Business Life: Christmas special

1st December, 2008

First published in Business Life magazine, December 2007

It will not have escaped your notice that Christmas is upon us. And for gift-giving advice, why not turn to an economist?

That seems a strange recommendation, and it becomes even stranger when you consider that by far the most notorious Yuletide contribution from economists is a research paper titled “The Deadweight Loss of Christmas”, which was published in a respected economic journal back in 1993.

The author is Joel Waldfogel, described in print not long ago as a “slightly balding imp” by one of his fellow economists. But while his ongoing research into the economics of gift-giving tends to be seen as an example of the limitations of the dismal science, I believe that Professor Waldfogel’s work has been utterly misunderstood.

Waldfogel’s “deadweight loss” will probably top $20bn in the United States alone this year, and it arises because my wife will buy me a selection of compact discs that I already own, while I will buy her a revealing dress that she will be too embarrassed to wear – and so on, multiplied by the hundreds of millions of poorly-chosen gifts we exchange each year.

To be precise, if my wife spends £100 on the compact discs and I value the spare copies at, say, £15, she might levitra online just as well have given me £15 and thrown the rest of the money in the dustbin. That’s the deadweight loss.

Waldfogel’s own estimate – based on surveying his students about the gifts they’d received at Christmas – was not quite as pessimistic. But he still found that a gift costing £100 was typically valued at between £70 and £86 by the recipient. He also found (and surely this is no surprise) that grandparents and aunts gave particularly inept presents.

But what tends to be missed is that Waldfogel’s surveys specifically instructed students not to consider the sentimental value of the gift. He wasn’t aiming to prove that Christmas was a load of humbug, but he did show that the experience might be improved if we chose more suitable gifts.

While the sentimental value of a gift is very real, it is not unlimited. The more expensive the gift, the warmer the glow will need to be to outweigh the money wasted in buying it. The fool will grab something flashy but inappropriate from a designer store.  The wise gift-giver will choose something inexpensive that expresses affection – a home-made gift, perhaps, or perhaps nothing more than time spent together. It is familiar advice, but nobody would have expected it to come from the economists.

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