Undercover Economist

‘Tis the season to be stingy – because Christmas presents don’t have to cost much to have value

The Undercover Economist – FT Magazine, 17 December 2005

Early in the Christmas season, we received an e-mail from some hippy friends. “We have decided to have a ‘gift-free’ Christmas this year,” they began, before warning that they would not be sending out any presents, and would request none in return. Wise, charming and kooky in equal measure, the last thing this e-mail conveyed was emotional impoverishment. Yet when economists take the same attitude towards Christmas, emotional impoverishment is exactly the crime of which they are accused.
Much of the fault must lie with Professor Joel Waldfogel, who in December 1993 published a paper called “The Deadweight Loss of Christmas”. The loss in question was between $4bn and $13bn in the US alone, and that was back in the days when $13bn was a lot of money.
For Professor Waldfogel, the deadweight loss arises because nobody knows your preferences quite as well as you do yourself. If I give you a £50 cardigan for Christmas, it is unlikely that you would have spent £50 of your own money on that very cardigan – you might have found something you liked much more. Through the use of questionnaires, Professor Waldfogel estimated that the typical £50 gift is actually valued at between £35 and £43 by the recipient.
With laughter all round as we imagine a cheerless Christmas in the Waldfogel household, there the story usually ends: economists have not done much to dispel the impression that they are people who understand the price of everything and the value of nothing.
But Professor Waldfogel may be closer to my environmentally minded friends than we think. His questionnaire explicitly asked recipients to set aside any sentimental value when evaluating their gifts, because he was interested in how well people work out each other’s preferences. Professor Waldfogel was trying to make a point about the likely value of government “gifts” such as food stamps, education vouchers or free childcare. Such “gifts” have little or no sentimental value and are likely to be a poor match for the recipient’s needs. It would be much better for the government to give cash, argued Waldfogel, and he was almost certainly right. But he wasn’t really talking about Christmas at all.
Perhaps accidentally, however, Waldfogel tells us all we need to know about gift-giving. The fact that you do not want the cardigan you unwrap on Christmas morning is not a terrible problem, but neither is it an imaginary one. Waldfogel never says that it would have been better if I had given you nothing, but we can all agree that I might have chosen a better cardigan.
We can expect that most of our gifts will be imperfectly chosen, but because they are expressions of love they will still be valued beyond the price tag. Yet the higher that price, the more we need to rely on sentimental value. If somebody buys me chocolates while I am dieting, no great loss. If they buy me a three-piece suite that I do not want, it’s going to take a lot of sentimental value to make the thing worthwhile.
Two recommendations from the Undercover Economist, then: first, keep the price of gifts modest. Second, try to maximise the sentimental value of the gift. Something hand-made, carefully chosen, or symbolic of a relationship is good. An expensive gift of no obvious relevance, grabbed from the display near the front of Harrods, is not.
My tree-hugging friends have one exception to their ban on presents. “Give us the gift of your time! Come and sit by our Christmas tree to talk or play games.” No self-respecting economist could disagree.