Why Economists Hate the Holidays

By Jacqueline Verrilli

As the holidays approach, those of us who get confused by the concept of gift-giving get very nervous.  It’s not that we are worried about finding the exactly-right present for each of our loved ones, it’s that we simply do not understand why, in first world countries, when everyone in the middle and upper classes  buys exactly what they want whenever they want it… why is gift-giving still a thing at all?  We find gift-giving to be ludicrous attempts to please others in the circumstance of monumental information asymmetries.  And this doesn’t just apply to holiday presents.  We hate birthdays, anniversaries, new babies, housewarmings…  Were it not for the fact that all this gift-giving vigorously stimulates the world economy by keeping factories pumping out home goods and electronics, keeping untold millions employed, causing a substantial increase in the velocity of money, and sharply increasing the world money supply, we would most certainly attempt to put a stop to all the nonsense.  Why?  Because giving gifts to people who have the resources to purchase those items themselves is inefficient, and the emotional drama involved in getting just the right thing that the other person could have bought themselves is irrational.  And inefficiency and irrationality violate our laws and we just don’t like that!

Gifts are Not Rational

At this time of year, millions of people spend (economists might say waste) a great deal of time shopping trying to pick out that exactly-right thing for another party.  The first thing that an economist will point out is that the investment of time in any endeavor, in this case shopping, involves the opportunity costs of doing other things that might provide a higher level of utility, like, say, spending time talking with family or catching up on the fluff pieces in “The Economist”.  We do, however, concede that shopping is considered by many as a form of entertainment.  Constant, ever-changing visual stimulation of lovely items that one might potentially bag and bring home is fun for people, so shopping in and of itself does provide utility.  With the additional overlay of touching upon our instincts to hunt and gather, shopping is a natural, ritualistic, survival behavior, which is both exciting and comforting. 

But gift-buying is where things get dicey.   Upon coming upon an item that attracts them, people often think to themselves “He’ll love this!”  The reality of this moment is that a particularly attractive item has triggered the person’s brain to react - to have a positive emotion known as infatuation - and the item now becomes a set point enmeshed with the buyer’s emotional state.  Additionally, the buyer has a positive experience in believing that they have achieved a few goals: getting one gift identified, anticipating making another person feel good, and anticipating having that person appreciate their thoughtful efforts and the results of those efforts because they found the greatest gift ever.  These (mostly unconscious) thoughts produce (mostly unconscious) expectations and emotional investment in the buyer’s mind regarding the receiver’s appreciation of the item.

The unfortunate reality of this whole situation is complicated and profound, so I will only touch on a few ways in which the irrationality of gift-purchasing and giving can ultimately decrease utility.  The expectations and emotional investment in the gift can result in the giver feeling personally rejected if the reaction the giver gets from the recipient is anything less than utter joy.  We often (egocentrically) assume that we know someone well enough to have an idea of what they might appreciate, but we may be disregarding the facts that tastes change and people can be very fickle.  Moreover, even if the item is exactly right in every way save one, e.g. the color, the giver and receiver will be somewhat disappointed and utility is destroyed.  Even more so when returns or exchanges are required.  Next, it happens very often that the receiver actually does really like the item, but makes some comment about it that the giver misinterprets as an expression of dislike or disappointment and so, even though the gift added utility to the receiver, the giver’s feelings are irrationally hurt, lowering their utility. And, of course, if, in fact, the receiver does not like the item, money and time have been spent to no avail – the utility-level bottoms out for both people.

When you get right down to it, gift-giving in the first world, among the middle and upper class, which is clearly not even remotely needs-based, is fundamentally irrational.  The idea that we can provide someone else utility by buying them something stems from an irrational, egocentric view that one human being can somehow know what is in someone else’s mind, which is not only impossible, it may border on a schizoid disorder.  Only the individual can know what will truly provide them with utility and so gifts are based upon a huge informational asymmetry – they know what they like, you do not.  You have an educated guess, an inkling, or a notion.  Those are not the same thing as knowing.  The reality of gift-giving actually involves a buyer taking a risk in purchasing something that they are attracted to in hopes that the other person will like it, too.  Hope is not a rational reaction to risk.  Calling up the potential receiver’s spouse to see if they still enjoy golf is close to rational, and calling the potential recipient directly to just ask if they would like the item you are considering is the most rational thing you can do when it comes to gifts.  “But that would spoil the surprise!” I hear you thinking (my own irrationality duly noted, here).  Yes.  Economists don’t like surprises, they are the manifestation of an information asymmetry and are, therefore, a sign of inefficiency.  Eeeewwww!  I just gave myself the heebie-jeebies!!

