According to some economists, the annual tradition of holiday gift-giving creates a massive “deadweight loss” in our overall utility. The reason? Gift recipients don’t value the gifts as much as they cost.
In Scroogenomics, author and University of Pennsylvania economics professor Joel Waldfogel explains that, on average, people value items they receive as gifts 20% less per dollar spent than items they buy for themselves. All told, this has the effect of $25 billion worth of “value destruction” each year.
Yet gift-giving is deeply entrenched in our culture, and our consumer-economy depends on it. We feel obligated to buy gifts, and finding the perfect present is a stressful, time-consuming endeavor. The most economically efficient gift is cash, but there is a tremendous stigma against gifting greenbacks. Waldfogel proposes gift cards as one potential solution, although they still have certain drawbacks. First, gift cards have less utility than cash because they can only be used at specific stores. And second, millions of dollars in gift cards go unclaimed each year, to the delight of retailers but the disappointment of gift-givers and economists.
On the other hand, there also convincing evidence in favor of gift-giving — but not from the economics department. Sociology studies have found that money spent on others creates greater happiness in the spender than money they spend on themselves.
In one study, subjects were given an amount of money (either $5 or $20) and asked to either spend it on themselves to cover a bill or buy themselves a gift, or to spend it on someone else or donate it to charity. The ones that spent it on someone else or made a donation were happier at the end of the day. The amount of money didn’t matter, only how they spent it.
So gift-giving may be futile or inefficient in economic terms for the recipient, but perhaps the “value destruction” is canceled out by the increased happiness in the giver. Who’s that gift really for?
It turns out money can buy happiness, just not how we thought.
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