The Perils of Gift Giving

The gifting season is upon us.

Like several things that require you to interact with others, gift giving is an apparently simple, benign activity that can quickly turn into a can of worms. The main problem is that the giver and the recipient have different perspectives and they often follow different incentives, which sometimes end up clashing.

As a giver, for example, you tend to think that more is better: two presents are a more generous offering than one. But there’s a twist. Imagine you’re buying a $300 sweater for a friend. At the counter, you add in a $25 gift card, so that he can get himself a necktie or a few socks. Which one is the best gift, just the sweater or the sweater and gift card combo? In this case, one is better than two, because as a recipient you tend to average out the value of all the gifts you receive from someone: the small gift is thus lowering the perceived value of the big gift, and you are better off with just the sweater.
You should refrain from the temptation of adding candy, gift cards or novelty items to your main present, whatever its value.

We have a peculiar way of evaluating items in a group. Take this example from Nobel laureate Daniel Kahneman. Suppose there are two sets of dinnerware that you can buy:

Set A has 24 pieces.
Set B has 40 pieces. It has all the pieces from Set A plus an additional 16 pieces, but 9 of these are broken. 

Which set is worth more? Obviously Set B, since it has everything from Set A plus an additional 7 intact pieces. And indeed, in the study this refers to, participants valued Set B more ($32) than Set A ($30), when presented with both options.
But in single evaluation, when sets were presented by themselves, results were reversed: Set A was valued far better ($33) than the larger Set B ($23). Why? Because the average value per dish in Set B is much lower due to the broken dishes, which nobody wants to pay for. Calculating the average makes the set with less pieces worth more, and taking out items from the larger set improves its value. Economic theory dictates the exact opposite: «adding a positively valued item to a set can only increase its value».
But not so in behavioral economics.

So yeah, less is more and all that. Surely, you might say, reducing the act of gift giving to just a matter of value is simplistic, not to mention heartless. But there’s a little economist inside our heads who strongly disagrees: that is why some people only give out kitschy, sarcastic gifts that have no intrinsic value beyond the chuckle they produce once the wrapping is torn off. It’s an efficient way of avoiding the problem of a sincere gift, and it works well with acquaintances or your sister, but it’s not an ideal option for everyone else in between.

In purely economical terms, the best gift is cash. I recommend that if you happen to have a friend who’s an economist, because then the gift will double its function and also get you a chuckle. A classic study called The Deadweight Loss of Christmas explains why: in a survey, it was found that «holiday gift-giving destroys between 10 percent and a third of the value of gifts». In other words, if you give your friend a $100 shirt, his perceived value of it, or how much he’d be willing to pay for it, will be 70 to 90 dollars. That’s the deadweight loss, which would be avoided to the benefit of everyone involved by just handing out cold, hard cash. The world would be a gloomy place, but it would save around $10 billion that go lost each year in the very transaction of gift giving.

When buying stuff, you also have to deal with another problem: choice. The average supermarket carries about 40,000 items, twice as many as just a decade ago. You can only marvel at the number of different types of jeans you can find in a Gap store now compared to just twenty years ago. More choice is good, right? Psychologist Barry Schwarz has a different opinion, as he explains in his book The Paradox of Choice.
In a memorable study conducted at a gourmet food store, jams were offered for tasting. On one day, 24 flavors were available; on another day, just 6. Surprisingly, 30 percent of buyers who tasted from the small selection made a purchase, compared to just 3 percent of those who tasted from the wider array. Apparently, more choice creates «decision paralysis» and a lower level of satisfaction, because it leaves room for greater regret: you have an increased chance of making the wrong decision as the number of options escalates.

(While not everyone agrees with this theory, companies seem to have picked up on it: when Procter & Gamble reduced the number of variations of its Head and Shoulders shampoo from 26 to 15, sales increased by 10 percent. And when the Golden Cat Corporation eliminated the 10 worst selling types of its kitty litters, sales rose by 12 percent and profits more than doubled due to reduced distribution costs).

If that wasn’t enough, be aware that simply buying groceries can mean relinquishing your most personal secrets. Large retail stores are ravenous for information about your shopping habits, and they can use the data they gather from fidelity programs to predict your future needs. Charles Duhigg narrates in his book The Power of Habit of an incident that happened at a Target store in Minnesota, when a man walked in protesting the fact that his daughter, still in high school, was getting coupons in the mail for baby cribs and clothes: «Are you encouraging teenage pregnancy?», he complained. When he received an apology call from customer service a few days later, he had to apologize himself:
«I had a talk with my daughter. It turns out there’s been some activities in my house I haven’t been completely aware of. She’s due in August». If you think that’s too much, let it be known that credit card companies can predict a divorce just by analyzing spending patterns.

But back to presents: there’s one final piece of advice that I can give you. If you want to extract the maximum amount of happiness from your purchases, wether it’s something you buy for yourself or someone else, buy experiences instead of things. The excitement of a brand new object soon fades, while a new experience (a weekend somewhere, a yoga lesson, a concert) gives you a memory than can be revisited and stays with you forever.

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