As we make our way through the holiday season, I want to ‘wrap’ up my posts for the year with a challenge to the conventional economic wisdom regarding gift giving. Around this time of year there is always one or two economist grinches out there who will smugly assert that the best (and presumably only) gift to give is cash. The logic goes, the best you can do in gift giving is purchase what the person would have bought for him or herself. Any other outcome, by definition, is less desirable. Ergo—play it safe and give the green.
What a bunch of Chicago School perfect market nonsense. As so often happens, such sharp outcomes are driven largely by assumptions behind the model, rather than the reality of the world we live in. Strip away the assumptions and suddenly the gift of cash doesn’t look so hot.
One basic reality is that the cost of buying an item goes beyond the actual money put forth. There are also what economists refer to as transaction costs. These are, for example, the time spent going to the store and the agony of picking out the right item in a world with too many choices. In a sense, a nice shirt bought for you by your significant other represents not just the cash spent, but the delivery service to get it to your house as well as the fashion input that helps you look good (on that count I for one need all the help I can get). From this perspective, we should all give gifts that we know the most about. So from me, you get gains from trade due to comparative advantage wrapped up in colorful paper and tied with a bow!
And its not just transaction costs, but also information. We don’t have complete knowledge of what all our consumption options are in the world. There is no better gift than one the person loves but didn’t know existed before receiving. Plus, the person buying the gift is likely spending time to make sure they are getting a good price, whereas the receiver does not have to worry about buyer’s remorse—when you realize right after buying something that you could have bought it cheaper somewhere else. Sometimes ignorance truly is bliss.
And lets not forget the surprise factor. There is something truly magical about opening a wrapped gift with little idea of what may be inside. Sometimes you will be disappointed, and sometime you will be blown away. We all love a roll of the dice—just ask Vegas.
Finally we also have to think about the idea of whether, excluding all of the above, you would truly be better off with cash. We always have to make tradeoffs—eat a cheap meal tonight to save for a jacket you want to buy. Use an old not-so-good camera because you need to save money to buy textbooks for the spring semester. The wonderful thing about receiving a frivolous Christmas gift that you would never buy for yourself (being a responsible person), is that you get to enjoy a frivolous, wasteful thing—guilt free.
So forget the green. Get out there and buy fun, different, entertaining, and silly things for your loved ones. Not only will they be better off, but you get the enjoyment that comes from buying a truly great gift for someone special. Its tough, but like many tough things, the payoff is worth it.
Just in case, though, keep the receipts. They may actually prefer cash to what you end up buying, but will still surely appreciate the effort. And in the end, that is what gift giving is about.
From Beacon Economics, have a wonderful holiday and a happy New Year!