Gift-Giving is Inefficient

Economists view the world through the lens of efficiently distributed and utilized resources.  This requires “perfect” information.  Everybody knows exactly what they need in order to survive, and want in order to thrive, and they exchange that information readily and freely with others in order to gain access to those resources.  The economist’s idea of a great gift is the one where the receiver told you  the exact one they would appreciate, including the color; no surprises, no wrong sizes, and no inefficiency.  Perfect information creates zero waste.  In Italy, similar to here in the US, it is customary to give people a gift when they get married, but it is not customary (or it wasn’t until very recently) for the coppia di fidanzati (the engaged couple) to register for gifts.  The newly married would find themselves the owners of random sets of mismatched dinnerware, a large number of knick-knacks, and multiples of household appliances like irons or espresso makers.  And in Italy (also unless things have changed recently), there are often no returns or exchanges on purchased goods.  Italian wedding gifts are an economist’s nightmare.  The utter inefficiency and utility destruction would likely keep some of us up at night.  [Don’t worry guys, after speaking to my cousin, the customs have changed a bit – registries are coming into vogue in the metropolitan areas and most people have learned to just give money.] Thankfully for us economists, the internet is making things SO much more efficient.  On-line registries and wish lists coupled with the ability to buy something instantaneously and have it shipped directly to the recipient expediently and transparently (thanks to package-tracking technology) are better than any anti-anxiety drug for an economist.

But let's face it, gift-giving among the relatively well-off is the equivalent of playing musical chairs with enough chairs for everybody, we are simply trading among ourselves the things that we all already equally have.  Truly, the best possible solution to the inefficiency of gift-giving is, of course, to give items to those people who actually need things so that resources are not just efficiently purchased, but efficiently distributed and utilized.  People providing needed items and services to those who are generally less well-off is likely to substantially improve the recipients’ well-being.  We see this happening in offices where people are asked to purchase gifts for the underprivileged locally, and at churches that organize food and clothing drives and providing meals for those who need them within their communities.  Many people are donating year round to local food banks, clothing charities, and emergency funds, and I have seen many initiatives for people to donate their professional expertise to community members.

Giving of Your Gifts

Within the last ten years charities have been exposed to be a mixed-bag of efficiency; many people who need the resources do not show up to get them out of pride, fear of judgement, or lack of awareness. Also, it has been shown that some of those who accept the charity can become dependent on it because they begin to view themselves as incapable or undeserving of wage-paying work.  A self-esteem downward spiral ensues.  The problem has been that, historically, donations are in the form of products, foods, and even money, given with no expectation of anything in return.  This is based on two misguided beliefs, that giving without the expectation of receiving anything in return is a show of unconditional love (which it can certainly be if the receiver understands how to use the charitable donation effectively to raise their level of well-being), and that people should be free to do whatever they wish with what they are given freely (again, this is noble and this article should not be viewed as denigrating charitable donations and freedom from interference – please read on).  The science is clear.  The best way for those with means to assist in the efficient distribution and utilization of resources is to act as a mentor: developing a relationship with underprivileged individuals and respectfully learning from them what they need in order to be able to raise their own levels of utility.

More and more charities are now looking to make gains in particular, focused areas of need using outreach and mentoring as their main means of impact.  Charitable organizations and social entrepreneurs are learning how to gauge the effectiveness of programs and track success with actual hard data.  Did I just hear all you economists cheer?  The effective and efficient use of resources is absolutely founded upon people at the lower end of the economic continuum being able to increase their own well-being through the better utilization of their HUMAN CAPITAL resources.  The need for food banks, homeless shelters, free clothing and other basic necessities is not going to go away in the immediate future, so don’t stop giving money and goods to those entities that effectively distribute those resources.  But when it comes to gifts, there can be no greater way to increase your own utility and that of another than giving the gift of your time in mentoring another human being.  You will make us economists very, very happy.  Funny thing is, I think this suggestion better reflects the real purpose behind some of these holidays, anyway.

