Every year, as the festive season approaches, India experiences a consistent and notable uptick in economic activity. Shopping malls witness increased footfall, e-commerce sales break new records, automobile showrooms witness increased bookings, and families invest in gold and real estate. For businesses, this is the golden quarter; for markets, it is a period often marked by optimism and increased participation.
Yet, beneath the cultural rituals and traditions lies a powerful, overlooked force that sways our choices investor psychology. During this time, behavioral biases; the emotional tendencies that shape decision-making; tend to become more visible and influential. When millions act on these biases simultaneously, the impact can ripple across the broader economy and financial markets.
Festivals bring a wave of celebration accompanied with optimism about the future. This positive outlook often spills over into consumer and investment decisions, a phenomenon known as optimism bias, where individuals tend to overestimate favourable outcomes. During festivals like Diwali, households increase their spendings driven by the belief that prosperity is imminent.
Businesses, too, often expand supply or launch new products in anticipation of strong demand. Investors also take this optimism into the markets in the form of higher retail participation, with Diwali’s symbolic Muhurat trading as a key indicator.
While this festive cheer provides a short-term boost, it also carries risks. People often overstretch their budgets to buy more, and investors chase valuations that may not be justified by fundamentals.
The festive season also highlights how strongly herd behaviour influences financial decisions. People buy because “everyone else is buying too.” The same pattern plays out in markets, where retail investors tend to enter equities during periods of high sentiment, often under the influence of advice by peers or friend’s relatives, or social media chatter. At the macroeconomic level, herd behaviour drives demand surge that businesses anticipate for months. Companies increase ad spends, stock up inventory, and launch promotional campaigns to keep pace with the competition. However, while herding amplifies short-term momentum, it also introduces vulnerabilities. If the demand fails to sustain, businesses may be left with excess stock, and consumers who joined the trend late may regret their impulsive purchases.
Herd behavior plays a reinforcing effect on the economy because it synchronises demand. Retailers see surges in sales, automakers record bumper numbers, and markets witness higher trading volumes. But what feels rational in the moment is often more about conformity than careful decision-making.
Another bias that shapes festive spending is mental accounting. People often treat money received as a bonus or “festive budget” as guilt-free spending, separate from their regular household expenses. This explains why people may cut back on routine discretionary spending but still splurge on gifts, new clothes, or home upgrades during festivals. The economic impact of this is significant. The October–December quarter consistently shows spikes in auto sales, consumer durables, and FMCG demand. Banks and NBFCs cater to this by offering festive loan schemes, easy EMIs, and credit card offers, which in turn amplify consumption. While this boosts GDP figures and corporate earnings in the short term, the heavy concentration of spending within a brief period can strain household finances for many months afterward.
Also read | The credit card trap: How festive shopping spree can lead to debt
Layered onto all this is the FOMO, which has become an increasingly visible driver of Diwali spending in the era of online sales. Flash sales, “limited time” discounts, and the cultural notion of “auspicious days” to buy gold or property create a sense of urgency. Peer pressure further adds fuel. For businesses, this strategy works: demand is pulled forward, earnings rise, and stock sentiment improves. But at the macro level, the bunching of purchases creates uneven sales cycles. For households, FOMO-driven decisions can lead to impulsive debt or investments that may not align with long-term goals.
Together, these biases explain why India’s festive season is integral not just to its culture but also its economic fabric. These biases turn individual impulses into collective behaviour, creating seasonal booms in consumption, credit growth, and market activity. Recognising these biases can help ensure that prosperity is not just symbolic but also sustainable.
While sentiment-led demand supports earnings and market activity in the short run, it is important to ensure that long-term financial goals are not compromised by short-term euphoria.
The writer is Head – Equity, Bajaj Finserv AMC.
Disclaimer: Mutual fund investments are subject to market risks; investors should read all scheme-related documents carefully. The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
