CHRISTMAS ECONOMICS

Christmas Gift Optimization — How A Little Spending Can Go A Long Way

The economics and psychology of gift-giving

Photo by Hert Niks on Unsplash

Finding the right gifts for one's better half, parents, or other relatives can be stressful and tedious.

The average American expects to spend around $650 on presents this year, but the money may not be well spent.

Christmas presents thus represent an inefficient reallocation of money. It follows that the deadweight loss can be avoided by canceling the exchange of them or by transferring cash instead.

But before either deciding to use the above to explain to in-laws and cousins why they aren’t getting anything this year or shrugging it off as yet another sign economists are cold-hearted ignorants, some further investigation is in order.

Several Factors Matter When Gifting

The Waldfogel paper considers a classic microeconomic problem of optimal allocation of limited resources.

The results suggest other things besides the price and the recipient’s preferences determine the value of a present.

Gifting sends a signal of affection. The giver of a gift incurs costs when searching for the right gift. This is because it takes time and potentially a lot of thinking.

Photo by Nathan Lemon on Unsplash

Finding The Perfect Gift Is Tricky

The value of a present depends a lot on the giver's ability to choose. It could be tempting to address the deadweight loss and avoid the stressful search for proper presents by giving cash.

Thus, gift cards are the worst of two worlds carrying a deadweight loss without any of the benefits of a personal, time-intensive gift.

Shopping from wish-lists has also grown more prevalent. While it may carry less of the benefits associated with the thoughts invested and the search costs, it depends on the recipient. And at least it can remove most if not all of the deadweight loss from buying a gift that turns out to be unappreciated.

Focus on the long term value can thus aid proper gift selection.

People also tend to avoid gifting the same thing to several relatives. But recipients won’t value a gift based on who else is getting it. Instead, strictly avoiding dublets (‘overindividuation’) can lead to less desired gifts.

Concluding Remarks

The monetary price of a gift does not alone determine its value. The time spent, the thoughts given, and the signal sent adds a sentimental value to the gift that money itself cannot.

Spending less money and more time could increase the total value of gifts relative to the price paid for them.

The below points summarize guidelines to optimizing Christmas shopping:

  • Cash only works for some.
  • The value of a gift is not tied closely to the price. There is no need to overspend for the sake of showing by the monetary cost of a present how appreciated the recipient is.
  • The value of a present also stems from the signal of appreciation and the search costs associated with buying it.
  • The recipient may not appreciate what the gift-giver appreciates.
  • If a person asked it, it will be a good gift.
  • Things used often, while maybe not as sexy, are great choices.
  • Giving identical gifts to several people is not a problem.
  • Experiences are great choices for close relatives like partners, children, or parents.

I’m an economist doing policy design and analysis. I write about the economy, taxation, innovation and growth, policy design, and financial markets.

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