The perils of gift-giving
Gift-giving. It can be fun, it can be exhilarating, it can be exciting, it can be stressful, it can be magical, it can be disappointing. It can also be—according to economists—a huge waste.
In 1993, the economist Joel Waldfogel published a paper in the American Economic Review called “The Deadweight Loss of Gift-Giving.”
To economists, “deadweight loss” is a tragedy: it represents missed opportunities, ways we could have been happier or wealthier if not for some external factor. Here’s what “deadweight loss” means in the example of gift-giving.
The giver spends money on a product for someone else. But the person receiving the gift may think it’s worth less than what the giver paid for it. The giver might spend $100 on a gift, but the recipient might only get $75 worth of pleasure from it.
The difference—$25 in this case—is the deadweight loss. It’s value that is never coming back. One person spent $100 to give another person just $75 in value. That’s like setting $25 on fire. The buyer should have just given the recipient $75 and kept the other $25. The recipient would have gotten the same value, and the buyer would, economically speaking, have been better off.
To make a maximally efficient gift, then, you should give cash or gift cards to stores you know your recipient likes. Um, I don’t know about you, but that sounds boring to me! I don’t want to live in a world in which everyone just gives everyone else gift cards.
This economic paper has proven to be a great conversation-starter, not because the findings are controversial, but because it makes you think about the purpose of gift-giving. Why do people give gifts?
One purpose of giving gifts is to transfer wealth. In a wealth transfer gift, the giver wants to make the receiver richer in some material way. This is the perfect time to look to that economic paper. If what you really want is to make the recipient richer, then the best and most efficient way to do that is simply to give money. But if that makes you feel uncomfortable, then do the next-best thing to giving money.
You can see this with wedding registries. In many western cultures, the purpose of buying a wedding gift is to help the new couple with the expense of setting up a new, better life together. The purpose of this gift is to transfer wealth from the giver to the happy couple. And it’s common to give money at weddings. The next-best thing to money is to buy from a registry of gifts, a list of things that the couple has said that they want. This minimizes the deadweight loss. There’s very little chance that they’ll get something they don’t want.
The same goes for new graduates. You might give a high school graduate a new computer to take to college—but let her choose the model. You might give a college graduate some money to buy furniture or pay a security deposit. These are wealth-transfer gifts.
But not all gift-giving is like that—in fact, most gift-giving is different. Giving a gift within a family is not about transferring wealth, but about something else.
Most gift-giving is about reinforcing social ties, about showing a person that he or she means something to you. And in these cases, even if there is economic deadweight loss, there’s still a social benefit that outweighs the loss.
I don’t like using cliché examples, but I’m going to in this case. Let’s say a woman gives her husband a watch that costs $500. The man might only have paid $400 for that watch, if he were shopping for himself. Economically speaking, the couple is $100 worse off than if the man had just bought a watch for himself. But socially speaking, they are probably better off.
That’s because now, for as long as he owns the watch, the man might think of his birthday or the occasion of the gift whenever he checks the time. If he travels for work, it might be a reminder of the bond he shares with his wife. And so on. That’s social connection, and it’s worth more than $100, so both sides probably are better off.
You get the idea. If you’re going to give a gift, keep in mind that there’s always the possibility of an economic loss. So as a gift-giver, you should try do things that make the gift about more than just money.
Here are some ways you can do that.
One, you can buy something that the other person would like, and would value, but that the other person would never buy for him- or herself. A great example here is a professional massage. Many people consider it a luxury to go to a spa for a massage—almost too much to spend on themselves. But they would really like it.
Giving a gift certificate for a massage is great because it alleviates the guilt a person might feel when paying for a massage. I might feel guilty, I might feel bad, about spending $200 on a massage, so I don’t do it. But if someone gives me a coupon for a massage, I don’t have to feel guilty about getting it. The gift is the massage, yes, but the gift is also taking away the guilt. And you can’t put a price on that!
Number two, you can give a gift that introduces a person to a new thing or a new experience. Imagine you have someone on your wish list that loves musicals, but has never been to an opera. You could buy tickets to the opera. Maybe he’ll like the opera; maybe he won’t. But either way, he will have had that new experience. Even if he doesn’t like the show, well, at least he has a good story and now he’s had that experience.
A third thing you can do is add meaning to something with a modest monetary value. This is very, very common. How much does a hardcover book cost? Twenty dollars, maybe? You might be able to spend a little more and get a signed version of the book. That makes it more meaningful. Or, you can write your own inscription inside the cover. Or pick out a colorful bookmark to place inside. Doing this adds a little personalization; it adds a little added social value.
This is a good time to mention handmade gifts. If you make something by hand, you put a little of yourself into the gift; that’s something you can’t buy in a store. That’s a great way of adding social value to a gift.
The best gifts make a person feel seen and appreciated. And the best gift-givers think about giving year-round. They don’t just Google, “best gifts 2024” a few days before Christmas. So if you missed this holiday season, don’t worry. Start a list on your phone and start collecting ideas for the people you care about. Do that right away, and then you’ll have gift ideas for when you need them.
Jeff’s take
Joel Waldfogel, the author of that paper, wrote a whole book called “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.”
But he did admit in an interview that he does buy gifts for some people—for people he knows well. And listen, I agree with that. If you don’t know someone well, you can’t add social meaning to a gift.
So I say, think about the people you know well. Give them a meaningful gift. And for everyone else—either don’t buy anything or give a Starbucks gift card or something like that.
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