They call it retail therapy for a reason.
In the midst of a cost-of-living crisis, you’d think that people would batten down the hatches and tighten the purse strings.
Yet during times of economic hardship, people keep buying. Sometimes we spend money on things that seem irrational.
If you’re struggling to afford groceries and basic items, should you really be getting that foot massage? Apparently, Australians seem to think so.
It’s not the only example. People forgo big purchases when times are tough. But they seem to make exceptions for little luxuries.
The typical example is cosmetics. Anecdotal evidence going back to the Depression suggests that women spend more on cosmetics during economic downturns.
More recently, the theory has been tested – and proven.
In the US during the GFC between 2007 and 2009, the income elasticity of lipstick fell from 0.31 to 0.05. Before the recession, if your income fell by 10%, you’d decrease your spending on lipstick by 3.1%. During the recession, if your income fell by 10%, your spending on lipstick fell by just 0.5%.
This implies that, during recessions, lipstick becomes a necessity. Like bread, milk or tea, it’s a thing that we can’t go without.
In Australia during the Covid-19 recession, we saw something similar. In the June quarter of 2020, Australia was officially in its first recession in three decades. What’s more, it was the steepest quarterly fall in Australia’s GDP on record.
You wouldn’t know it if you walked into a makeup store, though. Data from illion, a credit risk company, shows that weekly sales of cosmetics were consistently 1.5 times higher than they had been in January of 2019. In July 2020, they were at 203% of January 2019 levels.
There are two possible explanations. One – you’re doing some astounding mental accounting gymnastics. Two – your behaviour is completely rational.
If it’s mental gymnastics, it’d be a classic example of “girl maths”. The term was coined by NZ radio hosts to describe some of the truly bewildering leaps of logical fancy we make to justify spending. It quickly became an internet sensation. We might tell ourselves: “it’s worth spending an extra $20 to get free shipping, instead of paying $8 for shipping”, or “I got this cash as a Christmas present, so anything I buy with it is free” or “It’s half price, so I’m making money by buying it.”
Just so we’re clear, this process of rationalisation has nothing to do with gender.
The internet has made a relatable, lighthearted joke and called it “girl maths”. But we all rely on purchasing heuristics to make our lives easier.
Men make equally questionable choices, based on equally preposterous logic.
Spending in another non-essential area – gaming (think Fortnite, Nintendo and Steam) – also rose during Covid-19 and has not come back down since.
Maybe it’s not girl maths at all. Maybe it is, in fact, rational economic decision making.
Marketers call it the lipstick effect. Small touches of indulgence can make us feel inordinately good – especially when times are tough. You may not be able to afford to truly splurge. Sadly, that European holiday, that couture suit and the 12-course degustation may be out of reach. But the fancy linen sheets, the designer lipstick, or yes, the avocado toast? Well, if you can make the budget stretch, it feels like a slice of heaven. That pleasure may far exceed the price tag.
What’s more, investments in physical appearance may actually improve your financial prospects. Studies suggest that women may invest in their appearance in the hope that it will improve their chances of professional advancement, especially when times are tough.
This instinct is not wrong. A study in Shanghai found that women who spent more on beauty-enhancing goods and services received higher earnings.
Putting together the feelgood effect of indulging in a little luxury and the possibility of financial gain, spending on cosmetics doesn’t look so silly. In economic terms, it’s utility maximising behaviour. Far from being frivolous, it’s money well spent.
None of this is to say that all of our financial heuristics are smart decision making.
If you spend an extra $20 to get free shipping, you’re just spending an extra $20. Often, it’s on something you don’t actually think is worth $20. The thing you got with cash from a Christmas present? It isn’t free – there’s the opportunity cost of the other things you could’ve done with the money. If you bought something for half price, you didn’t make money, you just spent a bit less.
There are whole industries dedicated to encouraging us to spend more. We don’t need to buy into the hype.
But we also don’t need to be eaten alive by guilt. If you’re lucky enough, you’ve already paid the rent, covered the bills and put food on the table. You’ve got something tucked away for a rainy day. Once the basics are covered, if you’re craving that little luxury – go for it. If it makes you happy, it’s worth every cent.
