Why Economists Hate Gifts

Disclaimer: Friends and family, this is not about you. I love you all (and your gifts), and your company is what makes the holidays special. This is more of an abstract rant about the gift-giving system.

From one of my favorite podcasts, Planet Money:

Giving and receiving gifts can be a joyful thing — unless you're an economist. All those books that will never be read and ties that will never be worn are hugely inefficient.

To investigate a possible solution, we went to a seventh-grade classroom at a public school in Brooklyn.

The students were already familiar with the issue.

"This is kind of silly, but I got a Power Ranger," Tadre Jones said. "I was grateful, but I didn't really like it."

So we had no trouble conscripting 10 kids to participate in an economic experiment that aimed to improve the efficiency of gift giving.

The full podcast is fantastic- give it a listen.

An economist's hierarchy of gifts:

  1. Cash
  2. Gift cards (usually worth about 10% less than cash based on the market)
  3. Gift of the receipient's choosing (subtract a few percent for the chance of buying the wrong item, and the awkwardness of telling someone what to buy you.
  4. Gift of the giver's choosing.

One exception: getting someone something they don't know they need. For example, I got my mom a Roku box so she could watch Hulu or Netflix on the TV without dragging her computer into the living room and plugging it in. I've been given kitchen gadgets that seriously improve my life, but would have never thought to buy on my own.

So what do we do about this? Three proposals:

  1. Treat gift-giving like a game, where the goal is to surprise and delight the recipient more than any other gift-giver. To level the playing field, set a dollar limit on purchases. Crown the winner king of Christmas (y'know, after baby Jesus).
  2. Hold gift-exchange parties after the holidays, where friends go to swamp gifts until they have the ones that maximize their personal welfare.
  3. Know when it's time to fold your cards and just give a gift card or cash.

I'm not sure we'll ever completely eliminate the deadweight loss of Christmas, but I think we can try, and do it without eliminating the spirit of generosity and kindness that makes the holidays so great.