(credit: stux/geralt/artsybee)

The intriguing psychology of gift economics

What does viewing the giving of gifts as economic transactions reveal about what we really value?

It’s two days before Christmas. You’re frantically looking for a gift for the one person you completely forgot. What is going through your mind? What to buy? How much to spend? Fast forward to Christmas Day… Someone hands you a parcel, enveloped in festive paper. As you begin to tear the wrapping, what goes through your mind? Will it be something you like? Will it be expensive?

Every voluntary transaction between people is, in essence, subject to a fundamental law of economics. It has to be a win-win. That is, both parties believe that what they sacrifice is more than compensated by what they gain. Gift giving and receiving is no different, but there are a few peculiarities that make it stand out. What can we learn about our complex, human quirks by dissecting it into its components?

The economic term for expressing the perceived value of a good is ‘utility’, referring to the satisfaction the consumer of that good experiences. From the viewpoint of the donor of a gift we immediately run into the first peculiarity. If giving gifts is a win-win transaction, the giver, necessarily has to experience some utility from giving something away. So the utility cannot be material. There is a material loss, which in order to result in a net gain, must be compensated by non-material utility. What could this be? For their part, for the recipient, the transaction is by definition a win: they get something for free. But is it really that simple?

Part of the motivation of the donor could, paradoxically, be loss aversion. If you turned up at the Christmas party without gifts, you would most likely suffer an embarrassing loss of reputation. So clearly arriving empty-handed is to be avoided. But it’s improbable that just any old gift will do — an inappropriate gift might still leave your reputation dented.

Does the price you pay matter? For many gifts, the recipient will have some idea of the monetary value. So why not just give money? At least this is something that has the same kind of material utility to everyone — it can be exchanged freely for something to the preference of the recipient. But how much? From a purely economic perspective, a recipient should be happy with any amount: they end up richer than they were. But giving someone a single wrapped pound coin might, again, not serve your reputation too well. Too much, on the other hand, might cause embarrassment on both sides. So gifts of money seem not to be the panacea solution, as this study suggests.

There may not be blood in them boxes, but definitely some sweat and tears (photo: pexels)

So perhaps it’s worth acquiring something that provides the recipient of the gift with consumption utility — the value in the eye of the beholder. But that doesn’t absolve you from thinking about the monetary value: if the object itself, no matter how useful or pretty it is, is seen as too cheap or too expensive, you’re still in trouble. And if you managed to buy something valuable at a fantastic discount… should you take that into account in your gift-giving strategy? Imagine you have two brothers, and you have a book for each one. Only, the book for your elder brother was in the sale, and cost only a quarter of the price of the other one. Should you add something to his gift to make up the difference (meaning you’d need to provide a somewhat awkward explanation)? Or better keep hush, and risk that they find out? Tricky!

Unfortunately this is not the end of your troubles: aside from monetary value and consumption utility, there is also something like emotional utility. When we give gifts, the thought and the effort we put in tends to matter too. That is the main reason why we’re often reluctant to give cash: it requires literally no thought. But beware: emotional utility, as represented by your effort, is a slippery affair. The trouble you go to tracking down a special, rare (and expensive) edition of a Slipknot CD might score high on the emotional utility scale, but it might be the wrong thought if it’s your gift for great aunt Ethel. And a jumper you knitted yourself, with a wonderful Christmassy theme, no matter how many hours it cost you (and even how well it fits), or three jars of home-made plum jam, no matter how sweet, may fail to provide much overall utility as a gift to your 15-year old daughter.

It’s even worse if you get something that you believe they should like (because you like it). Don’t get anyone a Strictly Come Dancing box set unless you are 100% certain that this would make their day, however much you enjoy it. And be very, very careful with ethical gifts like a donation of a goat to a remote Ethiopian village, or malaria nets for a family in Mali in the name of the recipient. The thought here might be impossibly noble, but you’re in high risk territory here. Better use your own money for being ethical.

Beware of the goat (photo: chraeker)

Another temptation is that of trying to put your highly original personality in the choice of your gift. If you see yourself as a funny, an eccentric, or even a sensitive kind of person, it is appealing to want to choose a gift that reflects that side of you. But will that really go down as well as you think with the recipient of your generosity?

Ultimately, aversion to reputational loss is just a boundary condition. With the rare exception of entirely symbolic gifts (like the ones the queen gets when a foreign head of state visits), the utility of giving a gift to you is intimately tied up with the overall utility it gives to the recipient. The happier they are, the happier you are.

If you start from there, you cannot really go wrong. If, as you read this, you still need to get a present for someone, make finding out what makes them happy the focus of your thought and your effort, and you should be OK.

And when, on Christmas day, you open the gifts you receive, think about how it makes you happy, rather than about how happy it makes you. That way you will get the most utility out of it.

Merry Christmas!

Originally published at koenfucius.wordpress.com on December 22, 2017.

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Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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