The Holidays-- An Economist's Worst Nightmare

Well, we're coming down the final stretch toward New Years, and I'm sure presents are flying about already. Here's an interesting bit of information that I've come by about the inefficiency of holiday gift giving. Interesting, to say the least. But just to cover my butt in the event someone files a lawsuit against me for plagiarism, all credit for these findings go to Joel Waldfogel. His latest book, Scroogenomics: Why You Shouldn't Buy Presents for the Holidays, is an interesting read. Check out the Amazon page here:


Scroogenomics

Waldfogel also wrote a journal article for the The American Economic Review back in 1993. It's definitely an interesting read as well, and I suggest you check it out. You can find that here: 

Deadweight Loss of Christmas


Waldfogel's results should not be surprising though. How many times have you gotten a gift that you've hated? You simply smile at the gift giver, hoping to conceal your disappointment. Every time this happens, the buyer has paid more for the item than the satisfaction received for it. Say, for example, that my friend buys me this awesome pair of glow-in-the-dark tube socks. Let's assume that he paid $10 for it. However, as soon as I see it, I roll my eyes in disgust. "Glow-in-the-dark tube socks?!?!" I say, "I wouldn't pay more than $1 for those!" And therein lies the problem. According to Waldfogel's findings, people are, on average, only willing to pay 25 cents on the dollar for the gifts they receive during the holidays. Now I don't know about you, but to me that's a pretty big efficiency loss!


So does this mean that we should stop giving our holiday presents? Perhaps not. It is indeed possible to add to the value of a gift if it is worth more to the recipient than what was paid for it by the buyer. This can happen under a couple of circumstances. The simplest is sentimental value. Even a cheap necklace from the dollar store can be worth a lot if it's given to you by the girl that you've had a crush on for the past 30 years. The second circumstance is a function of opportunity. Say that I have an uncle who works for Nintendo and gets unreleased video games for free. He then proceeds to get me a copy which I value at $50 while he pays $0. But if neither of these circumstances apply to you, don't fret. Any type of liquid asset, like cash or gift certificates, make very efficient gifts. Why attempt to value a gift yourself when you could have the recipient value it themselves? So the next time you get someone cash for the holidays and feel bad about it, don't. Just tell yourself that you're promoting economic efficiency. 


But come present time, (whatever holiday you celebrate) do a little experiment. First, write down a valuation of  what you think your gifts are worth. Then look up their prices online. Using this method, you can roughly compare your own satisfaction gained with the prices paid. You can even calculate a rough value for the deadweight loss (by finding how many cents on the dollar you're willing to pay on average for the gifts you receive)! 


See? Isn't economics exciting?