And if you still feel the need to give a gift to someone who has the resources to buy the item in order to show your appreciation for that person being in your life, well, so be it.  Go ahead, see if we economists care.  It’s your money, you get to do whatever you want with it…  Fine.  But call them first, please…???

Trump Brand Gets Trumped By Trump

By Jacqueline Verrilli

Has Donald Trump Permanently Damaged His Brand?

Branding.  It is the one thing that keeps all cans of corn at the grocery store from being identical commodities.  There is little reason to pay more for something that doesn’t provide greater value to a consumer, but pretty packaging, particular words, and carefully chosen imagery do provide value.  Economists and business leaders know this.  Luxury branding is particularly risky because the products must meet the expectations of very discerning individuals who have time to complain, the money to purchase other luxury items, and the power of personal connections to destroy the brand with one off-hand comment at a board meeting or golf outing.  Personal branding is something that is becoming more and more ingrained in society as we all try to find ways to differentiate ourselves from our coworkers and other job applicants.  Most of us use resumes to denote our education, certifications, skills, and talents to try to convince an employer that we will do the job better than all other comers.  But Donald Trump uses his own name to denote his luxury brand of golf courses, home goods, commercial real estate properties, and himself.   As he becomes the target of boycotts across the nation and around the world how will Trump fare as brand?

On July 16, 2015, Donald Trump announced that he would run for President of the United States of America.  Since then he has attended debates and created press opportunities that have substantially increased his following and have established support for his candidacy.  But along the way, he has made statements that have alienated and insulted entire potential constituencies including the Latino community, people who identify as Muslim, women, and intellectuals.  In the world of instantaneous information transmission, and a world market full of people hungry for news, the words that come out of a celebrity’s mouth quickly become a part of the portrait of who they are.  In Donald Trump’s case, with his image so enmeshed with the value of his businesses, his eagerness to get publicity at any cost may in fact cost him more than he anticipated.  As of this moment, a major middle-eastern retailer has removed Trump products from its shelves at the request of its customers.  A Dubai-based luxury property developer, DAMAC Properties that is building on behalf of Trump, is facing tremendous pressure to cut ties with his organizations.  Numerous calls for removing the Trump name from billboards and buildings have been circulated on social media such as Twitter, Facebook, and Instagram.  Business leaders across the world are distancing themselves from Trump.  IdeaWorks is a respected travel consultancy, and in emails to members of the global travel industry, its president, Jay Sorenson, vowed to boycott Trump properties and is calling for colleagues to do the same.  Sorensen said he expects that the national and global response to Trump’s remarks “truly will penalize the finances of the Trump hotel brand.”  In the New York Times today, reporter Christopher Reynolds interviewed Alan X. Reay, president of Atlas Hospitality Group.  Mr. Reay suggests that licensing deals involving the Trump name may soon start to unravel.

“Alan X. Reay said he imagines big trouble behind the scenes at the Trump hotels.  If you’re the manager of a hotel that’s operated by the Trump organization, ‘I don’t think there’s much that you can do,’ Reay said.  But in situations where other investors and hoteliers have paid to use the Trump name – “there’s going to be huge fallout from that … You’re obviously paying to drive business toward your hotel, not drive it away.”

And according to CNN Money, an “influential Arabian Business magazine on Tuesday published an opinion titled: "Time for Gulf firms to review their links with the toxic Trump brand."

At this point, I would guess that it is highly unlikely that Mr. Trump will be able to mount a new TV series given that most major media outlets will also wish to distance themselves from him.  And his access to banking resources is likely to dry up quickly for similar reasons.  It seems that Mr. Trump, having become overly focused on a goal of raising awareness of his personal name for political gain, may have created a financially disastrous situation for his businesses.  Forgetting that you are an international businessman whose name is inextricably linked to the value of your companies is bad business.  Perhaps "The Donald" should have taken a refresher course in Global Marketing.  The rest of world should learn this very valuable lesson: your name is your brand, don't tarnish it.

