Rapt in the true value of Christmas gifts
Chua Mui Hoong, Straits Times 28 Dec 07;
THE Christmas presents have been unwrapped and politely gushed over.
Now it's time for some hard-headed analysis: Was it worth all that bother, buying and wrapping the presents and then giving them to people who may not really value them?
Hold the criticism. This isn't as churlish as it may sound.
In fact, there's a respectable sub-sub-sub-specialty in behavioural economics that analyses the economics of gift-giving in general, and Christmas presents in particular.
Academic Joel Waldfogel published a paper in 1993 on the 'deadweight loss' in Christmas gifts. In economic parlance, deadweight loss refers to the waste incurred in a transaction.
In the context of Christmas presents, it refers to the fact that you pay S$20 to buy a present that the giver probably doesn't really want, and which he would have paid just S$16 for. The S$4 difference is the deadweight loss, or wastage, involved in the gift exchange.
Mr Waldfogel conducted an unrepresentative informal survey of his students and collected data on 278 gifts. He found that most recipients valued their gifts at less than the market price, about 87 per cent.
From this, he attempted a tentative analysis suggesting the deadweight loss of Christmas gifts was a whopping US$4 billion (S$5.8 billion) to US$13 billion worth in the United States.
If one million gifts exchange hands in Singapore over Christmas, and each gift has a deadweight loss of S$4, that's S$4 million down the drain here as well.
And if that's the case, are we better off not giving Christmas presents?
Hold on, say other economists. There are flaws in Mr Waldfogel's analysis. Apart from his survey data not being representative, his analysis ignores the intangible sentimental value attached to gifts.
In a 1996 rebuttal of Mr Waldfogel's article, academics Sara Solnick and David Hemenway argued that 'a large literature, which Waldfogel did not discuss, indicates that a gift received is often far more valuable to the recipient than its market price'.
'For example, a gift may be something the recipient greatly values and had not known existed,' they said.
'Also, many items give recipients higher utility if they were purchased by someone else; due to self-management or other problems, an individual would not buy the item for herself but would gladly receive it as a gift.'
The writers added: 'Why did people value their gifts? Half of all respondents said the gift showed a lot of thought, half said the gift was something 'you wanted but felt you shouldn't spend money on for yourself', 22 per cent said the gift was something they needed but never remembered to get and 20 per cent said they would not have wanted to shop for the gift themselves.'
Many of us can vouch for the truth of those statements in our own lives.
I love receiving pretty, frivolous gifts - stuff I would not have bought for myself.
My favourite Christmas gift this year is a pair of lacey bra straps - yes, bra straps - adorned with pearls. It's something I would not have bought for myself, but when I opened the present after a lucky dip at a Christmas party, I was thrilled and knew it was what I had always secretly wanted. Well, sort of.
In my office, one colleague got a red G-string for her Christmas gift - another item she probably wouldn't have thought of getting for herself.
Then there are gifts which are really priceless because of the effort and thought that went into them: Hand-made jewellery, for example, or home-made cookies.
Can one place a value on such sentiments, you ask. Well, economists try.
One good old-fashioned way to do this is to ask recipients how much they would accept to give up their gifts. Often, the price will be a multiple of the market price of the item.
Economists have found from repeated experiments that people want more money to give up something than they would pay to get the same item.
For example, I may be prepared to pay just S$4 for those bra straps. But once they are given to me, I won't give them up for less than, say, S$10. This is called the 'endowment effect' and refers to the way we tend to place a higher value on things we already have. Think of how much you love your comfy pair of jeans.
When asked how much they thought a gift cost, and how much they would accept to give it up, Ms Solnick and Mr Hemenway found that often, recipients wanted twice as much to give up a gift.
In other words, the pleasure they get out of the gift has a monetary value equal to twice the market price.
From this, they concluded that 'most gifts created positive value'.
But wait, sceptics will say. What about the cost of the giver's time in selecting the presents and wrapping them? Factor in the cost of all this time and energy, and you may yet discover that gift-giving still represents a deadweight loss.
Rational-thinking people trained in economic theory know the best gift is cash. According to economic theory, cash gives you the freedom to decide what you want. It's a pure currency of exchange, devoid of sentiment, stripping giving of the hazards of second-guessing. It's the most efficient gift, eliminating deadweight loss.
But in polite society in the West, it's not the done thing to hand over wads of cash, unless it's from adult relations to minors, or from children to their parents.
In Chinese custom, however, there's an established tradition of cash-giving. Stuff those notes into little red envelopes and they become a perfectly acceptable gift for birthdays, weddings, special occasions.
Maybe the hongbao is the perfect solution to the purported deadweight loss of Christmas gift exchange. Trust the ancient Chinese to come up with a practical solution to an economic problem.
Happy New Year.
