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Economic Analysis: The economists' guide to Christmas presents

'Recklessly inefficient': Cash gifts are better than goods, according to economists
'Recklessly inefficient': Cash gifts are better than goods, according to economists / Peter Byrne/PA
17 December 2015

was the night before Christmas, when all through the house, not a creature was stirring — except the economists busily stuffing cash into envelopes for their nearest and dearest, because that’s the most “efficient” gift.

Economics really comes into its own as the “dismal science” during the festive season, as its practitioners shake their heads in disapproval on the subject of present buying.

The profession’s most prominent “bah humbug” merchant is Joel Waldfogel, the father of “Scrooge-onomics” who’s been banging on about the “orgy of value destruction” in Christmas present buying for more than 20 years.

His theory of the “deadweight cost” of Christmas is that billions are wasted on unwanted gifts, because they’re valued less by the recipient than by the giver.

The heartwarming 1992 article says “that it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash”.

"Non-cash gifts from relatives (such as the vile jumper from Auntie Joan) are the least efficient and destroy around a third of the recipient’s value."

Waldfogel’s family Christmases must be a total blast.

Gifts from friends and “significant others” tend to be the most efficient, he reckons, albeit far from perfect.

Non-cash gifts from the rest of the family (such as the vile jumper from Auntie Joan) are the least efficient and destroy around a third of the recipient’s value.

But if you don’t succumb to the world of the purely rational economic beings who only exist in textbooks, and still want to buy a present instead of giving your loved one a few tenners, what then?

Gift vouchers may be the way to go, as they come across as more thoughtful than a cash gift and avoid the stigma of handing over notes, according to US economist Jennifer Offenberg.

Put a sock in it: the Grinches say presents other than cash cause value destruction (Picture: Rex) / Rex

That said, the risk of the “deadweight loss” still looms. That’s because gift cards are paid for by the giver up front, but around 10% of them are never redeemed, which is why shops are keen to promote them by the tills in the first place.

Rather depressingly, Offenberg recommends that to play it safe and cut the risk of lost value you should buy gift vouchers for general purpose stores (basically the vouchers as much like cash as possible), while avoiding gift cards to more specialised chains like jewellers.

She cheerily adds that “gift-givers planning on giving a gift card might want to bear in mind the possible benefit of a cash gift with a note to the recipient suggesting that the money could be spent at [insert name of store here] to add the thought that counts”.

Merry Christmas to you too, Jennifer.

If after all this, you’re still absolutely determined to be recklessly inefficient and buy an actual gift, the behavioural economists have some useful insights.

As Cass Sunstein, who co-authored behavioural bible Nudge with guru Richard Thaler, puts it: if people aren’t much good at making decisions for themselves, it’s hardly realistic to expect them to make sound decisions on behalf of other people.

So when braving the last-minute hordes this year, there are pitfalls to avoid.

One is optimism bias: buying the gift for the idealised rather than the actual recipient, so little Johnny gets Shakespeare’s complete works for Christmas instead of an Xbox.

Egocentrism can also be an issue, as we tend to have an exaggerated sense of how similar people are to us, which can influence our gift buying.

And don’t forget projection bias: when it’s cold we buy more jumpers and, according to Sunstein, the return rates on cold-weather gear bought in colder weather are “unusually high”.

There’s also the concept of “experience value”: presents like a balloon ride or a flying lesson tend to stay in the memory well after the socks and pants have been consigned to the dustbin.

With that in mind, good hunting.

And for a truly happy Christmas, forget the Grinches like Waldfogel and keep in mind the wise words of American novelist and friend of Mark Twain, Charles Dudley Warner: “The excellence of a gift lies in its appropriateness rather than in its value.”