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The Behavioral Economics of Christmas
Money

The Behavioral Economics of Christmas

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Some economists dislike Christmas. They allege that it “destroys value,” which is, in Econoland, the first and only sin. The economist Joel Waldfogel, author of Scroogenomics, goes so far as to contend that the winter holiday season is “an orgy of value destruction.”

Waldfogel’s main concern is that the value of gifts to their recipients is typically far lower than the money that was spent on them. He found that of the $65 billion spent on winter holiday gifts in 2009, about 20 percent was wasted, in the sense that the gifts were worth that much less to the recipient than they cost. And indeed, it is an inescapable fact of life that people who receive holiday gifts often don’t much like what they get. If you’ve ever been presented with a sweater that you would never wear in public or electronic equipment whose purpose escapes you, you will understand what Waldfogel is talking about.

In hard economic times, when both the government and ordinary people are trying desperately to save money, this is a sobering analysis. We don’t propose that Congress should try to solve the debt crisis by requiring people to give holiday season money to the Treasury Department rather than spending it on presents. But mis-giving does no good for anyone, and we have a few ideas about how to make it through the season a bit more easily.

 

IT HAS PROBABLY already occurred to you that the economic analysis of gift-giving reflects an incomplete understanding of the purpose of gifts, which involve relationships, as well as commodities, and which provide value not only to the recipient but also to the giver. Gifts represent messages“signals,” in social science parlancefrom giver to recipient. The signals tend to differ for individual givers and receivers, which explains why there are no simple answers to standard holiday etiquette questions, such as whether it is OK to give cash. Cash is best for some relationships but highly inappropriate for others. If you give your nephew $75, he’ll probably be thrilled. If you give your boss $75, it’s just weird.

Gifts also serve as investments in relationships. When interpreted this way, the destruction of value can be part of the very essence of gift-giving. If I give you a $50 gift card for Best Buy and you give me a $50 e-certificate for Amazon, economists would tolerate the exchange, since no destruction of wealth has occurred. However, very little investment has occurred, either. Suppose instead that I give you an expensive sweater that you find loathsome, and you give me a fancy travel case for which I have no use. True, each of us might think that the other has terrible taste. But we will certainly notice the effort and money that went into the purchase. In fact, destroying value in an exchange of overpriced gifts can increase the likelihood that our relationship will endure. If we weren’t committed to the relationship, why would we waste the money?

The absurd tension associated with gift-giving begins early in life. One of our colleagues notes that, during her two-year-old’s birthday party, her son became progressively numbed by the obscene onslaught of gifts. But each of the guests emerged momentarily from his cake-induced stupor and became raptly attentive when the gift he had brought was opened. You are probably not so different from those two-year-olds. Try to recall what each of your family members gave you last holiday season and what you gave them. If you are like the majority of the students and colleagues in our informal poll, you’ll be better able to recall the gifts you gave than those you received.

Gift-giving is fraught in part because the messages that people want to send can be subtle, and gifts are an extremely crude means of communication. For instance, an obvious way to send the message “you are very important to me” is to purchase an expensive gift. But what if the recipient doesn’t realize the gift was expensive? You could remark offhandedly that “it’s a genuine Vuitton!”intending this to translate as “and that’s how much I care about you.” But the recipient is just as likely to hear “and I want you to know that I spent a lot, so you will properly appreciate what a terrific guy I am.” She may even interpret your comment as an expectation of reciprocity, which spoils the effect altogether.

Behavioral research on perspective-taking provides some explanations for why gift-buying is often such a waste of money. When people try to predict how another person will respond to a certain situation, they begin by imagining how they themselves would respond, and then they make adjustments for differences between themselves and the other person. At both stages, they make big mistakes.

Surprisingly, people often mis-predict their own desires. Anyone with unworn clothing in the closet or unread books on the shelf will recognize this problem. One reason we mis-give to ourselves is that we are creatures of the present. Research on catalog orders finds that, on frigid days, people buy warm clothing. However, it takes a few days for the clothing to arrive, and by that time the weather may have changed. This is why the return rate is unusually high for cold-weather products bought in chilly temperatures.

In addition, most of us have an exaggerated sense of how similar other people are to usin psychological parlance, a “false-consensus effect.” Although you might love a subscription to a new monthly magazine focusing on the Chicago Bears, you should be prepared to entertain the possibility that not all of your friends and relatives feel the same way.

Luckily, behavioral economics provides some straightforward lessons for gift-givers. Don’t assume that other people like what you like. Beware of projecting your current mood onto your purchasing decisions. Avoid unrealistic optimism: People probably won’t react as enthusiastically as you expect. Focus on gifts that will get frequent use, rather than immediate applause, only to disappear into holiday-season purgatory. And unless you are dealing with people very close to you, don’t assume that the gift will matter a whole lot. You’ll probably remember it better than they will.

For gift recipients, the lessons are equally important. Psychologically astute recipients realize that they risk disappointing people who are trying to please them. As you tear off the wrapping paper, you should avoid the common mistake of failing to display enthusiasm commensurate with the giver’s hopes. Even if the gift confirms your worst fears, under no circumstances should you betray these feelings to the giver. Doing so will not increase the likelihood that next year’s gift will be any better.

If you receive a gift card, use it immediately. It is always tempting to save the card for the right moment, which for many cards never comes: Approximately 20 percent of gift cards go unused.

If you receive money, do not deposit it in the bank; the moment you do, it will become indistinguishable from your savings. Use it for something you wouldn’t have bought otherwisegivers want you to purchase something you’ll remember them by.

Even though gifts send messages, do not assume you can interpret the message. If your mother gave your brother a larger gift, your insecurities may tell you that she loves him more. However, his larger gift might simply signal that she loves you more and feels guilty about it.

Regifting isn’t worth the risk (unless you are mean or mischievous, and really want to make trouble). We have noted that gift-givers tend to have keen memories. Even if you are savvy enough to dodge the obvious pitfall of giving a gift back to the person who gave it to you, there is a real danger that the giftgiver will notice that the present is now in someone else’s possession.

Some families, exhausted by the orgy of gift-giving, declare a moratorium or decide to give money to the charity of the recipient’s choice. To which we say: To each his own. And yet, as long as people are giving gifts, value is going to be destroyed, and a lot of money is going to be wasted. The good news is that an appreciation of human psychology can make the holiday season not only less expensive, but less stressful and more fun as well. Of course, there are economists who might insist that a maximally efficient holiday season would consist simply of exchanges of cash. But that doesn’t sound very merry.

George Loewenstein is the Herbert A. Simon professor of economics and psychology at Carnegie Mellon University, and Cass R. Sunstein is the Felix Frankfurter professor of law at Harvard Law School and a contributing editor for The New Republic.  This article appeared in the December 20, 2012 issue of the magazine under the headline “Commerce Claus: The behavioral economics of Christmas.”

Image via Shutterstock.

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