed recovering from seasonal illnesses.
Loss aversion makes the transition to winter especially hard. It feels worse to lose sunlight than to gain it. Going from sunny and mild days in early November to days that fall below-freezing temperature in December feels worse than when temperatures are consistently below freezing in January and February.
But luckily, the holidays make these increasingly colder and shorter days more tolerable. I’m not going to pretend to be a holiday historian. Still, as a behavioral economist, if you asked me where in the calendar we should have Thanksgiving and Christmas. These two holidays ask us to see our family and friends and be grateful; I would place them in the weeks leading up to the winter solstice when I know people will, on average, feel the worst.
Having these traditions in late fall or early winter brings more happiness than having them in the spring or summer when the weather is energizing instead of depressing. So, creating traditions that are the literal prescription for depression: seeing loved ones, sitting in front of bright lights, and listening to joyful music, can reduce the mental health impacts of this time of year. Through enough coordination and shared delusion, these depressing weeks really can become the most wonderful time of the year.
However, these traditions, which create an expectation for family and festivities, can have negative unintended consequences. Yes, there are holidays in the spring and summer, but my dad doesn’t expect a phone call on the Fourth of July the way he expects one on Thanksgiving and Christmas. If you expect your family to call you on Thanksgiving or you expect your friends to invite you to their Christmas party, and they don’t, that feels like a loss and hurts more than if you never had that expectation in the first place.
So, this holiday season, I will embrace cheer for myself and the people around me. I’m not religious, but I do believe in the principles of behavioral economics, and I know that this time of year, small acts of kindness will have the largest returns on happiness.
Media Round Up
Yahoo Finance: Real estate market in 2024, 'will be another slow year,' economist says
The Atlantic: It Will Never Be a Good Time to Buy a House
Things should calm down when the Fed eases up on borrowing costs, right? Wrong. Things will not calm down. “Once mortgage rates drop, that will reactivate the housing market, leading to more demand. With a limited supply, that would only lead to higher prices,” Fairweather told me. In other words, millions of would-be homebuyers will flood into the market, bidding one another up and pushing poorer purchasers out. More homeowners will feel motivated to sell, giving up their 3 percent mortgage rates for offers above their imagined asking prices. But nobody expects the return of a buyer’s market or anything like it.
Marketplace: New construction homes are playing a bigger role in the housing market
Builders tend to make more motivated sellers, said Daryl Fairweather, chief economist at Redfin. “Builders have very different incentives than existing homeowners, they don’t care what rates were a couple of years ago, they just want to get their inventory sold for the highest price the market supports,” she said.