Many people spend more during the holiday season than they can afford. For myriad reasons, we put too many big-ticket items under the tree, only to see the satisfaction short-lived. How many times have parents of younger kids been witness to the “Cardboard Box Phenomenon,” where the kids play with the box the gift came in instead of the gift itself?
Understanding the behavioral economics of gift giving may help you decide when and what to buy.
You might take comfort in Wharton School professor Joel Waldfogel’s book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Although most of us could never get away with not buying presents, his opinion is at least instructive in that people are most efficient when spending their own money, producing a dollar in satisfaction for every dollar they spend. In other words, if you really don’t know what to get someone and they don’t let you know, giving cash is your best, most efficient option. However, spending money on those we don't know well results in what Waldfogel calls a "deadweight loss" of about 20%.
A deadweight loss, by the way, is a loss by one party (the giver) that is not offset by a corresponding gain of another party (the receiver).
With Christmas spending in the United States at an eye-popping $1.1 TRILLION, deadweight losses should amount to about $200 billion per year, although I think it may be a bit less.
Waldfogel found that givers with infrequent contact were those most likely to give deadweight-loss gifts. This group includes aunts, uncles, and grandparents who live in another city. Waldfogel compares this deadweight loss to the loss experienced when government guesses at what we really need and makes choices for us. Sometimes, people are better off when they make their own choices. For this reason, Waldfogel suggests giving money or gift cards instead.
To any criticism that this article is taking the joy out of holiday gift giving, I say go watch desperate, roughed-up holiday shoppers or those of us who host holiday parties. I think the joy was taken out of Christmas long before I existed.
Finding creative ways of showing love and caring for others is more complex and nuanced. Here are some categories of gift giving and receiving you may find helpful.
First, learn to distinguish between a gift and a present. It's a gift when you give something the other person wants to have. It's a present when you give something you want the other person to have. Offering a dictator military support is a gift. When we give him a copy of the Constitution, it is a present. Some gift giving is a social expectation and a test of the relationship. Sometimes, the message is much more important than the medium. Give a book that the other person despises, and you have revealed how little you pay attention to your loved one's opinions. But a pair of gloves, with a heartfelt note saying, "These will keep your hands warm when I'm not there to hold them," will score mega-points.
Parents can help extended family members select gifts for their children by providing specific wish lists to ensure that what they buy will be appreciated. If you aren't confident in your gift, include a gift receipt. You are guarding against deadweight loss when the recipient can exchange the gift or return it for cash. Using after-Christmas sales can mean getting the original value back, purchasing a different make or model at a discount, and still pocketing a sizable amount of cash.
Presents are handled differently (and can be more challenging for the giver). A present is when you buy Grandpa an iPhone because you know he would never buy one for himself. It’s a present if you want the recipients to have it more than they realize they want it.
Try asking, "What Christmas (or whatever holiday) present changed the course of your life the most?" to see how much influence you can have. A pair of binoculars may spark a love of ornithology. A telescope fuels a fascination with astronomy. The list can go on and on.
Discovering talent, calling, and vocation is never foolproof. Every success will be accompanied by many more failures, but that's what it takes to help children find their passion. Sometimes the risk of giving a present that may or may not be wanted is worth the possible deadweight loss. It is like research and development in the pharmaceutical industry. Most experiments are dead ends, but the whole process is worth the one success.
Another way is to work toward redefining your expectations for your particular holiday celebration and gift-giving habits—for example, volunteering your time, or sending gifts to nonprofit organizations in lieu of personal gifts, or sending gifts in someone else's name to their favorite charity. Letting the recipient know what you’ve done can go a long way toward avoiding a deadweight loss.
And remember, the greatest joy of the holiday season is not bought in a store and does not increase your credit card debt. There is a better way to celebrate that builds long-lasting ties.
Holiday spirit comes from taking time to celebrate values that don't show up in your net worth statement. Start by asking your family to share their fondest holiday memories. Make a list of all the things you have gotten right in past years, and make them annual family traditions.
Be well this holiday season!