Why Economists Hate Gifts
As the dust settles from the holiday season, we are prone to reflect on the gifts we have given and received. Some are cherished keepsakes, now guarded behind a display cabinet. More practical presents have quickly been adopted into daily use. Yet others lie unopened, fated to be regifted or thrown away. With lighter wallets and free from the high of the festive season, it is time to take a hard look at the cultural practice University of Pennsylvania economist Joel Waldfogel calls “an orgy of value destruction.”
The reason economists like Waldfogel have a problem with gifts is because, in theory, everyone knows their own preferences better than other people do. When choosing a gift, the giver will invariably end up guessing about what the recipient prefers. When gift-givers guess wrong, there is a deadweight loss associated with them having chosen a less-than-ideal present.
On the other hand, if the recipient is simply given cash, they can spend it on whatever they most prefer. Because everyone knows what they like better than others, the purchases made by a recipient of cash will have greater value to them than a gift chosen by another person.
However, there are some obvious exceptions to the assumption that people know their own preferences best. For instance, if someone is given a gift that they didn’t previously know existed, it is possible that the gift will provide them with more value than whatever they would have bought themselves if given cash.
In a similar vein, it is possible that some goods only reveal their value after usage. Though most of us don’t own a juicer, there are some who view them as essential appliances precisely because they use theirs everyday and have grown accustomed to having access to it. If gifted a juicer, it is entirely possible that the recipient could become a lifelong consumer of this good, voluntarily opting to spent their own money on the product.
Clearly, these are fringe cases which do not apply to the vast majority of gifts traded. Nonetheless, they are obvious situations where the anti-gifting logic does not apply.
How much value are we talking about here?
In order to quantify the level of deadweight loss associated with the average gift, Waldfogel conducted a study where recipients were asked to estimate the price of each gift they received and state the amount they would have paid for them. The difference between these two figures was about 20%. This would suggest that the 20% of the monetary value of the average gift is a deadweight loss. Waldfogel concludes:
Given the $65 billion in U.S. holiday spending per year, that means we get $13 billion less in satisfaction than we would receive if we spent that money the usual way — carefully, on ourselves.
I am quoting here from an article published by Waldfogel in 2009; it should be noted that the annual U.S. holiday spending (and thus the deadweight loss) figures quoted are lower than applicable to the 2019 holiday season. Regardless, $13 billion is a lot of money. The possibility of that much money being wasted should be a cause for concern.
Thankfully, one statistic doesn’t tell the whole story. Waldfogel also notes that gifts exchanged between individuals with daily or weekly contact are about 10% more satisfying than gifts exchanged between individuals with monthly or yearly contact. In other terms, gifts given to people who the giver knows more intimately retain greater value.
Another previously-unconsidered factor is the satisfaction derived from the act of gift-giving itself. As intrinsically-altruistic creatures, we often feel joy when giving to others. It may seem strange to give this joy a monetary value. However, this is the same type of calculation which Waldfogel uses to arrive at his 20% deadweight loss figure: money is used to measure a person’s satisfaction, which is independent of the actual price or cost of production of a good. Joy can be viewed in the same way as having economic value, even though it cannot be bought or sold.
Unless we factor in the joy of giving a gift, the hassle of shopping for it, the value derived by the recipient, (oftentimes) the stress of paying for it, etc. it is not possible to determine the exact loss/benefit associated with gift giving. To this end, Waldfogel offers that, even if the giver is overjoyed by giving a present, there is still an opportunity cost whereby the optimal present could have been given.
For instance, if I prefer a blue phone case to a red one and a friend gives me a red phone case, deriving happiness from the process, an even better scenario would be one where I was given a blue phone case. My friend would still derive the same amount of happiness, and I would be better off than before.
The problem with cash
If giving goods as presents is inefficient, would cash be a viable alternative? Probably not.
For one thing, cash is generally not a culturally-acceptable gift in the West. This argument clearly applies at an individual level; even if you personally became convinced that cash is the best gift, you probably wouldn’t give acquaintances cash because of the possibility of offending them.
However, cultural practices can be changed to fit a society’s needs. Besides, there are many other cultures where cash gifts are common, such as the cash-filled red envelopes traditionally-exchanged during Chinese New Year. Moreover, it is often seen as acceptable within family and close friends to gift cash for certain celebrations, such as birthdays.
While cash may function as a well-loved birthday gift, I am unconvinced of its merit during calendar holidays. This is because gift givers and recipients typically take on both roles at once; if you are giving a Christmas gift to a friend, they are typically also giving one to you. Giving $50 in cash and receiving $50 back from the same person is not a show of love so much as mutual trust.
Another objection to cash gifts which runs deeper than cultural practices is the relatively-smaller amount of joy associated with giving and receiving cash. Looking back at the previous example of two people exchanging equal amounts of cash, it intuitively seems unlikely that either of them derived joy from the exchange. But why is this the case? What does cash lack that goods have when gifted?
