By: Carl Coates
September 8, 2026 — Humans optimize. It’s a fundamental claim in the field of economics.
An annual event for many families is the summer vacation. They also happen to be a great experience to observe different forms of optimizing behavior. Sometimes optimizing means spending more money while earning none, making memories without making progress, and spending like your budget constraint barely exists.
So, how does a consumer whose spending habits lie somewhere between careful and frugal in their ordinary lives turn into a buyer with lavish spending habits bordering on reckless? That’s an extreme, but familiar transformation. Since vacation often sees such a significant swing in spending habit, can it be said that we are still optimizing?
A Dollar Is a Dollar Is a Dollar (Except on Vacation)
A dollar is a dollar is a dollar. Under the principle of fungibility, someone with $500 in a vacation fund who also has a $500 credit card balance at 20% interest should immediately use the fund to pay down the debt. But, if you dig a little deeper, you’re not acting inefficiently, you’re prepping to rent a different life for a week.
In standard economic theory, money has no “labels.” It doesn’t matter which mental bucket a dollar comes from, such as standard savings, or where it’s headed, such as a vacation budget. All that matters is the total amount available, because any dollar can costlessly substitute for any other. Traditional optimization theory states that people maximize utility based on a single budget constraint, choosing the combination that yields the highest utility. Viewed across the household’s entire budget, maintaining an untouchable vacation fund while carrying high-interest debt imposes a genuine efficiency cost. But, maybe the problem is not that people misunderstand optimization. Maybe the traditional model misreads human motivation and self-control.
Richard Thaler’s influential 1999 paper Mental Accounting Matters challenged that standard assumption of fungibility, showing that people actually apportion their money into non-fungible “sub-accounts” through what was termed mental accounting. Enter the Vacation Budget, which I am defining as a separate account, or a slice of savings, treated as practically untouchable. Such mental accounting serves an important role by addressing human’s all too real self-control problems.
A careful budgeting optimizer who clips coupons before going to the grocery store is not acting irrationally when they drop $18 on a smart cocktail at a resort without blinking. The dollars are identical, but the mental account they came from are not. People treat “vacation dollars” as a separate currency from “grocery dollars,” spending more freely on the former even when the dollars are, in fact, identical. You simply can’t apply everyday budget rules to a vacation budget. This is still optimizing behavior, just within separate mental budgets.
Vacation spending is not untethered from the overall budget constraint. Rather, the constraint was addressed during months of saving, allowing the vacation itself to feel less constrained, and more fun.
Flypaper Effect, Irrationality and a Week of Memories
What drives this categorization of spending that pushes back on the fungibility principle is called the Flypaper Effect. Initially observed in public finance, Thaler and economist James Hines observed a similar trend for personal finance. Money tends to stay put in the category it’s assigned to, resisting reallocation to what might be a more efficient use, “sticking” the way a fly sticks to flypaper.
That stickiness has a real cost because the household is leaving money on the table relative to a fully optimizing agent. But treating this purely as some sort of irrational failure misses something. The rigidity of not touching that vacation budget is about purchasing restraint.
A hands-off vacation account is a pre-committed answer to a self-control problem, which keeps the vacationer from comparing vacation purchases against their everyday budget while they’re supposed to be relaxing. This is John List’s second principle of Behavioral Economics in miniature: people have self-control problems. A sticky vacation account is a way of forcing self-control and avoiding the daily fight against overspending. The “irrationality” of the vacation budget, in other words, may be solving a constraint the textbook model assumes away entirely: willpower is not free, and budgeting rigidly is one way of purchasing more of it.
So, what exactly are we buying when we sometimes act irrationally in order to keep our vacation budget intact? It’s buying vacation-goers something real that’s valued beyond our day-to-day purchases. We are buying experiences, memorable moments and some treat-yourself pampering that is not part of most people’s everyday lives. We’re optimizing in a next-level way for a restricted amount of time that allows us to live beyond our everyday budget.
Peak-End Spending and the Remembering Self
So, what is it that makes memories on a vacation? This was documented by Fredrickson and Kahneman in a study that tracked people’s real-time reactions and later compared them to what people actually remembered afterward. It suggests that people tend to remember peaks and endings. A vacationer isn’t optimizing for some sort of “higher than my workday average” utility, they’re optimizing for what the remembering self will hold onto.
One psychological heuristic, or practical mental shortcut, is when people judge an experience largely based on how they felt at its most exciting moment (the peak) and at its end. A blowout dinner on the last night, or an extravagant excursion in the middle of the trip, isn’t wasted money on a single expensive event. Rather, each is a deliberate investment in two moments that will actually determine how the whole week gets remembered, and whether you decide to do it again next year. Additionally, this peak-end framing aligns with research that tells us memories are fueled by experiences as opposed to souvenirs.
Why We’re OK with Living Large: When Prices Stop Feeling Real
Leisure travelers are often price sensitive when it comes to airline tickets and they can act in that way because they often have flexibility in terms of travel dates. This business versus leisure travelers comparison is a classic textbook example used to describe price elasticity. When we talk about price sensitivity for this article, we’re observing behavior within the trip. A leisure traveler who researched flight prices for weeks will hardly blink at a resort appetizer markup. The individual small purchases, such as the coffee, the cab ride, or the cocktail, face less scrutiny on vacation than the equivalent everyday purchases would.
An explanation for why these purchases face less scrutiny is known as the reference price. These are the “normal” or “fair” prices a person carries around as a mental benchmark, against which every new price gets judged. Reference prices are built from frequent purchasing experiences. You know how much a cup of coffee costs in your town, how much a meal costs, be it homemade or purchased at a local eatery, and therefore a price above your benchmark is quickly processed as a ripoff. But, in an unfamiliar vacation spot, your reference prices are missing or poorly calibrated. You might have no idea how much an ice cream cone costs in a city you’ve never been before, so there’s no reference price to feel cheated against, even when the price is objectively high.
It’s almost like the missing reference price is mental accounting’s accomplice. The tool you would normally use to say, “No. I am not spending $10 on this breakfast sandwich” is not there on vacation, allowing for a level of permissiveness that differs from your everyday spending. A once frugal optimizer can be transformed into an extravagant spendthrift.
Pack Your Bags and Leave Your Constraints Behind
On vacation, disciplined consumers can transform into indulgent hedonists, splurging and spending with little restraint. The introduction to this article proposed the question: can it still be called optimizing if we ignore the fungibility of dollars and apply a different set of rules while on vacation?
Research tells us the answer is yes. Optimization doesn’t disappear on vacation, it’s disguised in a different budget with different price sensitivity driven by a different self at the wheel. Because of our self-control problems, we rely on the rigidity of the flypaper effect to keep our vacation budget sacrosanct. And then, within that separate mental account, we let our usual self-control soften.
However, this permissiveness is temporary and self-correcting. The everyday budget discipline snaps back the moment the vacation ends, which is itself a small piece of evidence that people know exactly what they’re doing. The suitcase gets unpacked, the reference prices come back, and the dollar goes back to being a dollar, no worse for the trip, because you weren’t optimizing dollars, you were optimizing memories.