Are Christmas presents a waste of money? Don’t listen to the Scrooge economists

 

In recent weeks, millions of us have struggled to buy Christmas gifts for friends and family. In many cases, it’s incredibly difficult to work out what someone you rarely see might want or need. Scarred by memories of that awful Christmas jumper, the ghastly socks, or those rubbish “games” sold in male clothing stores, I certainly feel a real sense of anxiety about what I’m purchasing for others.

 

Believe it or not, some economists have considered this issue in great detail. Using the basic insight that we tend to spend money on ourselves more efficiently than on others (ladies and gentlemen, I give you “government”), professor Joel Waldfogel observed, through survey data, that the value recipients placed on products they received as gifts at Christmas time was significantly below the cost of those products. This signifies what economists describe as a “deadweight loss” of between a tenth and a third of the cost of the gifts. In other words, it suggests Christmas is inherently inefficient. We’d all be much better off if we cut out the gift-giving, and gave each other cold, hard cash instead.

 

The implications are quite profound. It would suggest that every December we are all subject to some collective irrationality. Year after year, we buy each other things that we wouldn’t buy ourselves, given our own preferences and tastes. Perhaps the social norm of smiling politely and saying “thank you”, even when you’ve just been handed a diet book or a piece of old tat, feeds us false information, as we interpret the tepid gratefulness incorrectly as genuine pleasure.

 

It’s possible, but surely unlikely. It must be more plausible that the sort of economic analysis that leads to this conclusion misses some key things which influence our choices and behaviour, and ultimately what economists refer to as “utility” – the satisfaction of our needs and wants.

 

The first and most obvious is that the givers themselves receive satisfaction from buying and giving. How else could we explain expensive gifts for young babies or pets, who have no real idea about the gift or its value to them?

 

Yet we surely miss some obvious sources of satisfaction for receivers too. Many people get pleasure from surprises. That’s true of some more than others, of course (when a teenager says they genuinely want something, it’s probably best to take the wish at face value). But many like the anticipation surrounding gift exchange, with the hope that the giver may have access to information about products, experiences or activities that the receiver might not know about. To this extent, gift giving can be an entrepreneurial activity, helping to tap into people’s latent preferences. Office Secret Santas are a good example.

 

Many of us also value gifts as signals. In most cases, these are signals of love and thoughtfulness, which in themselves give us satisfaction, but in bad cases they may provide us with information that allows us to reassess the quality of our relationships.

 

Finally, it may just be that gift-giving enhances the overall Christmas experience. It is a complement to our turkey feast and the religious festival – and its absence would devalue the other aspects of the holiday period we enjoy. Would Christmas be as much fun if it just involved paper hats and going to church?

 

I’d suggest not. While the hard-headed economic insight of monetary value can help us think about when gift-giving is most appropriate, it doesn’t capture the true satisfaction we get from giving and receiving presents at this time of year. I hope Morning Wire readers have bought wisely, and wish you all a very Merry Christmas.