Due to investor psychology and behavioral biases including optimism, herd mentality, mental accounting, and FOMO, which affect investment and consumer choices, India’s holiday season stimulates economic activity.
India’s economic activity consistently and noticeably increases as the holiday season draws near. Families invest in gold and real estate, e-commerce sales set new records, car dealerships see a surge in reservations, and shopping malls see an increase in foot traffic. This is the “golden quarter” for companies; for markets, it is a time of heightened activity and optimism.
However, there is a strong, underappreciated factor that influences our decisions and investor psychology behind the cultural customs and rituals. The emotional inclinations that influence decision-making, known as behavioral biases, tend to become more apparent and significant during this period. The effect may spread to the financial markets and the larger economy when millions of people act on these biases at once.
Festivals carry with them a spirit of joy and hope for the future. This optimistic attitude often influences financial and consumption choices; this is known as optimism bias, a tendency for people to overestimate good outcomes. Households spend more on holidays like Diwali because they think wealth will arrive soon.
In anticipation of high demand, businesses often frequently increase supply or introduce new items. With Diwali’s symbolic Muhurat trading serving as a crucial signal, investors also bring this confidence to the markets in the form of increased retail involvement.
There are hazards associated with this joyous spirit, even if it offers a temporary boost. Investors want values that may not be supported by fundamentals, and people often overspend in order to purchase more.
The holiday season also emphasizes the significant impact that herd behavior has on financial choices. Because “everyone else is purchasing too,” they purchase. The similar tendency can be seen in markets, as ordinary investors often buy stocks during times of optimism, frequently influenced by social media talk or recommendations from friends, family, or colleagues. Herd behavior is the macroeconomic driver of the demand spike that companies have been anticipating for months. To be competitive, businesses boost advertising expenditures, build up inventory, and start marketing activities. Herding increases momentum in the near term, but it also creates weaknesses. If the demand does not hold up, companies can have too much inventory, and latecomers to the trend might come to regret their snap decisions.
Because herd behavior synchronizes demand, it has a reinforcing influence on the economy. Markets observe increased trading volumes, automakers report record numbers, and retailers notice spikes in sales. However, what seems sensible at the time is sometimes more about following the crowd than making thoughtful choices.
Mental accounting is another prejudice that influences holiday expenditures. Individuals sometimes perceive bonuses or “festive budget” money as guilt-free spending that is distinct from their usual family costs. This explains why during festivals, individuals may spend less on regular discretionary expenses but still treat themselves to new clothing, presents, or house improvements. This has a big effect on the economy. The demand for FMCG, consumer durables, and automobile sales all regularly increase during the October–December period. In order to address this, banks and NBFCs provide credit card offers, cheap EMIs, and festive loan plans, all of which increase consumption. Although this temporarily increases GDP and business profits, the significant concentration of spending in a short time frame may put a burden on family budgets for many months later.
On top of all of this is FOMO, which has emerged as a major factor influencing Diwali spending in the age of internet shopping. The cultural idea of “auspicious days” to purchase gold or real estate, flash sales, and “limited time” discounts all contribute to the feeling of haste. Peer pressure adds even more fuel. This approach benefits firms by increasing demand, boosting profitability, and improving stock sentiment. However, the grouping of purchases results in irregular sales cycles on a larger scale. Households may incur impulsive debt or make investments that are not in line with their long-term objectives as a result of FOMO-driven choices.
These prejudices together explain why India’s holiday season is essential to both its cultural and economic fabric. These biases cause seasonal increases in market activity, loan expansion, and spending by transforming individual impulses into group behavior. By being aware of these prejudices, we may make sure that prosperity is durable rather than only symbolic.
Although sentiment-driven demand boosts market activity and profitability in the near term, it is crucial to make sure that short-term excitement does not jeopardize long-term financial objectives.