Gift Giving is an Economic Nightmare. Hear me out.
If we look at giving gifts from the standpoint of even the most basic of economics, we see its fundamental flaw. When you buy something for yourself, you predict how much utility it will bring you. If you measure utility in the amount of dollars you would be willing to pay for a certain item, when you shop for yourself, you can actually save a lot of money. You could find a really nice shirt that you just love for just $10, even though you’d actually be willing to shell out $18 for it if you had to. This means that, of the $18 of value that shirt has to you, you kept $8, meaning you have $26 worth right now, despite only having $18 to begin with.
If we look at utility in that sense, we can see where gift giving falls short. When it is somebody else buying the gift, they have no idea how much utility it will bring you. They may see a shirt for $10 and think that you’d love it. When you receive it however, you might not like the shirt as much as they thought; it could be worth only $7 to you. This would mean that you two only have $7 from the $10, effectively losing $3. In fact, it is believed that between 10 and 33 percent of the value of gifts is lost during gift giving.
It is possible to cheat the system however. If you really get to know your friends and how much joy something brings them, you could get much better at predicting how much they are willing to pay for something. You might be able to break even on the value most of the time. Perhaps you are again buying your friend a $10 shirt. This time it has their favorite character on it. You know that they would buy that shirt for at least $15, since you’ve seen them try a similar one for that price online before they realized it was sold out. This would increase the amount of value between the two of you from $10 to $15. When they see the shirt, they are happy, they hug and thank you. Seeing them happy brings you joy, or utility as well. You might like seeing them happy so much that the $10 you payed is well worth it. In fact, you would pay $50 for them to be that happy since seeing your friend happy brings you joy as well. Now, in addition to the $15 you have $50 extra dollars.
So, if you ever must give gifts, do it well. You don’t want to waste money.
This is a great example of where economic theory meets human psychology. Humans can't often predict the amount of utility a recipient will get from a gift, making the whole endeavor of gift giving inefficient. But another aspect of gift giving that I don't think you addressed enough is the utility that givers get from the act of getting someone a gift.
ReplyDeleteA great example of this (even though it's not the same kind of gift giving you talked about) is foreign aid: in foreign aid, rich countries give money to poorer countries with the intention that this aid is used to better the quality of life for people in that poorer country. Unfortunately, in most non-democratic countries, foreign aid doesn't make it to regular citizens, instead getting siphoned into the pockets of a few powerful government officials. And yet, rich countries continue to pay billions of dollars in foreign aid. The donors don't seem to care about the utility that the foreign citizens get from the aid (which is very little), because the donors get their own utility out of the transaction, and that's enough for them. This utility that donors get could be the belief that they are selflessly helping others, or in the case of giving a Christmas gift, the belief that you are showing your friend that you care.
Most people don't consider the utility that recipients will get out of a gift, which suggests that they get enough utility out of the transaction regardless of what the recipient gets.
I would like to contend the title of your article: rather than saying that "gift giving makes no economic sense", I would argue that it may have been better to say "gift giving makes no rational economic sense." A rational consumer purchases a product because the marginal utility that they will gain from it is greater than the cost of the product. In terms of "making economic sense," I would say that gift giving can be justified, because regardless of how much the recipient enjoys the gift, the sender might gain utility from giving it, and the receiver might gain utility just from knowing that someone thought about them (of course, depending on the thoughtfulness/quality of the gift.) However, from the standpoint of a rational consumer, who is looking just for marginal utility out of their product, I would agree with your point that gift giving is irrational.
ReplyDeleteI found it very interesting how you turned utility into a dollar amount. However, I am a little confused by what you mean when you said, "meaning you have $26 worth right now". In this example, the shirt would be worth $18 to the individual, so even though they save $8 by only paying $10, I don't see how $26 is of importance. Also, I agree that if you receive a gift, but you do not gain utility from it, then ultimately that money was wasted. However, the person may get enough utility simply by giving their gift, so to them the price may not matter. Overall, it is more economically rational to buy gifts for yourself, but I do think there is economic benefit for the person receiving the gift.
ReplyDeleteI found the way that you talked about this topic, very intriguing. I, like many other gift givers, have never thought about giving gifts, to this extent. However, in the first example where you speak of a ten dollar shirt, I find myself confused. If the shirt is ten dollars, but you are willing to pay eighteen dollars, wouldn't that mean you kept eight dollars, which would amount to eighteen total, as opposed to twenty six. On the contrary, I think that the example of being willing to pay fifty dollars to make a friend feel joyful was a great example. It made me think elasticity of the consumer and to what extent they would go to bring joy to another. In conclusion, aside from a bit of confusion, I think your article produced good ideas, and it can be seen that gift giving is not economically viable.
ReplyDeleteYou make a valid point that reinforces my belief that giving cash is the best gift of all. In this way, the recipient can decide for his/herself what item at what price would bring the recipient the most utility from the money that was gifted. Giving straight cash would also save time for both the giver and the recipient, as the giver wouldn't have to spend time finding a gift, and the recipient wouldn't have to spend time returning the (practically useless) gift to the store.
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