Christmas Gift Optimization — How A Little Spending Can Go A Long Way
It’s that time of the year. Christmas is inching closer. For many, one of the highlights of the year. In the year 2020, where there may not have been too many other positives, probably even more so than usual.
While people can look forward to a few days off work and spending some quality time with family and friends, there are a few hurdles to overcome. One of them is buying presents.
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.
A famous 1993-paper by economist Joel Waldfogel argued that gift-giving is associated with a significant deadweight loss. That is, for every dollar spent on gifts, these gifts provide less than a dollar’s worth of value to the recipients.
The reason is the giver can at best replicate the exact buying decision the recipient would have made with the cash. As the giver doesn’t know the exact preferences of the recipient, there will be a mismatch between buying decisions.
Waldfogel originally provided an estimate of the deadweight loss in the region of 10 to 30 percent of the amount spent based on a survey of his undergraduate students at Yale University — a small and non-representative sample.
A follow-up 2002-paper based on a larger survey estimated the deadweight loss at 10 to 18 percent, providing some empirical backing to the theory.
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.
There are many other factors in play when gifting, and the below sheds some light on the economic and psychological arguments behind them.
Several Factors Matter When Gifting
The Waldfogel paper considers a classic microeconomic problem of optimal allocation of limited resources.
The deadweight loss from Christmas presents implies that the gifts are on average valued less by the recipient than what was paid for them. But 1996-comment on the original paper in the same journal found half of the respondents to a broader survey valued gifts higher than their prices.
A subsequent comment published in the same journal argued the above-mentioned surveys suffer from methodical issues. Correcting for them, the authors estimated a welfare gain associated with gifting.
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.
If the time and energy devoted to making or buying a gift help determine the value of it, gifting will make sense from a rational choice perspective even if it is inefficient due to mismatched preferences.
The benefits of a gift the giver put a lot of thought into — and invested time and money on — goes beyond the monetary and sentimental value to the recipient.
People may experience happiness from giving presents to those they care about. Research suggests the happiness attributed to giving is significant and much more sustainable than the happiness from receiving.
Further, studies suggest relationships are strengthened by gifting because it sends a signal of commitment.
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.
But just as gift-giving is often a social obligation, cash presents are not always acceptable. People gifting some needed cash for their teenage kids, who may be saving up for a year abroad or a new computer, is probably okay. Yet, people likely won’t get away with cash presents for their partners.
Gift cards have become a popular substitute for cash presents. At first glance, they appear to have the flexibility of cash without being cash.
However, gift cards signal the giver wanted to spend as little time and thought as possible while avoiding the stigmatized cash gifts.
At the same time, they are not as flexible as they seem. Each year, millions of dollars in gift cards are not redeemed. If used, they are restricted. And yet, they can’t buy things an equivalent amount of cash can’t either.
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.
Some backing to wish list based gift-giving is given by research suggesting recipients appreciate gifts they have explicitly asked for. It is logical since wish lists reveal the preferences of the recipient.
The best presents are those that clearly show the giver has given them lots of thought. They align with the recipient's preferences. And they need not cost a fortune. They need not be surprising and original either.
There are several behavioral pitfalls to be aware of. First, according to behavioral economists Cass Sunstein and George Loewenstein, people often assume the persons they are buying presents for are similar to themselves.
Therefore, they often end up with presents aligned with their own preferences and not those of the recipient.
The gift-giver also tends to try and maximize the happiness of the moment of exchange — the gratitude the recipient will show when unwrapping the present.
But the value of a gift is determined by the long term value of owning it. Buying presents that will be used often will often remind the recipient of the person who gave it.
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.
Finally, while material gifts can be of great value to the recipient, gifting experiences does a better job at strengthening interpersonal relationships.
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:
- Don’t give gift cards.
- 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.
An inefficient, but social welfare-improving merry Christmas to everyone!