gift giving

You know who I’ve realised is really good at giving gifts to people that already have everything?

Ellen Degeneres.

Last week, I glimpsed a clip of her giving Ugly Betty star America Ferrara a gift-wrapping station for Christmas. Genius*.
*And ironic, because giving a gift that’s a gift-wrapping station for them to wrap gifts for other people seems like the dizzying height of good gifting.

But it does remind me of an old topic:

The Deadweight Loss of Christmas

I’ve linked there to the now-seminal* paper by Joel Waldfogel, the Yale econogrinch that ruined Christmas.
*yes – that’s an academic term, apparently.

Here is his theory [paraphrased]:

  1. Let’s say that I have $15 to spend.
  2. Because I am the master of my fate and the captain of my soul, I am best placed to know how I would maximise the use of that $15.
  3. And since I’m a person of taste, that means spending it on the deluxe edition of Enya’s new “Dark Sky Island” album.
  4. In the gift-giving scenario, however, there is a disconnect: because I am sitting without $15, and the gift-giver is sitting with $15.
  5. Therefore, in order for a gift to be optimal, the gift-giver would have to use the $15 in the exact same way that I would have. Otherwise, I’d be better off with the cash.
  6. If, however, the gift-giver just knew that I liked music in general, and instead bought me the Mariah Carey Christmas album, then something has been lost.
  7. To put it in numerical terms: the gift-giver is short of $15; while I am not up by $15.
  8. The next question is: how cheap would the Mariah Carey Christmas album have to be before I would buy it myself?
  9. Well, arguably, not even if it were free. But let’s assume that, maybe, if it were on special for $2. Because now we’re talking about the choice between a beer and a Christmas album – and I might find the right moment to have diva-style carolling playing in the background over December.
  10. So to summarise: the gift-giver has spent $15 to give me a gift that’s worth about $2.
  11. $13 just vanished in a cloud of wrapping paper, and that 13 bucks is “deadweight loss” to society.
  12. It’s not very sentimental, but I’d have been $13 better off if the gift-giver had just slid some cash into an envelope.

So Mr Waldfogel went and investigated by conducting a number of surveys. The essential finding: he demonstrated that the act of gift-giving destroys 10% to 30% of the value of the gift – and that’s consistent across the price range of gifts (ie. even the very expensive gifts lose it). Just think how crazy that is across the world: 10% of everyone’s Christmas gift-spending just evaporates on Christmas morning.

More interestingly, Mr Waldfogel also investigated the impact of the relationship between the gift-giver and the recipient on the value of the deadweight loss. And he pretty much proved the standard experience:

  1. The best gift-givers are friends.
  2. Followed closely by significant others and parents.
  3. While gifts from grandparents and aunts/uncles are the most likely to be exchanged.

He also demonstrated that the amount of deadweight loss is correlated with the likelihood that the gift is going to be cash and/or gift vouchers:

  1. Grandparents are the most likely to give you cash.
  2. Followed by the rest of the extended family.
  3. Parents, friends and significant others do it much more rarely.

So, obviously, the key here is to conclude that you should just do it in cash.

The Key Clause In That Experiment

In those surveys in that seminal* paper, the questions contained the following phrases:

“Apart from any sentimental value of the items”


“not counting the sentimental value of the gift”

Which makes the whole experiment a bit blurry, if you think about it. The conclusion being implied in the paper is that it’s generally better to receive a cash gift than a non-cash gift, because that maximises the value for the recipient.

But the minute you re-consider the value of sentiment, all that we can really say is: it’s better to get a gift that you want from someone you like, than it is to receive a gift that you don’t really want from someone you like. And it’s better to get cash from someone you don’t really know.

Which is a little obvious, don’t you think?

The Power of Sentiment

In my experience, there is such a thing as a gift hierarchy. It goes something like this:

  1. A gift that you didn’t realise that you really wanted/needed until you got it (so you couldn’t ask for it even if you tried).
  2. A gift that you really want that you didn’t have to ask for.
  3. A gift that you like that you didn’t have to ask for.
  4. A gift that you wanted that you had to ask for.
  5. Socks.

In many ways, the demand/utility side of gifts is secondary to the test of the gift-giver’s ingenuity and their attention to the detail when it comes to knowing the recipient’s likes and dislikes.

In economic terms: gifts demonstrate a social utility that is not captured by the purist assessment of value vs price. And that social utility is closely linked to social importance of the pre-existing relationship (ie. there’s no sentiment attached to gifts from distant acquaintances).

The Real Conclusion

  1. Get gifts for the nearest and dearest, because sentiment (unless you know that they’re really prefer cash).
  2. And for anyone else, gift cash.

And for more on gifts, this WSJ article by Dan Ariely.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.