Deadweight December

19Dec06

The holiday season is by all accounts supposed to be the most joyous time of the year. Part of that mythology is built on the notion that giving giving (and receiving) will provide you and your family and friends a great deal of enjoyment. Many, often silently, recognize that the gift giving process is not only time-consuming but often anxiety inducing.

The anxiety comes from the recognition that gift giving is, at best, an imperfect process. Economics tells us that the process of gift giving is decidedly inefficient. James Surowiecki in the New Yorker that,

…in general, people spend a lot more on presents than they are worth to those who receive them, a phenomenon he calls “the deadweight loss of Christmas.

That is not to say that the sentiment behind the gifts does not matter, it does, but it does not make up for the fact that many people equate more expensive gifts with better gifts. However this leads to the paradoxical notion that,

…if most of the presents we buy are going to be less valuable in monetary terms than in sentimental ones, then there’s no reason to believe that the more expensive gift is a better gift. In fact, the more we spend at Christmas, the more we waste. We might actually be happier—and we’d certainly be wealthier—if we exchanged small, well-considered gifts rather than haunting the malls.

Joel Waldfogel at Slate.com also has a piece on the topic that goes one step further. In it he cites his research that estimates the actual deadweight loss to gift giving.

On average, a dollar that people spend for themselves creates nearly 20 percent more satisfaction than a dollar that someone else spends on them. Put another—depressing—way, gift-giving effectively discards 20 percent of the gift’s price. So, of the nearly $100 billion spent on holiday gifts each year, one-fifth is effectively flushed down the toilet.

This research argues for giving “cash substitutes” now commonly known as gift certificates as gifts. These show the least, often zero, deadweight loss to the recipient. They do however have the detriment of being the least personal. Choosing where to give along the trade-off from cash to gift certificate to gift is of course up to you.

One might argue that this is simply bah-humbugism wrapped up in economist-speak. Far from it. Gift giving aside, we like to think of this time of year as one in which we all are a better version of ourselves. More understanding, kind, and generous. For that, we can truly be grateful.

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