What We Need To Know About Gift Giving

In The Big Bang Theory, Sheldon was thrilled with the gift he received:

By contrast, according to University of Minnesota Professor Joel Waldfogel, we don’t want many of the holiday gifts our friends and relatives give us. The result (he says with a bit of smile) is an “orgy of value destruction.” When you dislike (and never wear) the $35 scarf Aunt Betty gave you, its worth sinks to $10. Consequently, the economy lost $25 from an unwelcome gift.

Following Dr. Waldfogel’s thinking, a per person gift giving projection for 2024 from Gallup of $1,014 is really less:

Economists call the difference between the price of the item and its worth a $25 deadweight loss.

But there is still more.

Signaling

On the supply side, we care about what our gifts say (signal) about ourselves more than what the recipient will like. By giving a pair of tickets, we indicate wanting to spend time with someone (or maybe just the desire to go to the performance). We might avoid buying something that is nicer than what we own, such as a more up-to-date iPhone. Or we could care most about what onlookers at a party will think when our present is opened.

Preference Falsification

Then, further compounding present problems, the demand side is not entirely honest. Sometimes we misrepresent what we really believe because we think we have to. When we get that ugly scarf from Aunt Betty, not wanting to hurt her feelings, we don’t tell her. Instead, we probably engage in what Duke Professor Timur Kuran calls preference falsification. Because we tell her we love the gift, next year, the same problem resurfaces.

Our Bottom Line: Market Failure

An economist might call the scarf situation a market failure. Ideally, markets are supposed to create an equilibrium price and quality that optimally satisfies buyers and sellers. However, when a scarf is worth $10 to the recipient but sold for $35, the market has failed. Because the gift giving created less utility (usefulness) the demand curve should have had a lower location:

So, where does this leave us? Let’s enjoy more gift giving calamities from The Simpsons and Seinfeld.:

In The Simpsons, Homer gave Marge what he wanted:

And, in Seinfeld, even with cash, Jerry gives the wrong gift:

My sources and more: Through Hidden Brain podcasts, here and here, scholars discussed what we don’t know about gift giving. From there, The Atlantic took us to the behavioral side of economics while, we’ve looked at Joel Waldfogel and the deadweight loss of gift giving, here.

Please note that several of today’s sentences were in a previous econlife post.