An Economic Perspective on Gift-Giving – “Christmas Destroys Value”
Events
Christmas is just around the corner and the annual hunt for presents has begun. But what does economics say about the sense and nonsense of gift-giving? Should the tradition of gift-giving be abolished from a rational point of view – or is there a good justification for it? This was the subject of discussion of a Christmas lecture by ZEW President Professor Achim Wambach and Professor Axel Ockenfels, economist at the University of Cologne, at the Centre for European Economic Research (ZEW), Mannheim.
„Santa Clause meets Gordon Gekko – Nice Guy meets Homo Oeconomicus“ was the title of the lecture which saw the clash of two opposing views. As the “nice guy”, Axel Ockenfels made a plea for unselfish gift-giving, whereas Achim Wambach adopted the view of the “homo oeconomicus” and questioned this established tradition. The ZEW President began with an excerpt from the film “Wall Street”, in which the unscrupulous banker Gordon Gekko praises the benefits of greed. “This is what the real world looks like,” commented Wambach, “and that’s not compatible with giving away Christmas presents.” He argued that donations – including gifts – would always be made out of selfish reasons. As an example, he cited a Harvard Law School fundraising campaign in which the donors were given the option to be named in the annual report upon request. Less than one per cent chose to remain anonymous. “It is not at all a matter of acting selflessly.”
Axel Ockenfels strongly contested the claim that all people behave selfishly. He cited psychological experiments according to which altruistic behaviour increases when self-control is low. “When making gut decisions, we behave more justly than when acting deliberately. This means we can train ourselves to act unjustly, but at the bottom of our hearts we are different.”
“Christmas presents imply deadweight losses”
Irrespective of the question as to whether humans are capable of acting unselfishly at all – what effect do gifts have from an economic point of view? Achim Wambach was convinced that “Christmas presents imply deadweight losses.” He referred to a study in which people were asked how much they would have spent on the gifts they had received, with the result that they would have spent significantly less than the actual cost of the items. “If you get a sweater that you never put on, the loss in value is as high as 100 per cent,” said Wambach. He concluded that “Christmas destroys value.”
Ockenfels countered that “gift-giving creates value.” To illustrate this, he showed a video of children sitting under the Christmas tree, being overjoyed with their gifts. In addition, the behavioural economist referred to an experiment in which a test group could choose between a bar of chocolate and a mug, with no clear preference for either object. The participants of another group, on the other hand, first received the bar of chocolate or the mug, and were later asked whether they wanted to trade it for the other item – which only very few of them wanted. “People don’t like to give away the presents they got,” said Ockenfels. “The act of giving creates value per se – it’s the opposite of value loss.”
“Gift-giving can be efficient and rational”
Despite all his scepticism, Achim Wambach finally struck a more Christmassy, conciliatory tone: “Gift-giving can also be efficient and rational.” One way is to give money. “This maximizes benefits and avoids deadweight losses.” He also suggested to “pick a present you know well.” The wine connoisseur can pick a good vintage for example. It would have been much more costly for the recipient to find a bottle of wine that was just as good – such a gift would thus reduce the search costs and bring about efficiency gains.
Ockenfels countered this rational argument by asserting that monetary value isn’t the only thing that counts. Often a real gift is not only more beautiful, but also more efficient than simply giving money. He made his point with a cartoon which showed a man and a woman being invited to another couple’s home. However, instead of a bottle of wine, they simply give their hosts a banknote, saying: “We didn’t have time to buy wine, but here’s the money we would have spent on it.” In some cases, giving money gifts might make economic sense, Ockenfels said, but people want something else. “We do not want useful gifts – we want something that we would not have bought ourselves, something we would never have thought of ourselves.”