Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats Gift Cards as Free Money
Transcript
- Lucas: If I handed you a $50 bill versus a $50 gift card to a store you already shop at, would you spend them the same way? Luna: Probably not. I'd feel freer with the gift card, like it's bonus money. Lucas: Exactly. And that's not just you — that's a well-documented cognitive quirk. It's called mental accounting, a concept Richard Thaler won a Nobel Prize for. Today we're looking at why your brain categorizes gift cards differently from cash, and what that means for retailers and for your wallet. Lucas: Quick honest thing — a handful of listeners chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's literally what funds making this many episodes. No ads, no sponsors, just listeners who find value here. If that's something you're into, we'd be grateful. Luna: Yeah, and it keeps the show independent. We don't have to pitch anything we don't believe in. Lucas: Right. So back to gift cards. Let's start with a number: according to the National Retail Federation, Americans bought roughly $190 billion in gift cards in 2025. And about 2 percent of that value — roughly $3.8 billion — goes unused each year. That's money retailers get to keep. Luna: So-called breakage. A nice little profit center for them. Lucas: But even the cards that get used — they're often spent differently than cash. In a 2024 study in the Journal of Consumer Research, researchers gave participants either $25 in cash or a $25 gift card to a bookstore. Those with the gift card spent, on average, 40 percent more on impulse purchases like coffee table books and magazines. They also browsed longer. Luna: Because it feels like free money. You're not dipping into your 'real' budget. Lucas: That's the mental accounting frame. Thaler argued we create separate mental accounts for different types of money. Cash from your paycheck goes into a 'serious spending' account. A gift card goes into a 'fun' account — even if it's functionally identical. And we treat losses from each account differently. Luna: So a $50 gift card to a clothing store — if I spend it on something I wouldn't normally buy, I feel less guilty because I'm not 'losing' my own money. Lucas: Right. And retailers exploit this. Think about the last time you had a gift card. Did you spend exactly the amount on the card, or did you go over? Most people overspend by about 20 percent, according to a study by the University of Chicago Booth School of Business. You're already in the store, you've already decided to 'spend' that card, and you don't want to leave with leftover value. Luna: There's even a term for that — the 'under-redeeming' aversion. You'd rather buy something extra than leave $5 on the card. Lucas: Yes. And this leads to a fascinating paradox. In a 2023 experiment, researchers offered people a choice between a $20 cash prize and a $20 gift card. Most people chose cash. But when asked how much they'd pay for a $20 gift card, the average was about $22. People valued the gift card above its face value, even though they preferred cash when given the option. Luna: Wait — why would you pay more for a gift card than it's worth? Lucas: Because the gift card carries a kind of forced indulgence. You're buying yourself permission to treat yourself later. It's a commitment device. You're paying a premium to override your normal frugal instincts. Luna: So in a way, gift cards are selling self-control. Or rather, a controlled loss of it. Lucas: Exactly. And retailers love that. They also love that gift cards bring in new customers. If you get a card to a store you don't usually visit, you're likely to come in — and once you're there, you might become a regular. There's data from Starbucks that shows gift card recipients become repeat customers at a rate 30 percent higher than non-recipients. Luna: But let's talk about the flip side. What if the gift card is to a store you don't like? Then it's almost like a loss — you feel locked in. Lucas: That's a real pain point. The mental account becomes a burden. You have to 'waste' time going to a store you wouldn't choose. And if the card expires or has a low balance, it can feel like a sunk cost that you're forced to manage. Some people even regift unwanted cards. Luna: Which creates its own awkward social dynamics. Lucas: But there's a simpler behavioral hack. If you're a gift giver, cash is actually more efficient — the recipient can use it anywhere. But if you want them to treat themselves, a gift card to a specific store might do the job better. And if you're a recipient, you can overcome the mental accounting by consciously reframing the gift card as cash. Just deposit it into your general spending plan. Luna: That's harder than it sounds. Our brains don't like reassigning money between mental accounts. Lucas: No, they don't. But awareness helps. And if you're a retailer, understanding this psychology is pure gold. You can design promotions that lean into the 'found money' frame — for example, offering a small bonus gift card with a purchase. That bonus card feels even more like free money than the original card. Luna: And that's exactly what you see around the holidays. Buy a $50 gift card, get a $10 bonus card. That $10 card has an incredibly high redemption rate because it's pure windfall. Lucas: So the bottom line is that gift cards are not just a convenience — they're a behavioral tool. They change how we spend by changing the mental category of the money. And that's why they're a $190 billion industry that keeps growing. Luna: I guess the question for each of us is: do you want to be a smarter spender, or do you want to enjoy the permission slip? Both are valid. Lucas: That's a good note to end on. Next time you get a gift card, ask yourself — am I going to spend this like cash, or am I going to let it unlock a little indulgence? And if you're okay with the latter, just enjoy it.