Just a Little More Jading for Your Holiday Season

Christmas doesn’t jive with classical economics. Why? Economists assume that within the constraints of your resources, wanting something and buying something are the same thing. In an economist’s world, if a book is worth $10 to me, and I have $10 to spare, and that book can be bought for $10, I’m going to buy that book. Gift-giving forces someone else to estimate how much things are worth to us, and since it’s almost a given that the givers don’t perfectly know the receivers’ wants, everyone ends up with something sub-optimal. The difference between the value of the gifts you get, and what those gifts are actually worth to you, is the deadweight loss of Christmas.

In a paper that has proved seminal in the literature on the issue, [Joel Waldfogel] asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, apart from the sentimental value of the items, if you did not have them, how much would you be willing to pay to get them? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver.

The most conservative estimate put the average receiver’s valuation at 90% of the buying price. The missing 10% is what economists call a deadweight loss: a waste of resources that could be averted without making anyone worse off. In other words, if the giver gave the cash value of the purchase instead of the gift itself, the recipient could then buy what she really wants, and be better off for no extra cost.

(via The EconomistM)

Econ students/nerds can read Waldfogel’s full paper here, or you can buy his book, Scroogenomics, for a great mood-killer on Christmas morn.