Decisions Have An Opportunity Cost That Require Tradeoffs

Behavioral Economics: The Best Gifts

by Elaine Schwartz    •    Nov 19, 2012    •    279 Views    •    TIME TO READ: 1 minute

A gift can be worth much more or less than its price tag. It just depends on whether you are the giver or the receiver.

One of the best gifts I have ever gotten was a book of car wash coupons. Happily, I used every one, each time feeling that I had gotten something for free. The value of the gift to me was equal to the value that the giver had paid to say thanks for driving her daughter to school every morning.

According to economist Joel Waldfogel, my experience was unusual. What we give rarely is worth as much to the recipient. As a result, he says that there is an “orgy of value destruction” during the holidays. If you are willing to pay only $25 for that $50 sweater your Aunt Minnie gave you, then $25 of value is destroyed. Called deadweight loss, Waldfogel estimates that 18 percent of the value of all gifts given during the December holidays disappears.

Is the answer cash? Not necessarily. Explained by behavioral economist Dan Ariely, the reason might be that we have market norms and social norms. A stranger asked to help someone move a sofa says no when offered a small amount of cash. However, when asked as a favor, more people willingly assisted. The former was a transaction. The second was an act of good will.

The good will takes us to gift giving. Even when value is lost on the recipient’s side, it might be gained with the giver. After all, if the pleasure of giving a $50 sweater could “add” $25 to its value and make it worth $75 to your Aunt Minnie, then that 18 percent deadweight loss is eliminated.

Maybe you think this behavioral analysis is ridiculous. But, the combination of gifts’ deadweight loss and the need to judge gifts with social norms might be why gift cards are so popular. It also explains why my car wash coupons were worth more to me than their price tag.

Sources and Resources: Joel Waldfogel conveys the academics behind his ideas in his paper, more informally explains his book, Scroogenomics, in this video, and summarizes his conclusions in this NPR segment. My top recommendation, though, is Dan Ariely’s book, Predictably Irrational in which I read about social and market norms (Chapter 4).

Past Monday Behavioral Economics Posts

Managing Risk: 11/12

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