Smiling at a deadweight loss

featured image: Matt Stratton/Flickr CC BY NC ND 2.0)

Should we be simply be giving each other cash, or are presents better after all?

28 years ago, then young-ish economist Joel Waldfogel wrote a paper, The Deadweight Loss of Christmas, in which he argued that giving gifts at Christmas (and similar holidays with gift-giving rituals) is a colossal waste of money. Recipients value the gifts they received as less than the amount the giver has spent on it, and he calculates this deadweight loss at between one-tenth and one-third of the amount spent. In the US in 1992, that corresponded with $4-$13 billion. Big if true. But is it?

Every year in December, journalists and bloggers around the world cite this paper (I actually did so myself), often to point out, and poke fun at, the crazy excesses of the holiday season. But not all economists agree with Mr. Waldfogel. In 1996, Sara Solnick and David Hemenway challenged his findings in a comment reporting on their own research, which suggests that recipients commonly value a gift higher than its price (in their case, recipients valued the gifts at 214% what the giver paid). John List and Jason Shogren looked at both studies in 1998, and did their own, more robust analysis, finding that gifts do indeed produce a welfare gain, but a somewhat more modest one, at 121-135% of the spend. A little later, economist Bradley Ruffle and behavioural scientist Orit Tykocinski explored why Waldfogel’s study finds a deadweight loss, and Solnick and Hemenway a welfare gain. They find one reason may be that the results depend considerably on how the questions are asked – subtle changes in the wording can drastically affect responses. (The debate goes on, with other economists and Waldfogel himself (re)joining the controversy, but I guess you get the picture.)

The giver’s perspective

However, all this research looks at the matter from the point of view of the recipient – the ‘demand side’ of the transaction. 25 years after Waldfogel’s original paper, economists Laura Birg and Simon Pommeranz turned the tables, and investigated how things are perceived from the giver’s perspective – the ‘supply side’. Might there be a surplus on that side, i.e., might givers themselves derive welfare from the act of giving a gift of a particular value (rather than giving the money)?

You must pay me to give cash as a gift! (image: 401(K) 2012/Flickr CC BY SA 2.0)

Their participants (all students at the university of Göttingen) were asked details about the three most important (to them) presents they were giving at Christmas 2015. This included many aspects, including who was the recipient; the type of the gift: in-kind (with quantifiable value), idealistic (without quantifiable value), gift card or cash; the price paid; how time-consuming and stressful selecting and purchasing the gift was; how suitable the gift would be; the motive for choosing the gift; and, for in-kind gifts only, how much they would have spent if they had given money instead, and how much they would need to be paid to, instead of the in-kind gift, give its value in cash.

Their survey covered 716 presents, 87% of which were in-kind gifts, 9% gift cards and 4% idealistic gifts, with just one gift of cash. The average price of the in-kind gift was €36, and givers would require an average compensation of €10 for themselves, if they had to give that amount in cash instead of the gift. In other words, giving a present worth €36 provided them with a “giver’s surplus” of €10, compared to giving the cash – an uplift of 43%. Interestingly, this welfare gain is higher for parents, siblings, and grandparents and aunts and uncles (140-161%) than for friends (134%) and partners (131%).

Even if there is a deadweight loss on the receiver’s side, this giver’s surplus may compensate it, the authors concluded.

Another study by Adelle Yang and Oleg Urminsky sheds some light onto what might contribute to this giver’s surplus – and to the receiver’s deadweight loss at the same time. Their point of departure is the observation that many recipients of gifts either return the gift, or keep it but find it unsatisfactory. Could this simply be a – potentially profound – lack of understanding of the receiver’s preference?

Affective reaction beats satisfaction

The researchers hypothesize that the giver’s motive may not, in fact, be the maximization of the recipient’s satisfaction, but of their own. The immediate affective reaction of the recipient upon receiving a gift (facial, vocal or gestural expressions of emotion) – provided it is positive! – is a source of enjoyment for the giver. But of course, what elicits the recipient’s most intense affective reaction is not necessarily what will ultimately provide them with the greatest satisfaction. So, what would a giver select as a present, faced with one option that produces a stronger affective reaction, and another one that gives the recipient more satisfaction?

The authors suggest that while a houseplant might provide more long-term satisfaction, a bouquet of flowers might prompt a smile or a squeal of delight – and provide the giver with immediate gratification. Even the anticipation of the reaction may hold enjoyment for the giver, and further stimulate the preference for the gift that generates it. So, Yang and Urminsky postulate the smile-seeking hypothesis: when a giver’s beliefs differ about what would give the recipient more overall satisfaction, and what would produce a stronger affective reaction, they’d go for the latter.

In a series of studies, they put this to the test. For example, participants were randomly assigned to the role of giver or recipient, and asked to judge gifts like (a) a pair of ordinary mugs, personalized with a couple’s wedding date and (b) a pair of award-winning ergonomic mugs, especially pleasant to hold. Both givers and receivers rated them as providing equal satisfaction, and predicted that the personalized set would elicit a stronger affective reaction. However, while recipients would prefer to receive the designer mugs, the givers would prefer to give the personalized ones.

Agreement on satisfaction and emotion, disagreement on preference (image: Yang & Urminsky)

They found similar discrepancies with Valentine gifts (e.g. a dozen roses in full bloom vs a dozen budding roses about to bloom). Interestingly, they also found that the giver’s preference for reaction-inducing gifts disappears if they expect not to be present to observe the recipient’s reaction. The final study asked participants what the most and least favourite gifts were that they had either given or received. Givers’ favourite gifts were those with the highest reaction-inducing scores and a lower satisfaction-generating score. Receiver’s favourite gifts were those with a higher satisfaction-generating score and a lower reaction-inducing score – precisely the givers’ least favourite gifts. All in all, the difference in preference between giver and recipient really matters.

So, dear reader, it appears that giving gifts is not a simple affair. If you had hoped to find in this article some clear, unambiguous guidance regarding gift-giving, I am sorry to have disappointed, and perhaps even thoroughly confused you. My gift to you, this holiday period, is the awareness that we people are complex beings, with complex motives inspiring complex decisions and behaviour. Will that give you satisfaction? Who knows – as long as it makes you smile (even a wry smile is OK!).

Happy holidays!

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics, Emotions, Psychology and tagged , . Bookmark the permalink.

6 Responses to Smiling at a deadweight loss

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  6. We moved to a gift-free Christmas about 5 years ago, best thing ever! No stress, no wasted money, just more time and money to spend doing things with the people we love.

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