The rationality of giving gifts

It’s not necessarily what is in the box that matters

The season of goodwill and of finding suitable gifts for relatives and friends is upon us once again. It’s also the time of the year when economist Joel Waldfogel’s classic paper (now well over 20 years old), “The deadweight loss of Christmas”, reemerges from its summer sleep. In it he argues that the whole process of gift giving is a massive destruction of value (estimated to be between 10 percent and one third of the cost of the gifts).

Mr Waldfogel’s conclusion is typical for any economic analysis that focuses entirely on the material costs and benefits: all that matters is the price paid by the giver, and the price that the recipient would be prepared to pay for the gift. If the latter is lower than the former, you have a deadweight loss.

In practice, however, gifts may carry a non-monetary significance , and that affects whether the transaction really creates or destroys value. In 2001 The Economist challenged Waldfogel’s thesis on this basis: “by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before”. In addition, they say, gifts may be carrying sentimental value.

The importance of the gift

But there are more reasons still why giving gifts can be meaningful, even if there appears to be an economic deficit. Gifts are not an expression of altruism in the sense that it is our loss, but someone else’s gain. We choose to give gifts ultimately because doing so is important for us. It is no different from other transactions: when we buy a drink in the pub, a pair of shoes or a city trip to Casablanca, we do so because we find it important — more important than any alternative use of the same money. As long as we experience a gain that is greater than what we give up in the gift-giving process, the amount of money the recipient would be prepared to pay for the gift in question is therefore irrelevant in our decision.

So why would someone buy a pricey gift for someone else? What benefit could the giver possibly derive from spending a large sum of money on a gift?

For some people it is important that others know (or believe) that they are well-to-do, and that they don’t need to worry about a couple of hundred pounds either way. Lavish spending is a very effective way of signalling one’s wealth, and it doesn’t really matter whether the money goes to items for their personal collection or to gifts for others — as long as the purchases are highly visible. From a purely material perspective it may look like a lot of money is being wasted on buying, say, an expensive espresso machine for someone who would not remotely consider spending even 10% of the purchase price, or who is perfectly happy drinking cheap instant coffee. But for the giver, the goal is completely different: the gift shows how wealthy they are. And that goal is well and truly achieved, even if it looks as if it makes no economic sense to someone who is unaware of the true intent.

The deeper meaning of a sacrifice

An expensive gift may signal the ability of the giver to make what looks like a huge sacrifice in absolute terms, without actually sacrificing very much in comparison with their bank balance. But a big sacrifice may signal something else — whether in money, in time or in effort — and here too an observer who takes a narrow, materialistic economic viewpoint might miss the point.

A sacrifice may also signal a willingness to give something up. We show others that they are important to us by making sacrifices that make us, from that blinkered perspective, worse off. Why would we give up a half day’s leave, spend all afternoon sitting on the most uncomfortable chairs in the known universe to watch a bunch of snotty children (among whom our own 6-year old) clumsily pretending to be sheep, angels or, if they’re lucky, Joseph or Mary? You got it: because it is important to us to show that our 6-year old is important to us.

Interestingly, money is not a particularly powerful carrier of that signal. If you received a gift from someone that was so expensive they had to sell their car to be able to afford it, you’re more likely to think they’re a bit daft, than that you are very important to them. But if someone goes to great lengths to find a rare pristine copy of that storybook from when you were a child — the book you cannot talk about without tears coming to your eyes — now that is more likely to send the right kind of signal. Actually, it can be argued that material value barely matters. Just imagine that, unbeknownst to the person giving you that special book, you had actually found and bought a copy of the same book, at a lower price than they paid. Will the fact that the gift is a duplicate diminish its significance? In all likelihood it won’t — you will feel no less important to the giver even though the material value to you of the second copy of the book is actually close to nil (well you could sell it on eBay of course).

Your choice

To avoid the deadweight loss that they assume, some economists would advise you to give money, the ultimate fungible resource, or if that is too tacky, to simply ask what people would like and buy it for them. Maybe that is the most important to you — and that sends an implicit signal too: namely that you can’t really be bothered and prefer to keep things simple, because Christmas is enough of a hassle already.

But if you think it’s important to send a different signal, then neither of those will do, and you will either have to fork out a considerable amount of dosh to show how well off you are, or go for some meaningful sacrifice to show how important the beneficiary of your gift is. You can rest assured that there will be no deadweight loss in this case.

Only one question remains: which signal will you send?

Originally published at on December 16, 2016.

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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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