Year After Year – On the (Ir)rationality of Gift-Giving

Economic truths can be cruel. In 1993, the University of Minnesota’s Joel Waldfogel published a famous article about the deadweight loss that occurs at Christmas. According to his analysis, billions are lost each year during the holidays. To understand his argument better, we must take a look at last year’s Christmas presents.

What do the mother-in-law’s vase, the itchy sweater and the individually patterned tie have in common? Each year, items are produced, found, purchased, packaged and given as presents that ultimately go unused, getting squirreled away surreptitiously in attics and cellars. These three presents – the kind that are put on display or worn only when the giver comes around – are examples of what Waldfogel calls deadweight loss: items that consume resources in production but provide owners with no benefit, say because they do not like cut flowers and have no use for a vase. What else could have been done with all those resources – the fine fabric of the tie, the wool of the sweater, the time searching for the right gift? Think of the time spent pushing through crowds of people, standing in long lines, or sorting through hundreds of pages on eBay or Amazon and the lost income it translates into. A present’s value consists not only in its material worth but also in the associated time commitment. And this value is voided when presents go unused in the cabinet or even land in the trash.

Fortunately, no problem is too difficult for hard-bitten economists. Their solution? Give cash (as long as we still have it) or transfer money (and leave a copy of the remittance slip under the tree). In this way, recipients can buy what they really want. Money avoids misallocations. Those who find the idea of a family exchanging gifts of money under the tree too unromantic could resort to gift certificates or introduce wish lists to make gift-giving more efficient.

Monetary value is not everything

Yet economics have developed further in the ensuing years. Money is not everything. New behavioural economic research has shown that the act of giving also creates value. In one study, students who received a cup as a present were later asked whether they wanted to trade it for a bar of chocolate; most decided for the cup. Likewise, most students who received a bar of chocolate as a present decided not to barter it for a cup. Neither group wanted to trade in the present. This shows that monetary value isn’t the only thing that counts. A bottle of wine as a thank-you for collecting the neighbour’s mail during vacation is certainly more appropriate than a 10-euro bill, even if the wine was less expensive.

Despite years of research, each person, at the end of the day, must select the right present on its own. If saving search costs is the goal, it is perhaps best to pick a present you know well. The wine connoisseur can pick a good vintage; the gamer can identify original video games. If, by contrast, large feelings are what you want, pick a present whose acquisition costs effort. Two tickets for a Helene Fischer concert would be seen as a sign of love if the recipient is a Helene Fischer fan and the giver is not but enjoys the evening anyway.

By the way: Waldfogel expanded his 1993 study into a small volume, which has appeared in many languages. It would likely make a good Christmas present...