Posted on

By Darina Keshtova

Every year, millions of people in the United States have fun on Halloween. This month is special not only for children and their parents, but also for economists who study trends in the consumer goods market. Preparing for this holiday is a high priority for many, and in the run-up to All Saints’ Day, people purchase themed costumes, decorations, gifts, and—of course—candy, all to organize themed events for themselves and their friends. Thanks to the variety of experiments conducted by researchers, I can share how Halloween can be used to study economic behaviors. 

A particularly convenient factor in these experiments is the sincerity of the behavior of children, who are often not subject to external influences in such situations. From such experiments, researchers have drawn many interesting conclusions. For example, they have partially uncovered why people sometimes make irrational decisions, why free things are so tempting to purchase, in what situations people are ready to make a choice towards something new or unknown, and in what environment people can change their preferences and views.

About a century ago, during Halloween, two scientists, Daniel Reed and George Loewenstein, conducted a Halloween-themed experiment, with children as their subjects. They wanted to understand how people select products when they need to purchase many things at once, and they have the means to do so. It turned out that when children had the opportunity to choose only one thing from each house they visited, they usually took the one they liked best, taking into account the advantageousness of the item. But if they could take more treats, they often chose different types, even if it wasn’t always their exact favorite.

This case demonstrates “naive diversification,” the concept or strategy which involves the investor simply investing in a range of different assets, hoping that thanks to the dispersion of resources, the risks associated with the portfolio’s expected returns decrease. Even though the experiment was done with candy, the results were analogized to investing. Sometimes, investors randomly allocate their investments among different stocks, before reconsidering their picks and making more economically sound choices. Thus, the “naive diversification” affects the committing person more at the time of purchase than in the future, when they see the consequences of their actions and can change their course.

Eventually, the conclusions of this Halloween experiment were used to analyze financial behavior. Children, although making various choices in different circumstances, especially when choosing two treats at once, put both of them into one bag without considering their qualities with the intention of eating them later. This demonstrates the importance of not only the selection of assets, but also the composition of the portfolio. American economists Richard Thaler and  Shlomo Benartzi noticed similar behavioral tendencies to the process of decision-making of private investors and examined them in their study “Naive diversification strategies in defined contribution savings plans.” Similar to “trick-or-treat”-ing children, investors, when they buy several different types of stocks in one day, often do so without rigorous calculation, usually purchasing each share in equal quantities. What’s interesting is that this “naive diversification” effect occurs primarily at the moment a purchase is made. Later, very few people maintain such an equal allocation of stocks in their investment portfolios, reconsidering their choices and distributing their assets more wisely. So it’s important to remember that when we make decisions about how to allocate our resources, whether it’s Halloween candy or stocks on the stock market, we sometimes don’t act very logically, and the effect of “naive diversification” has an impact on us, especially at the moment of decision-making.

Another interesting Halloween study was described in the 2008 book Predictably Irrational. In it, Dan Ariely, a Professor of Behavioral Economics at Duke University, studied how differently people perceive things they receive for free. It turns out that when we obtain something at no cost, we begin to consider it especially valuable, even if other options are more profitable and beneficial. In this Halloween experiment, children were given three Hershey’s Kisses and then were invited to participate in a game where they could trade them. In the first group of children, they could receive a small Snickers bar in exchange for two candies, and a large Snickers bar in exchange for three candies. Almost all the group members chose the larger Snickers, which made economic sense: the latter contained more chocolate by volume. But in the second group, the children could get a small Snickers completely free, in addition to their three candies, or take a large Snickers. And what did they choose? The vast majority of children preferred the small “free” Snickers, even though the large one still had objectively more candy. 

This behavior has also been observed in adults, whose actions while participating in similar studies led to the same conclusions. If both options cost money, people usually make a logical choice and choose whichever is better, but when one of the options is free, everything changes. The magic of the word “free” makes people overestimate the value of the offer; it generates such strong emotions that they are willing to overpay—or even refuse a “better” option—just for the feeling of getting something for free. In other words, offers like these make us irrational due to our lust for “free” things.

The experiments and their results once again demonstrate how taking a unique perspective on something ordinary and familiar, such as “trick-or-treating” during Halloween, helps us discover connections that contribute to our understanding of economics and its agents. Just like kids navigating their way through the neighborhood in search of the sweetest candy, investors often venture into the financial landscape with the same sense of adventure and a bag full of “naive” intentions. Such an approach makes studying economics not only informative but entertaining and, consequently, more wide-spread and accessible.

Leave a Reply

Your email address will not be published. Required fields are marked *