The Reason for the Season: Economic Inefficiency?

I just read an excellent article on Slate that confirmed the intuitive sense I've long had about gift-giving. The article describes two of the primary reasons why giving gifts is economically ill-advised. The first is dead-weight loss, which is nicely summed up in the classic tale of the Gift of the Magi. The basic idea is that if a person really wants/needs an item, they will buy it.

Even if Della hadn't cut off her hair, economic theory would demand to know why, if Della really wanted the combs, she wouldn't already have bought them. Or why, if Jim really wanted to replace his worn leather watch strap, he wouldn't already have done so.

Based on this concept the ideal gift-giving situation is one in which the gift giver is able to anticipate a gift that the recipient wasn't aware they wanted. In order to do this, you must know the person well---often better than they know themselves. This is difficult to do for anyone outside of your own household.

You might argue, But they bought those gifts because they love each other! True, and I'll address that point below. But as a quick aside, a separate point not mentioned in the article is that you might buy an item for someone else for the simple reason that they can't afford it. However, giving this person the gift they really want but can't afford is no good if the gift-giving is expected to be reciprocated, as is the case during holidays. By receiving your gift, they have what they want, but they can't afford to give back in kind, which potentially fosters either guilt on one side or resentment on the other, or both.

This leads us to the second problematic aspect of giving gifts, resentment costs. From the Slate article:

Give your mailman a Hershey bar for Christmas and the worst he'll likely do is shrug. Give your wife a Hershey bar for Christmas and she may file for divorce.

By giving gifts, we signal that we have thought long and hard about the other person and know them as well as they know themselves. Succeed, and you have a happy loved one. Fail, and you not only waste money, but you signal that you don't think much about them ("It's...a sweater!").

I'm not so into all this signaling. I'm much more into directly communicating my thoughts. I wasn't always good at doing so, and I still have to work at it, but I try my best to tell people that they matter to me and that I love them and think of them often. To me, this is much more valuable than waiting for a set date (holiday) to signal those thoughts through inefficient, and often wasteful, gift-giving.

This is not to say that I don't give gifts to Erin. I just try to wait for the rare times when I can anticipate something she wants and surprise her with it. Not because Hallmark tells me to do so, but because right at that moment I want to do it for her. If it's at a random time, then there's no pressure for her to give one back. Giving a gift or otherwise expressing love outside of when society compels me is a much more sincere and meaningful gesture, in my humble opinion.

There are also my anti-consumerism sentiments. I've long viewed holidays as excuses to spend a bunch of money you wouldn't otherwise spend. I strive to be responsible with my family's finances. Arguably, I sometimes flirt with outright cheapness. But if Erin and I set a budget at the beginning of the year to spend a certain amount of money on necessities each month---and even some non-essential items---then we take a lot of pride in sticking with this plan. It would be irresponsible for me to, in the middle of July, go out and buy myself a big-screen television or a new Lexus, complete with the obligatory red bow on top, especially if I didn't discuss it with my wife or plan for it in our finances.


So why is it any better for me to make this purchase, or hope that Erin does so, just because its Jesus' birthday (or the winter solstice)? If it's irresponsible on July 14, then it's equally bad on December 25. But it's worse than this. If Erin buys me a red-bow-topped car for Xmas, then I damn well better buy an equally exceptional gift for her. The expectation of a gift in return potentially doubles the cost of Erin's gift. However, if I try to keep costs down, then I increase the chances of resentment (indeed, even for a nearly perfect person like Erin, resentment is a risk :)

Yes, we could budget for a blockbuster Xmas gift each year. But is that really gift-giving, or just good budget planning in anticipation of buying a big-ticket item? Plus, the risk of a bad gift and/or inequality in the gift exchange still loom large.


I'm a big fan gifts that only require your time and effort, rather than money. By removing the monetary aspect you bring fidelity to your signal: people see that you care because you put the actual effort into the gift, rather than just swiping your Visa card. How about the gift of togetherness in a quiet, relaxed, non-commercial environment? This is what I enjoy most about our annual trips to Houston for the Holidays. Lounging, yelling (Pousson-style), and eating.

Instead of making that big, day-long shopping trip, why not take the kids to the park and frickin' relax together for an hour? Here's my favorite quote from a recent opinion piece about saving Thanksgiving from Xmas:

[R]ethink gift-giving. It is a simple and lamentable fact that the percentage of the Christmas gifts you receive that are useless to you is pretty high. Yes, it’s the thought that counts. But  if it’s the thought that counts, then it is perfectly acceptable for people to exchange the kind of gift that cannot be purchased in a store, namely, the gift of time.

Astronomers: Give the gift of 3 straight days without checking your email. It's a much harder gift to obtain, and likely much more appreciated than a new Blu-ray player. (Oh, it hurts! I know!)

When it comes to actually making a purchase, I've always enjoyed giving gifts to kids. Young children are bad at anticipating their real desires. Plus, if they are not overly spoiled throughout the year, a child's holiday gift can be very inexpensive, resulting in a huge return on investment. One year our friend Quinn gave Owen the gift of a cardboard box fort. I am certain that Owen derived more enjoyment from that gift than he got out of the $100 bike we bought for his third birthday. It's not that he didn't (eventually) enjoy that bike. It's just that A) we would have eventually bought him a bike because, let's face it, a kid needs a bike, and B) that box fort was AWESOME.

I'm extremely fortunate to have married a woman who is into practical spousal gifts. For example, she got upset when she found out I was looking for a diamond ring for our engagement. She instead insisted on an engagement mountain bike, which we still have. This year she had the great gift idea of paying off part of eachother's credit cards. Now this is truly the gift that keeps on giving. Each month we'll have lower payments, and in the long run we'll pay much less. A related gift is a pledge to pay, say, $20/month above the minimum payment of your spouse's credit card. You might be shocked how much faster this pays down your balance. For example, if you have $4000 on a card with a 13% APR, paying the minimum ($83/month) will take 239 months to pay down your card and you'll pay $3855 in interest alone. Paying $20 above the minimum reduces this to 51 months and $1213 in interest.

Of course, all of this is probably way to pragmatic for most people, which is entirely understandable. Paying down credit cards isn't exactly romantic. If you still feel the need to buy gifts for others outside of your household due to social pressures, or because you are a damn good gift-giver, you can side-step the wasteful aspects by explicitly removing the expectation of reciprocation. Tell people not to give you a gift back. That is, unless you really expect a gift in return. Then again, if you expect something of equal value in return, why not just exchange a "Merry Christmas" and go buy what you each really want?

But, as the economist Slate author argues, if you still insist in going on that big shopping trip at the mall, you can take comfort in knowing that your economic inefficiency is at least stimulating the economy. And that, after all, is the true Reason for the Season!

Note: The author of this article is not a true economist nor a financial expert, and the advice given herein should be used for entertainment value only.