Behavioural Finance - A lovely letter will not stop Santa from getting it wrong!
Recently we drew a parallel between the biases in our personal finance and the 350,000 tonnes of presents delivered by Santa Claus. In this merry month of December, we take a look at the letters sent to the man himself and consider the behaviours they reveal that may affect our finances: emotions, selection bias, or the illusion of adequate information.
Edouard Camblain
Investment advisor at Societe Generale Private Banking
All wrapped up in affect and attachment
Santa’s secretariat, managed by the French national post office, receives over a million letters every year from around the country. That’s on top of the 500,000 letters sent to Lapland, some of which come from children living in France. Not included are the letters that children quietly slip under the doors of their parents, or those carefully written then hidden at the bottom of a drawer.
Despite technological progress, a lot of letters to Santa are still written by hand. And as difficult as deciphering them may be, the wishes they contain are more likely to come true. Research carried out in the retail market shows that handwritten notes are more effective in promoting product. A study involving 1,232 participants1 demonstrated how customers spent USD 52 more on beauty products with a handwritten note, compared to USD 26 more without one. In marketing, personalised handwritten notes are used to create a special connection by evoking consumers’ emotions2.
Applied to personal finance, such inflated emotion and affect can result in poor decision-making. Compounded by handwritten marketing notes, our mistakes also stem from two types of cognitive biases: the framing effect, i.e. the way an investment is presented; and the confidence bias, which hampers our ability to back out of an investment or asset disposal, for instance.
Moved by the handwritten letter, Santa begins the arduous task of selecting from the (very) long wishlist of presents. The process confronts our hero in red and white with several biases. Should he choose something trendy? Something simple? Stick to what he knows? The same applies to our investments decisions, with a real risk of falling prey to social biases, such as mimetism, limiting ourselves to assets with readily-available information (the “availability heuristic”) or to “familiar” assets (such as the “home bias” by opting for domestic stocks).
Trouble below the Christmas tree: Santa’s biased little helpers won’t shake his confidence
Parcel delivery aside, there’s the small matter of choosing the precise gift. Rarely does Santa receive letters specifying the brand or model. They’re more likely to be vague and general, sometimes requesting toys that don't even exist! As the big night approaches, how does he choose among the multitude of costumes, plush toys and other gifts? He makes his choice based on the little information he gleans.
Incidentally, a study on the illusion of information adequacy3 was recently published, just in time for Christmas. (Coincidence? We think not!) To illustrate this new confidence bias, the US researchers conducted an experiment with 1,261 participants split into three groups. All three were given a fictitious article to read about a school facing a water shortage. The first group only received arguments in favour of the school merging with another school that has water (88% pro-merge); the second group only received arguments in favour of the school finding its own solutions (77% anti-merge); the third group received all the arguments (55% pro-merge). Interestingly, the participants with only half the information had greater confidence in their decision (70-74% confidence for both groups) versus those who received all the information (65% confidence).
Applied to our finances, these findings echo the wisdom of understanding how information is presented, allowing us to moderate our level of confidence in the decisions we make. The study illustrates the importance of taking our time to consider countervailing information. Indeed, when presented with the counter arguments, the participants in the two biased groups significantly reconsidered their positions.
And so the gift Santa finally decides to place under the Christmas tree will largely depend on his ability to keep his confidence in check — resisting biased sources — and weigh the arguments for or against a particular toy.
...
Time to sharpen our pencils and write — by hand — those letters to Santa!
1 “Do Handwritten Notes Benefit Online Retailers? A Field Experiment” (2022), Sanghwa Kim, Jeonghye Choi and Seung Hyun Kim
2 The Power of Handwritten Notes for Growing Your Business - Marketing Scoop
3The illusion of information adequacy, (2024) Hunter Gehlbach, Carly D. Robinson, Angus Fletcher
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