Scrooge alert: Your holiday spending may result in an economic loss

December 23, 2013 at 12:00 AM EDT
When purchasing holiday gifts for your friends and family, is it really the thought that counts? Some economists argue that spending money on presents that don't produce the same amount of satisfaction from the receiver is a dead weight loss. Paul Solman explores this grinchy economic perspective on the holiday shopping season.
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GWEN IFILL: After tonight, there is only one shopping day left until Christmas.

And now Paul Solman tells us maybe gift-giving is not all it’s cracked up to be. Paul’s alternate perhaps Grinchy view is part of his continuing coverage Making Sense of financial news.

MAN (singing): It’s beginning to look a lot like Christmas everywhere you go.

PAUL SOLMAN: The Roseland mall outside Minneapolis, setting for our annual holiday shopping story. But this year, it’s not about consumer confidence or retail profits or the old reliable crass commercialization of Christmas.

This year, we bring you the dismal science of economics at its Grinchiest.

JOEL WALDFOGEL, University of Minnesota: We’re spending $70 billion a year in the U.S., and probably twice that much around the world.

PAUL SOLMAN: Yet much of that spending, says University of Minnesota economist Joel Waldfogel, is pure waste.

JOEL WALDFOGEL: Are we in the U.S. getting $70 billion worth of satisfaction out of the items that we’re choosing for others? My answer is no.

PAUL SOLMAN: Waldfogel is the author of “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.” The reason, he says, is because of a decidedly unfestive economic principle which he named in a now famous academic paper 21 years ago.

What is the dead weight loss of Christmas?

JOEL WALDFOGEL: Well, the dead weight loss of Christmas is just the waste that arises from people making choices for other people.

Normally, I will only buy myself something that costs $50 if it’s worth at least $50 to me. When I go out and spend $50 on you, though, since I don’t know you what like and what you need, I could spend $50 on you and buy something that would be worth nothing to you.

PAUL SOLMAN: Now, a less-than-perfect gift isn’t a total loss. The recipient’s satisfaction equals some fraction of what you spent, and if you bought it at discount, maybe more than awe spent.

But, seriously, who among us would choose the mall’s twerking sweatpants, over $30 in cash, the genuine badger head gear made of a genuine badger head, instead of the $150 it costs, or even some of these T-shirts over a crisp 20-dollar bill?

“Mac Miller Incredibly Dope Since ’92,” do you know what that means?

(LAUGHTER)

JOEL WALDFOGEL: I don’t. I guess I’m not incredibly dope.

PAUL SOLMAN: Nor, we should be clear, is Waldfogel a dope who opposes all gift-giving. He actually endorses gifts, so long as you think you really know the recipient’s tastes, or she tells you, as his own wife does.

JOEL WALDFOGEL: Sometimes, she drops hints. Same with my children. But with people who are more distant from me, I feel very uncomfortable choosing items for them.

PAUL SOLMAN: But wait. If even you give gifts, then doesn’t that sort of undermine your entire theory?

JOEL WALDFOGEL: Well, not necessarily. First of all, I’m not against spending. I’m just against spending that doesn’t produce the requisite amount of satisfaction.

PAUL SOLMAN: To psychologist Dan ads, however, economic fundamentalists like Waldfogel miss the whole point of gift-giving.

DAN ARIELY, psychologist: When we give gifts, the real issue is not an economic transfer. The real issue is friendship. If I want to you care about me, how much am I willing to sacrifice in terms of economic efficiency? And the truth is, I’m willing to sacrifice a lot.

PAUL SOLMAN: But economics is premised on the rational maximization of satisfaction. Isn’t it irrational to buy a badger hat for $150, when even University of Wisconsin zealots or “Frances” the kid’s book badger fan would prefer the actual money?

DAN ARIELY: So if you had a system in which everybody was perfectly rational, everybody was Mr. Spock from “Star Trek,” giving money would have been a better solution.

