Scroogenomics

Why you shouldn’t buy presents for the holidays.

Scroogenomics

For many people, the holiday season is the most wonderful time of the year. For University of Minnesota economist Joel Waldfogel, it’s the most wasteful. The problem is in the gift-giving, says Waldfogel, who highlights the fact that gifts frequently “leave recipients less than satisfied, creating what economists call a ‘deadweight loss,’” (defined as: a loss to one party that is not offset by a benefit to another). In other words, from the standpoint of economic theory, gifts are often poorly matched with the recipient’s preferences, so holiday gift-giving results in what Waldfogel calls “an orgy of value destruction.”

Before you label Waldfogel a “grumpy economist”—or decry him for waging war on Christmas, a charge he heard after he published his initial research (“The Deadweight Loss of Christmas”) in The American Economic Review in 1993—understand that he merely hopes to prompt people to reconsider their gift-giving habits, “and reclaim the true spirit of the holiday season.” So hold off on buying that present for your Secret Santa, and resist the temptation to bestow an ugly Christmas sweater on that special someone, at least long enough to read the following Failure Interview.

Let’s start with “The Deadweight Loss of Christmas.” Where did you get the idea to study this issue?
Shortly after I got my Ph.D. in economics, I started looking around at all kinds of behaviors, and one thing that jumped out at me was how holiday gift-giving is nothing like how economic theory imagines resource allocation to operate. Normally we buy things for ourselves when the value exceeds the price, and in so doing, this free choice by individuals maximizes society’s benefit. But gift-giving is entirely different because someone else is choosing for you.

A light bulb went on, and I thought, Wow, this could be a terrible way to allocate resources. I wondered how terrible it might be. And I had this impish impulse coming from the fact that holiday gift-giving is so well-intentioned. It’s always fun to discover some horrible result arising from good intentions.

What led you to write a full-length book on the subject—last year’s “Scroogenomics”?
Over the years I continued writing papers on gift-giving, and even though the research got a fair bit of exposure, I thought it would be nice to communicate my ideas in a form that would reach a wider audience.

Many people have the sense that holiday gift-giving is inefficient, so why does it persist?
There isn’t much in the way of feedback. When you give something that is truly awful—that is, from the standpoint of how satisfying the recipient finds it—it’s not okay for the recipient to tell you it’s awful. So there isn’t the sort of feedback that we normally rely on to promote efficiency. That’s a good thing. I think it would be bad to be rude.

But the fact that gift cards were almost non-existent 15 years ago and now account for about a third of holiday gift-giving means that in some sense it isn’t persistent.

How do you feel about gift cards?
Ambivalent. On the one hand they are fantastic because they avoid the stigma of giving cash. They give recipients the right to choose what they want. The problem is that a lot of the value never gets redeemed. So as a way of getting value or purchasing power from me to you, they are not that much better than a crappy gift.

In the book I introduce ideas about how retailers could issue gift cards where the unspent balance would go to charity after, say, 24 months. Meanwhile, I have become involved with an outfit called Tango Card—full disclosure, I am on their Board of Advisors—which has a gift card that allows the recipient to choose among gift cards and also give some of the balances to charity.

Do you think gift cards are popular because businesses push them, knowing that some of the value won’t get redeemed? Or is it more because consumers are concerned about value destruction?
I think it’s because consumers have been turning away from value destruction. The people who are most likely to give cash or gift cards are grandparents or aunts and uncles, who tend to be in less frequent contact with the recipient, and also the people whose gift choice is most likely to be awful. That shows it’s an impulse to avoid a waste of money that motivates the use of flexible gifts.

So you differentiate between giving to people you know well—like siblings, friends, and significant others—and people you don’t?
Absolutely. We do a pretty good job giving to our children and to people we see frequently and know well. But for the people we don’t know well, that’s where we do poorly. 

What about the pleasure that the gift giver gets from giving? How does that factor into your thinking?
That’s important because if there’s pleasure on the part of the giver—and for many givers there is—then not giving misses out on the pleasure of giving. The challenge becomes how to choose a gift that gives the giver pleasure but also gives the recipient as much satisfaction as possible.

When I was young and naïve I argued that the answer was cash. Cash is good in that it lets the recipient choose what he or she wants, but giving cash feels unimaginative and it’s tacky. The genius of gift cards is that they allow people to give something like cash without the tackiness.

What about the idea that gift givers sometimes do better than if the receiver is buying for himself, because individuals are prone to making bad choices?
I do believe in that, and in some ways that’s what motivates our idealized vision of gift-giving. If you know somebody well, it sometimes will be the case that you’ll know about something they would otherwise not have encountered. In the book I talk about some other examples too. If you think about gift-giving inside the family—like between spouses—it’s a little weird because we are spending each other’s money, so how can we do better than cash? One way is thinking about things they might not know about. Another is giving them permission to buy things they wouldn’t have bought for themselves.

When you were growing up, what was your experience like in terms of gift-giving?
I come from a family of relatively careful gift givers. Though even in that context I got some stinkers.

What’s the best gift you ever received?
I remember going to a bicycle shop with my father and seeing a bicycle I really wanted and I asked him if he’d buy it for me. He said no, but the next morning he bought it. It’s a wonderful memory, but he knew I really wanted it, so there wasn’t a lot of risk. Yet it was still a surprise, so that was neat.

Do you still get accused of hating Christmas?
I did get that when I first wrote about this subject. But now I hear the opposite. A lot of people—particularly people of faith—are really fed up with commercialism. I’m not quite on that wavelength—I’m just saying let’s not do wasteful spending. But they find my kind of evidence supportive of this let’s-stop-this-crazy-consumerism around the holidays.