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An Economist's Guide To Christmas

Andre Gray |
December 22, 2013 | 9:15 p.m. PST

Staff Reporter

Well wrapped socioeconomic indicators. (Creative Commons)
Well wrapped socioeconomic indicators. (Creative Commons)
What does he need? It’s the weary question that haunts the last minute shopper. These desperate mall scavengers will spend the next couple days looking for the answer between aisles and under price tags, trudging relentlessly to the military march of Jingle Bells and Santa Clause is Coming to Town. For many of them, the Christmas adrenaline and caffeinated cocoa will wear off too quick, and they'll find themselves stumped mid-purchase, out of breath, spiritually depleted. “What is it all for anyway?” they’ll ask themselves. “Why bother with all the jumble and fuss? Why not just get them a giftcard? Or cash?”

Luckily, economics are here to convince otherwise. Before you start closing the money-filled envelopes, it’s important to know what you’re giving up in a real present. Gifts matter, and here’s why: 

1. A Gift Is A Signal 

Some economists will tell you that, during the holidays, cash is the most efficient present. Wharton professor Joel Waldfogel argues that as much as 20% of gift giving value is lost during Christmas in the form of unwanted gifts. He calls it the “deadweight loss of Christmas.” With cash you don’t waste time, and the recipient can get whatever he or she wants. 

But what this perspective doesn’t take into account is the fact that gift giving isn’t about value transactions. It’s all about sending a message. In an article published in the American Journal of Sociology, behavioral economist Colin Camerer explains that a gift is an economic “signal,” meant to communicate with the receiver. Just as a firm might look at market signals to describe and value stocks, people use gift signals to describe and value their relationships with other people. 

Santa is a great example. The quality of the presents he gives are a signal to children, letting them know if they’ve been “naughty or nice” (aka if they’ve adhered to the demands of parental authority). With the data, the children know whether or not they have to invest more time in behaving well next year. 

Santa is an economic power structure. (D'Arcy Norman/Flickr)
Santa is an economic power structure. (D'Arcy Norman/Flickr)

2. Gifting Game Theory

Signals are especially important for romantic Christmas gifts. When looking for a gift for your significant other, what you’re really looking for is something to tell them just how committed you are to the relationship. A gift tells the receiver how much their partner is investing in the relationship. The recipient then uses that information to decide how much they should be investing in their partner (emotionally, spiritually, and financially). It’s an investment game. That’s why gifts usually increase in value as the relationship gets more serious—you're becoming increasingly committed, and therefore investing more in your partner. 

The trick is that the receiver also pays an investment cost for accepting your gifts. Take the gift of dinner at an expensive restaurant. One partner signals commitment by paying for the dinner, while the other partner “invests” in the gift by taking the time to get out of bed, get dressed, and go to the restaurant. Both parties signal to each other that they’re still interested by incurring some sort of cost. That way, both partners know the other is committed to more than a one-night stand. Dating continues.  

Game theory is romantic. (thatcuterelationshipiwant/Tumblr)
Game theory is romantic. (thatcuterelationshipiwant/Tumblr)

3. Guessing Is Important

Even in non-romantic gift giving, the gift can say a lot about the gifter. Picking something just right tells the recipient that you care about them enough to know their tastes. A vintage poster of a young Tom Selleck might not have a lot of cash value, but it lets you know that I was listening when you told me you were a fan. Guessing your recipient’s tastes adds tangible value to whatever you get them. It sends the signal that you have invested attention in your relationship with them. Of course, I run the risk of sometimes guessing wrong (turns out you don’t like Tom Selleck, you like Tom Cruise), but the risk is worth the potential emotional return. 

4. Rushing Around Is A Good Thing

All the time put into rushing around looking for a gift adds value to the gift itself. The panic, the anxiety, the exhaustion; every piece of the process contributes to the ultimate value of the present. With cash, you don’t get any of that opportunity cost bonus. That’s why a gift violently wrestled from the hands of another last minute shopper is worth more than the equivalent value in cash. It sends a signal to the recipient, telling them that you have spent important resources on their gift, because hey, they matter. 

Cash may be the most rational, useful present, but it’s not the most economically sound. Gifts can be inefficient, but they make up for it by being multi-dimensional. In an uncertain world of social transaction, gifts are a way to establish and solidify the nature of your different relationships. They are an indicator of your willingness to invest, and their value comes in the form of time spent, attention paid, and shoppers fought. 

So before you buy another $20 Amazon gift card, remember what the holidays are really about: maximizing emotional return. Merry Christmas!

Reach Staff Reporter Andre Gray here



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