But if you are an economist in the world of normal human beings, and you go to dinner parties and you offered people cash, you’re going to be treated very badly.

PAUL SOLMAN: Why?

DAN ARIELY: Because it would basically imply prostitution. When you give a gift to somebody, you basically are hiding the economic nature of the transaction. You pay the store, the store gives you something, you give them this something. You lose money in the exchange, but it doesn’t look as direct money for favors or for loyalty or for something like that.

PAUL SOLMAN: But it’s maintaining a myth.

DAN ARIELY: Absolutely. It is a myth, because the reality is that a lot of relationships, even marriage, has a lot of financial underpinnings to it. But we do a lot of work to try and hide it because, if we didn’t hide it, love without not be able to flourish.

PAUL SOLMAN: Avner Ben-Ner is a colleague of Joel Waldfogel’s, but as a behavioral economist, he sides with Ariely.

AVNER BEN-NER, University of Minnesota: Not only we don’t know what others like and dislike. We don’t know our own likes and dislikes.

(LAUGHTER)

AVNER BEN-NER: I don’t know how — about you, but my closets, my basement, my attic are full of things that I bought with good money, thoughtfully, I thought, and I discovered that I don’t like this.

(LAUGHTER)

PAUL SOLMAN: So you are suggesting there is a considerable dead weight loss potential every time we go shopping even for ourselves?

AVNER BEN-NER: Yes. But, with gift-giving, sometimes, you give a gift that costs you $10, but the recipient may value it at $12 because maybe the thing itself is worth $8 to them, but they get $4 of warm sentiment.

PAUL SOLMAN: But wait a second, behavioralists. The world seems to be coming around to Waldfogel’s position in the form of gift cards.

JOEL WALDFOGEL: As this point, gift cards accounts for a third of holiday gift-giving, so they are immensely popular, and they are, from the standpoint of economic theory, like giving cash.

PAUL SOLMAN: Even though 10 percent of gift cards don’t even get redeemed.

What’s more, over half of all consumers in a recent survey said they prefer general purpose gift cards issued by credit card companies to cards that are store-specific. But that’s just a short step from cash. So why not give the even more convenient green stuff itself, we asked the anti-Santa, Joel Waldfogel?

JOEL WALDFOGEL: It’s really socially awkward to give cash. Older people can give it to younger people, grandparents to their grandchildren and so forth. It’s a very awkward gift, say, between significant others. But gift cards avoid all ickiness.

PAUL SOLMAN: Right, says Dan Ariely. It’s just because money is icky, impersonal, objectifying that he disapproves of giving gift cards or even wanting them.

DAN ARIELY: When people ask for a gift certificate, they basically are undermining the friendship. Whatever gift they’re going to get in this way is not going to help their friendship.

PAUL SOLMAN: So what do you give people?

DAN ARIELY: I try to give people gifts that they want, but feel guilty about buying for themselves. I also want a gift to remind a person of me. So if I buy them something, I want them to use it from time to time, and to keep on thinking about me.

PAUL SOLMAN: Fancy pens, for example, or — and we love this one.

DAN ARIELY: Headphones, good, expensive things that people keep on using, and feel guilty about buying for themselves. And, by the way, I am feeling really guilty about buying a Porsche, if you are interested.

PAUL SOLMAN: In other words, leaving the Porsche for another story, Ariely’s key to gift-giving is just what your parents told you. It’s the thought and the thinking that counts.

Isn’t that right, we asked dead weight Waldfogel?

Sure, he said, but:

JOEL WALDFOGEL: People are spending a lot of money buying things that are not valuable as items to their recipients. What I would love to see, I would love to see gift cards that default to charity after 24 months. Those would preserve spending, but, more importantly, from my standpoint, they would insure that the spending produces some important kind of satisfaction for some ultimate recipient.

PAUL SOLMAN: And with, that Joel Waldfogel left to us buy — and we’re not making this up — the oven mitts his wife had hinted she wanted for Christmas.

GWEN IFILL: She didn’t want those oven mitts.