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…???