Sunday, December 20, 2009

Against Scroogenomics

Joel Waldfogel, Professor of Business and Public Policy at Wharton, Pennsylvania, makes a powerful case against buying Christmas presents: see his Scroogenomics – Why you should not buy presents for the holidays (Princeton University Press, 2009, review), and his earlier article "The Deadweight Loss of Christmas" (American Economic Review, December 1993, 83, 5, pp. 1328-1336).

Ebenezer Scrooge and Bob Cratchit

Waldfogel argues that “gifts may be mismatched with the recipients’ preferences”. We are worse at buying for other people than we are at buying for ourselves. As a result, a gift is likely to “leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss”. Waldfogel estimates, on the basis of a survey given to Yale undergraduates, gift-giving losses between 10 percent and a third of the value of gifts. The most efficient are gifts from friends and “significant others”; the most inefficient are those from members of the extended family, who therefore would be better advised to give cash. On average about 18 per cent of the value of gifts is estimated to be a deadweight loss. Waldfogel’s latest estimate of seasonal presents in the US is $85bn, i.e. which on his reckoning involves a net loss of over $15bn a year, which obviously could be better employed in alternative private or public pursuits.

Speaking as an economist, I am ready to acknowledge that economists are inclined to be spoilsports and miserable sods. Professor Waldfogel is no exception.

First, most gifts are either objects predictably coveted by the recipient or novelties not yet experienced by her but recognized as superior by the giver, and just as likely to surprise and please the recipient.

Second, gifts give rise to reciprocal exchange and a whole network of social relations (see Marcel Mauss, Essay sur le don, 1924). Reciprocity in gift-giving, including Christmas presents, instead of compounding inefficiency, has the added benefit of affirming and strengthening bonds of love and friendship. An exchange of gifts whose prices cannot be precisely guessed leaves an open-ended balance: it is as if both parties opened a credit account with one another, on which they could overdraw in the future.

Third, presents are statements about the consideration and the status enjoyed by the recipient, regardless of a mismatching of gift and preferences. Besides, even unwanted gifts can be, and mostly are, re-cycled: a gift multiplier is set in motion in which the disappointed recipient (who cannot be made worse off by the present) can realize the full value of the unwanted gift by passing it on, while the new recipient is made happier at no extra cost. The circulation of unwanted gifts is a kind of segmented barter system, where circulation stops if and when a sufficiently appreciative recipient is found.

The real pain of seasonal gift-giving is its concentration on one or two weeks in the year, inevitably leading to a frantic last-minute search for suitable objects, first in one’s mind and then around the shops. Although the first search could be eliminated by publicizing personal wish lists, the second by diluting purchases over time.

Everybody interested in receiving appropriate presents should keep a public wish-list – say, on one’s website – of coveted objects, roughly ranked according to their perceived ratio between satisfaction expected from those objects and their estimated price. Then a potential giver could go down the list until he finds an affordable single item – this would take care of indivisibilities, unless givers pooled their resources – and possibly go further down the list as far as he can afford. An object would be removed from the list as soon as someone made an irrevocable commitment to give it, so as to avoid duplication.

The problem with gifts, Waldfogel argues, is that the donor of an unwanted gift seldom gets a feedback from the recipient’s disappointment, and never learns; with a prior indication of individual preferences there would be no need for such a feedback. The incentive to keep a wish-list up-to-date is the resulting maximization of individual satisfaction from the total gifts received. Moreover, potential givers would be more generous than they would be otherwise, given the certainty of their gifts being well received.

Diluting purchases over time is perfectly possible, but hard for some people. A dear aunt of mine used to have a capacious and apparently inexhaustible “gift cupboard” always at hand, but I find it very hard to accumulate suitable gifts over time, since giving at once is an irresistible urge. One possible solution is to give presents throughout the year whenever an attractive and suitable object is found, instead of giving at Christmas, and to make oneself known for that particular habit.

Whatever you do, give widely and generously this Christmas, just as Ebenezer Scrooge did in the end. My token gift to you is a set of the collected posts from this Blog, “Transition – April-December 2009”, downloadable from my Website under Publications Miscellaneous.

A Very Happy Christmas to all my readers, and a Smooth Transition to a Super New Year.


Janet said...

Lists of desired objects work very well already for wedding presents. With Internet offering information and shopping facilities, it should work very well also for Xmas presents!

chilosi said...

"First, most gifts are either objects predictably coveted by the recipient or novelties not yet experienced by her but recognized as superior by the giver, and just as likely to surprise and please the recipient."

I would rather apply to the above the term "rarely" rather than "mostly". With Christmas, as with marriages or with birthdays a gift is a social obligation, and I must say, a bore. You have to scratch your head to find something suitable that (in the case of Christmas) is usually twice as much expensive than in the after Christmas sales. You waste money, you waste time, how unfortunate. And for the "list of desired objects" how plain and vulgar, if only for the fact that the (usually inflated) price is open for everybody to see. It would in the end be nicer and more efficient to make a gift of the corresponding cash. When on the receiving end, I am always very embarrassed because almost never the presents I receive (always from my close relatives, nobody else happily enough bothers) are of any use to me, and for obvious reasons I cannot throw them away. After all, if I had a need or a fancy for something I would have already acquired it (I have rather inexpensive tastes, by the way, and I don't like waste, even if the waste is of somebody else's money). As far as social relations are concerned, I don’t need to receive a gift to value proximity or friendship, and the obvious displeasure with the gifts I receive, which often I am hardly able to dissimulate, does not endear me to the givers. What a stupid waste! For impecunious or very small children, obviously things would be different. But impecunious children, and very small children, at least as far my relations are concerned, are rather a thing of the past.

chilosi said...

In order not to be me misunderstood I would like to add that my misgivings above are about gifts that are required by social obligation, not about completely spontaneous gifts that originate, irrespective of social obligations tied to circumstances or times of the year, in the opportunity to give "objects predictably coveted by the recipient or novelties not yet experienced by her but recognized as superior by the giver, and just as likely to surprise and please the recipient", a pleasurable opportunity both to the giver and to the receiver (of course if the expectations of the giver are fulfilled, what is not always the case).