The hidden value of gifts
The obvious difference between gifts and the cash used to buy them is the sentimental value attached to the good. On the surface, it seems like ‘sentimental value’ is the same thing as the joy derived from giving a present; however, I will argue here that there is an important distinction between the two.
Consider a child’s homemade craft gift to her mother on Mother’s Day. The popsicle sticks, acrylic paint, pipe cleaners and pom-poms used to make it are probably worth mere cents in total. However, to the mother, the gift has a much higher value. She would be unwilling to part with the present for $1, for instance.
Value addition to goods is a well-understood concept in economics. When labour is performed, raw materials (primary goods) are transformed into processed goods which command a higher price than the sum of the component primary goods. However, something different is happening when the little girl makes a gift for her mother. On the open market, the value of the craft is likely less than the sum total of its components. Thus, there is a drastic difference between the market price and the value the girl’s mother places on the gift. Why?
The majority of the value of the gift is sentimental. Store-bought goods can also hold sentimental value purely because of the person who gifted them. While the joy in the act of giving does not directly add any value to the gift itself, sentimental value is intrinsic to the gift.
From Christmas sweaters to novels, certain objects become imbued with this additional sentimental value which cannot be exchanged on a market. Even if everyone knows what they want best, sentimental value associated with the gift giver is impossible to purchase. Thus, everyone keeping their money and spending it on themselves may in fact lead to a deadweight loss because of the opportunity cost of foregoing the sentimental value of certain presents.
Clearly, not all gifts carry sentimental value, and people vary in their level of attachment to objects. However, between close friends and family, one or two particularly meaningful gifts could go far in eliminating the deadweight loss associated with the remainder.
Opportunity cost to the rescue
I present a final rebuke of Scrooge and company in the form of a $13 billion question:
How would people spend their money if not on gifts?
Economists can’t condemn gift giving without weighing up the alternative, which is that everyone keeps their money and spends it however they please. In my view, this question pokes a major hole in the anti-gifting case. Just as gift givers rarely buy the optimal product, households also spend suboptimally.
Poor management of finances, lack of information, medical problems (e.g. addiction) and other factors can influence a household’s ability to make purchases in its best interest. Therefore, those who oppose gift-giving must go further than to simply claim that gifts have a deadweight loss. They must prove that the deadweight loss of gifts exceeds that of a household’s would-be purchases.
In the holiday season, it seems likely that most households would regardless buy things which they didn’t value highly if gifts were not the norm. The consumerism surrounding many major holidays encourages people to buy relentlessly. Therefore, any reduction in the deadweight loss of gift-giving would be partially eliminated due to an uptick of households buying themselves the low-value goods which they were not given as presents.
Of course, the holidays are not the only time when households are making purchases which don’t maximise their wellbeing. In an age of convenient e-commerce options, impulse purchases are a fact of life. Part of a household’s budget previously allocated for buying gifts for others would likely be spent on goods which do not provide value commensurate with their price.
It seems unlikely that the deadweight loss of households spending their money inefficiently is nearly as large per dollar than the tradition of gifting. However, in conjunction with the exorbitant sentimental value of some gifts, this inefficiency may make the deadweight loss of gift-giving irrelevant, or at least small enough to stomach.
Okay. Now I’m confused. What should I do?
While traditional gifting of goods is a messy subject (in the eyes of an economics, at least), there are some alternatives which bypass many of the harms of regular gifts.
For instance, gift cards serve as a halfway point between cash and physical goods. They are socially-acceptable, less-crude and eliminate much of the deadweight loss (because recipients have some agency over how the money is spent) born by traditional gifts. Moreover, gift cards for particular stores may retain some of the joy associated with gift-giving, especially if the chosen store aligns with a recipient’s interests. A card for a niche arts supply store, for instance, may create more happiness for the giver and receiver than a general one from Walmart. The arts gift card conveys the giver’s thoughtfulness and feels more personal, potentially increasing the joy of giving and receiving it.
Besides gift cards, homemade gifts are probably the most efficient option, not only minimizing deadweight loss but likely creating value as well. This is because of both the value-added to the original material during the processing and the high sentimental value of a handmade present. On the giver’s end, creating a homemade gift is in all likelihood a more fulfilling experience than shopping for presents. However, the potential stress and opportunity cost of the time spent making handmade gifts must also be considered.
Ultimately, the ideal gift will depend on personal circumstances, such as the value the giver places on their free time and their familiarity with the recipient. It is nonetheless clear that current cultural norms surrounding the exchange of gifts can lead to grossly-inefficient outcomes. Worse, gifters often take on massive amounts of debt in order to fulfill this social obligation, severely hampering their own satisfaction down the line.
It is obvious that we will continue exchanging gifts, regardless of deadweight losses. After all, humans don’t operate as utility maximisers, weighing the harms and benefits of every action and cutting out inefficiency.
Just as Scrooge eventually realizes, emotions, culture and traditions can not always be quantified, subject to cost-benefit analysis, or neatly tied up with a ribbon.