Behaviorally Socialist Government?

It is a well-known fact that human beings often make choices that are counter to their best interests.  Yes, that includes you, dear reader.  And influencing people to do such things is not really all that hard.  Using advertising as an example, by appealing to people’s emotions, you can get them to buy things that are not necessary for their existence and may even be counter to their goals - like snack chips and really expensive jeans.  Appealing to your emotions helps companies stack the deck in favor of you exhibiting the behavior of parting with your money.  As it turns out, and as the newly established Social and Behavioral Science Team (SBST) under the Obama administration is proving, you can also use behavior-influencing techniques to get people to do things that are clearly in their best interests.  And it can be incredibly cost effective to do so.  By implementing a simple verbal prompt, people begin to save for retirement; requiring a signature on a form gets greater compliance with the terms of an agreement; and blast reminders can get potential students to complete the process of applying for college and get military service-members to renew their choices for earned benefits.  In the report that the SBST released in September, the proof of concept for the implementation of behavioral interventions to enhance government program efficiency and effectiveness was very clear; double digit percentage improvements and millions of dollars in potential increased revenue and tax savings.

Because these were pilot programs that were experimental in design, the SBST was extremely limited in what they could attempt and accomplish.  The scope of most of the interventions was limited to communicative prompts and form redesigns.  But as the report points out “…because behavioral changes to program administration often require little or no additional cost, returns on investment can be large even when project effects are small. It is no more expensive to send an effective version of an email than an ineffective one.”  The results of the pilot programs using minimal behavioral interventions known as “nudges” and “choice architecture” created dramatic, beneficial results.  But the social and behavioral sciences include disciplines like psychology, sociology and anthropology (and some other “ologies” that I’m forgetting right now) and they have all come a long way from Pavlov and his dogs.  Utilizing the vast wealth of research and data from the social and behavioral sciences could profoundly change the nature of governance.  Human behavior is not a mystery to us and just as companies can use behavioral techniques to sell you goods and services, organizations like the government can use the knowledge of behavior to make their programs more effective.  In fact, up until now, the government has been at a huge disadvantage in not doing so.  Program effectiveness is at the heart of simultaneously improving societal welfare and reducing government.  Could it actually be that, aside from benefiting society, the behavioral sciences show promise for finding commonalities among political constituencies?

This is not just a flippant, rhetorical question.  It is often forgotten that the social sciences includes economics.  Economics is the study of transactions and their value.  Transactions can be defined broadly to include a mother’s kiss on a child’s forehead, which can create an incredible amount of future value by way of the child’s self-esteem.  It is also considered a transaction when you choose to (or not to) read a document completely before signing it.  But, as we all know, economists tend to focus on those transactions that involve money.  Because of an historically excessive focus on money, however, it is also often forgotten that transactions are, in their essence, human social behavior.  Government exists in large part to facilitate the beneficial transactions within society and minimize or mitigate those that do not.  Quite frankly, how we’ve gotten this far without incorporating scientific research on behavior in government is a mystery to me and a testament to society itself.  But there is a wealth of knowledge in the social and behavioral sciences that has increased the understanding of beneficial interpersonal transactions tremendously, and it has been largely ignored until now.  All sciences investigate the realities of our world so that we can make predictions about what will happen under certain circumstances and make educated guesses about what is most likely to happen under uncertain circumstances.  The fundamental goal of science is, therefore, to help us poor, hapless humans to behave according to the best information we can get about the future.  Thus far, we seem to have been operating under aphorisms like “every man for himself” and “share and share alike” as attempts to govern behavior.  Science provides a more pro-active approach.  By observing behavior and predicting responses to stimuli we can get more individuals to behave in their own best interests and that of others.  We can get members of social groups to support one another, we can get families to function better, we can get people to eat more healthfully, save for the future, and avoid risky behaviors, and we can get more people to earn higher wages by staying in school longer.  These are all practical results of social and behavioral science research.  And now, finally, we can get government to be more effective and efficient.

