Tuesday, January 6, 2009

Got a gift card for Christmas? Too bad.

Gift cards are the No. 1 gift choice these days: two-thirds of Americans say they plan to buy one. But nobody uses them (well, almost nobody). On average, we each have between three and four gift cards lying unused in wallets, purses and dresser drawers. And these add up: each year, Americans lose about $8 billion through unredeemed gift cards.

That's bad for us -- but great for the companies that issue them. Not long ago, Limited Brands, parent company of the Victoria's Secret chain of lingerie stores, reported a quarterly pretax gain on unused gift cards of $47.8 million, or 8 cents a share (talk about a panty raid!). And they're not alone. Big retailers like Target, Best Buy and Home Depot also make a killing on the cards. One mall owner even allegedly charged fees on unused gift cards, so that by the time shoppers got around to using the card, it was worth less than they expected.

Here's where the mistake comes in: when it comes to predicting future behavior, we think we (and others) will act more virtuously than we end up acting. This behavior is so predictable that researchers have a name for it: projection bias.

There's lots of research demonstrating this, as well as much real-world experience (Busted New Year's resolutions, anyone?). One long-term study tracked high school students who smoked cigarettes. Only 15% of light smokers (less than one cigarette per day) thought they would still be smoking in five years -- but, five years later, 43% of them still were. Researchers have found similar results when it comes to the food we eat and the movies we watch: in the future we think we'll eat healthier food and watch high-brow movies. But today we end up eating junk food and watching trashy movies.



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