It’s that time of year again, when online and bricks-and-mortar retailers are bombarded with shoppers in a frenzy to find that perfect gift for family, friends and colleagues. Is it worth the effort? A waste of time? A misguided, inefficient allocation of resources?
Indeed, a Wall Street Journal article this weekend noted that many economists see the holidays “not as an occasion for joy but as a festival of irrationality, an orgy of wealth-destruction.” And Joel Waldfogel, a former Wharton professor now at the Carlson School of Management at the University of Minnesota, has written a book – Scroogenomics – plus many articles arguing that Christmas gift giving is a “deadweight material loss.” Many people buy gifts that cost far more than the value the recipients assign to them, he suggests. The perfect gift? Cash, says Waldfogel, because the giver and the receiver value it in exactly the same way.
And yet Waldfogel is the first to admit that many people regard cash gifts as “lazy and even inconsiderate. They are offended by the idea that the giver didn’t make any effort to shop for them,” he notes in an earlier article for Knowledge at Wharton.
And thus enters those intangible aspects of gift giving that trip up rational economists and explain why consumers continue to spend so much time and money on the gift giving tradition. One reason, says Wharton operations and information professor Katherine Milkman, is “reciprocity. There is lots of evidence that people behave reciprocally towards one another, so gift giving can be seen as ‘rational’ even in the context of economics if you view it as a way of strengthening a tie to someone and generating the promise of future ‘gifts’ — in the form of friendship, social networking or other things of value — from them to you.”
In addition, says Milkman, “altruistic gift giving without any hope of reciprocity has been shown to make people happy: It generates what behavioral economists call a ‘warm glow.’ To the extent that giving to others brings us happiness in observing, or imagining, their reactions, it is certainly not irrational.”
Wharton marketing professor Barbara Mellers points to several findings that she and fellow authors Philip Tetlock, a Wharton management professor, and Ilana Ritov are presenting in a paper currently under review titled, “Surprise and the Value of Gifts: Why Christmas Is Not a Deadweight Loss.”
Mellers and her co-authors suggest that Waldfogel’s analysis “sidesteps the issue of sentimental gains,” which, the researchers say, “overcome material losses.” Their paper includes a survey method that measures the total value of Christmas gifts, including “both sentimental and material benefits. We found no evidence of aggregate value squandering.” They did find that women got greater total value than men from gift giving, and that “givers who were more intimately tied to the recipient were, on average, able to add more value.”
What increases “sentimental value is surprise,” Mellers says, pointing to other conclusions from their paper. “Pleasure was greater for unexpected gifts. Surprising gifts amplified enjoyment for both large and small items.” In addition, sentimental value is increased by effort: “Recipients also felt positively toward givers who worked hard to find the right gift, even when that gift was off the mark.” Givers who make the effort, but don’t quite succeed, “should be heartened by the fact that recipients recognize the difference between process and outcome,” the researchers note.
In their paper, Mellers and her co-authors note that people spend billions of dollars on gifts each year, especially at Christmas, “but it wasn’t always this way. The tradition of Christmas gift giving started in the Victorian era. Gifts were simple and modest expressions of kindness or charity. Gradually, the tradition transformed into the buying frenzy of today fueled, in part, by the firms and merchants who stood to benefit. Many Americans now view the holiday tradition as out of control.”
Critics of holiday gift giving certainly have a point. Along those lines, the Journal article offers some suggestions. Among them: Assuming your goal is to maximize a social connection, avoid “perishable gifts like flowers or chocolates.… For a durable impression, better to give a vase or a painting.” Perhaps best of all, the article says, give a gift that announces its existence every now and then, such as “an electric mixer which, when used, gets noticed.”
Worried that a painting may blow your holiday budget? If so, it might help to remember O’Henry’s short story, “The Gift of the Maji,” says Mellers. As described in her paper, it involves “a poor couple who give up their most treasured possessions to buy each other Christmas gifts. Della sells her long beautiful hair to buy Jim a chain for his watch, and Jim sells his gold watch to buy tortoise combs for Della’s hair. The gifts are complete deadweight economic losses with no material value to the recipients. But the sentimental gains are priceless. It is psychology — perhaps more than economics — that explains why the tradition has lasted so long. But it is economics — perhaps more than psychology — that explains why the message and the reality of deadweight losses resonate so clearly today.”