The use of social and behavioral science in government is long overdue and we can go far beyond shortening wait times and reducing printing costs.  Human behavior, in large part, is not random and is surprisingly easily influenced.  Often, it takes little more than a well-timed or well-worded communication to create a huge, positive difference in someone’s future.  While behavioral science may not have politicians running to the middle isle and shaking hands yet, the SBST report proves one thing - it works.

Are Entrepreneurs in Short Supply?

By Jacqueline Verrilli

Because of the news of wildly successful start-ups, it’s easy to get the impression that there are lots of good jobs being created around the globe.  But a few disparate pieces of evidence add up to a much different picture.

Would you like to upgrade to a Full-Size car?

Underemployment is still a huge problem. The Pew Research foundation gauges underemployment by looking at the wages and salaries of college graduates. A person is considered underemployed if their level of education exceeds that required for their job, like a college graduate working the counter at a car rental agency, or if the job’s wages are substantially below what the average person with that level of education is earning.  According to Pew’s research, the good news is that underemployment in the US has been dropping steadily for the past 15 years.  In 1990, fully 65% of college graduates were underemployed in “Good non-college jobs”, and “Low wage jobs”. That figure had fallen to 50% by 2012.  But that, of course, still means that 50% of college graduates are underemployed. Shockingly, over 20% percent of college graduates are now ending up in jobs that earn less than $25,000 a year; 5 percentage points higher than back in 1990.


Given that studies show that underemployed individuals are far more likely to be dissatisfied with their lives, not just their jobs, this statistic has larger implications. Job dissatisfaction is the number one stressor cited in polls and large scale studies of US workers and is a major contributor to poor self-confidence and behaviors that lead to health issues.  So underemployment is not merely a financial issue, it has more far-reaching welfare implications.

Go Generate a Job, Will Ya?!


Just last month several news outlets reported that the major banks, including J.P. Morgan Chase, Citigroup, and Deutsche Bank, were turning away their corporate clients’ cash deposits and, in some cases, charging fees to hold the cash.  The Wall Street Journal reported that the ostensible cause was the new regulations being put into place to lessen the likelihood of another banking crisis making these large deposits more costly for the banks. But if we look more closely, there is also another reason. The October 18^th Wall Street Journal article entitled “Big Banks to America’s Firms: We Don’t Want Your Cash” states “the globe is awash in cash”.  The article cites soft economic growth and limited corporate investment as causative reasons for the excess of cash.  The article goes on, “Many businesses have large sums on hand and opportunities to profitably invest it appear scarce.”  It appears that big companies literally have more money than they know what to do with. They aren't purchasing other companies, engaging in mergers, or even spending on R&D.

This boils down to a perceived lack of quality investments in the marketplace and no new good ideas coming from internal sources.  If this trend continues, an economic slow-down is all but inevitable.

Where is My Real Iron Man?

Elon Musk has gotten a lot of attention for taking on gigantic projects and succeeding. From PayPal to Tesla Motors to SpaceX, Musk has set his sights on making the internet more efficient for transactions, disrupting the fossil fuel industry, and colonizing Mars in our lifetime. Well, that’s all well and good, but I still don’t own a robot.  And I want one. True, I do own a little automatic vacuum that is, as I write this, scampering around the house sweeping up my children’s crumbs and the dirt my husband tracks into the house after a run, but I don’t have a personal servant that can get into a self-driving car to run errands, cook fresh, nutritious meals for my family, and give me a neck massage when I’ve been sitting at the computer too long. Okay, okay… My stiff neck may not qualify as a big enough problem that a fully functioning cyborg needs to be created to solve it, but burning buildings and tedious menial labor jobs abound. My point is that there are many, much larger problems in the world that need to be addressed and it takes people who are willing to take big risks in an effort to create a particular vision of the future to solve them. Right now there is an abundance of educated individuals and cash, and not enough visionaries to put these valuable resources to good use.


It’s always great to hear about a new flavor of snack chip, and I am always super-geeked to hear the news from CERN about the search for dark matter. But the world is in desperate need of people who can look just over the next hill and create something truly useful for society’s present problems. To all you readers, I call for you to take up the glove, pick a problem, and start running the entrepreneurial gauntlet.  The world needs you.