It’s starting to cost a lot like Christmas. For the past month, many of us have been shopping for family members, friends, relatives we don’t really like, and Secret Santas. But, argues one famous economics paper, why even bother?
In 1993, economist Joel Waldfogel wrote the article that is a favorite of Grinches everywhere, including myself: “The Deadweight Loss of Christmas,” published in the prestigious journal American Economic Review. Waldfogel asked Yale students about the gifts they received during the holidays. How much do you think someone paid for that gift? And, sentimental value aside, how much would you pay for them yourself?
You know where this is going. No matter how many holiday gift guides you read, someone is bound to be unhappy that you bought them whisky stones. On average, recipients valued the gifts less than someone paid for them. The most conservative estimate suggests that the receiver valued the gift at 90 percent of the buying price. According to Waldfogel’s estimates, the difference — the so-called deadweight loss — accounted for between $4 billion and $13 billion a year in economic waste.
From an economic point of view, we can infer that buying gifts is often a waste, especially if you don’t know someone well. The respondents were happiest with gifts from friends and significant others, who have a good idea of what they like, compared to an aunt they saw once a year. Rationally speaking, one of the best solutions is to give cash, especially if you don’t know someone well. The recipient knows their own tastes better than you do.
But as we’ve learned over the years, there are plenty of forces other than rationality in the world, and humans don’t often do the rational thing. This year’s Nobel Prize in Economics (let’s put aside for a moment whether this particular Nobel is “real”) went to Richard Thaler, who is known for his work in behavioral economics, or studying how people actually behave instead of how they rationally should behave.
There are plenty of reasons to give gifts that don’t have to do with economic rationality, and economists themselves agree, according to a 2013 IGN Expert Panel survey. The economist David Autor of MIT, for example, wrote “Are you serious? Presents serve multiple interpersonal purposes” and “income transfer is not” the primary purpose. Princeton’s Janet Currie wrote that “gifts serve many functions such as signalling regard and demonstrating social ties with the recipient” and “cash transfers don't do this as well.”
Somewhat ironically, a friend once gifted me a copy of “Deadweight Loss of Christmas” — meaning he tracked down and sent the huge AER tome where it was published —along with a card saying that this is the kind of economist I was meant to be. It was perfect.