Christmas Shopping With an Economist

Gift giving is fraught with peril: signalling, revealed preferences, relative values - a virtual minefield of potentially bad choices and worse outcomes.

Fortunately, the economics profession has given this some thought. And while the conclusions tend not to be conclusive, they do have the virtue of being market-based, which is to say that if you don't like one result you are free to choose another.

Innovation and technology have ably assisted by reducing the capacity for error through the introduction of the prepaid gift card, use of which improves the chances of optimizing one's impact without sacrificing efficiency.

All of which is to say, it's the thought that counts - though how that thought should be counted is certainly open to debate. Happy Holidays. JL

 Josh Barro comments in the New York Times:

"I find that holiday gift giving destroys between one-third and one-tenth of the value of gifts,”

“The Deadweight Loss of Christmas” is the sort of academic paper that makes ordinary people think economists are kind of crazy.

"I find that holiday gift giving destroys between one-third and one-tenth of the value of gifts,” proclaimed Joel Waldfogel, then an economics professor at Yale, in the 1993 paper. He estimated that ill-chosen gifts caused between $4 billion and $13 billion a year in economic waste; for comparison, he cited an estimate that put economic costs of the income tax at $50 billion.

This is the sort of provocation economists love: It rejects a beloved, sentimental tradition and devalues interpersonal interaction, while upholding the virtue of individual choice. After all, why should you shop for me, when I certainly know what I want better than you do? It’s no surprise that Mr. Waldfogel’s paper, “The Deadweight Loss of Christmas,” was published in The American Economic Review, one of the world’s top three economics journals.

But one thing I learned from growing up around economists is they do not always live up to their provocations. For example, my economist father, who taught me as a young child that voting is irrational because your odds of affecting the electoral outcome are infinitesimal, votes. And Mr. Waldfogel, who went on to write a book called “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays,” actually does buy presents at the holidays, at least for some people.

“When I know people well, I choose gifts for them,” Mr. Waldfogel told me. “I know my family well.”

That puts Mr. Waldfogel in line with most economists: Last year, members of the IGM Experts Panel at the University of Chicago Booth School of Business overwhelmingly defended gift-giving as an efficient way for people to show that they care about each other.

David Autor of M.I.T. pointed to “revealed preference”: If people give and receive so many gifts, it’s presumably because it makes them happy. Alberto Alesina of Harvard said choosing a gift “is a signal of intensity of search effort,” which is econo-speak for “it’s the thought that counts.”

Since it’s almost Christmas, I called up the economist I know best to get his perspective on gift giving: My father, an economics professor at Harvard. My dad says his approach to gifts is to try to buy something that the recipient didn’t know he or she wanted. And the Robert Barro record on this is instructive, because it is mixed.

Sometimes there are big hits: This Christmas he found a book of John Wesley sermons published in 1825, a perfect gift for his wife, Rachel, who is deeply interested in the history of Methodism, but most likely would not have found the item herself.

On the other hand, let’s evaluate the box of fancy chocolates he and Rachel sent me for Christmas this year.

There are three ways to evaluate this gift. The first level of analysis is that I’m on a diet and certainly would not have bought the chocolate myself, which suggests this was an example of what Mr. Waldfogel warned us about: gift mismatch leading to deadweight loss.

The second level of analysis is that I’ve already eaten half the box, which demonstrates my revealed preference for chocolate, and shows my father achieved exactly what he set out to do: He identified an item I would not have bought for myself but apparently wanted.

The third level of analysis considers the fact that I now feel I should not have eaten the chocolates, or at least not so many of them in two days. Behavioral economists call this phenomenon “hyperbolic discounting”: we overrate the value of immediate pleasures compared to delayed ones, and may do things today (like eat half a box of truffles) that we would have said yesterday we wouldn’t do and will say tomorrow that we should not have done.

My father, who is not a behavioral economist, would surely reject this last analysis and say if I ate the chocolates, that must have been the rational thing for me to do; therefore, the chocolates were a great gift.

In fairness to Mr. Waldfogel, a lot of gift-giving occurs between people who don’t know each other as well as my dad and I do, and a key point of his paper was that not all gifts are created equal. He made his estimates by surveying Yale students about how much they valued the gifts they got at the holidays, compared with those gifts’ actual purchase prices. Friends and significant others were pretty good at giving gifts the recipients actually liked; it was aunts, uncles and grandparents who bought the least-loved items.

The real drag on the economy then isn’t gifts; it’s bad gifts. And Mr. Waldfogel cheers the rise of the gift card as a substitute for the bad gift: Something you can buy your niece or grandson when you have no idea what they actually like.

“What’s interesting about gift cards is that they are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash,” he says. In other words, the deadweight loss problem he identified in 1993 may be on the wane because of a technological advance.It’s true that Americans have taken to gift cards: CEB TowerGroup, a research firm that tracks gift card sales, says they grew at a more than 10 percent annual pace through much of the first decade of the century. According to CEB data, Americans will load $126 billion onto gift cards in 2014, or almost 1 percent of G.D.P.

But not all economists agree that this is a valuable technological advance.

“It seems clear to me that a gift certificate is inferior to money,” says my dad. Which means there is more chocolate in my future.