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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The Paradox of Pleasure

Which would make you a happier person, winning the lottery or being in a car crash that leaves you paraplegic?

The answer to this apparently illogical question is, well, neither. Studies show that people who go through these radically different life experiences tend to revert, over time, to their previous level of satisfaction. Winning the lottery will send you to cloud nine for a while, but in a couple of months you’ll be back to where you started, no matter what you do with the money. Even more interestingly, ending up in a wheelchair will destroy you morale in the short run, but over the same amount of time you will again fall back to roughly the same happiness level as before the accident (psychologists call this your set point).

This rather disconcerting trait of human nature is called Hedonic Adaptation, and it was first studied in the 1970s, analyzing precisely the effects of lottery wins and debilitating accidents. Humans have an amazing ability to adjust to the hardships of life: that’s how people carry on after devastating losses and terrible misfortunes. On a more philosophical level, this also means that single life events, no matter how bad or good, do not necessarily alter our existence and might lead to very unexpected consequences. Winston Churchill, writing in his biography, remarked on this: «One must never forget when misfortunes come that it is quite possible they are saving one from something much worse; or that when you make some great mistake, it may very easily serve you better than the best-advised decision. Life is a whole, and luck is a whole, and no part of them can be separated from the rest».

This explains why people who go through terrible illnesses or other life-threatening events often sport a renewed outlook on life (think of how many times Michael J. Fox remarked that his life has been so much better since he was diagnosed with Parkinson’s disease), but it also carries a few unwanted side-effects. It makes it really hard to find happiness, for instance: just like you get used to the bad stuff, you make quick work of the good things as well. This is the Hedonic Treadmill, a perilous exercise that takes the fitness away from your mood. Think of the last time you bought a brand new car: how long did it take before the excitement of driving it wore off? Don Draper put it best in an episode of Mad Men: «What is happiness? It’s just a moment before you need more happiness».

We’re not very good at understanding how we derive pleasure from things. For example, when you’re doing something you hate, like filling out tax forms, you’re always happy to take a break. But when you’re having a good time, you don’t want to interrupt it: nobody wants to get out of the hot tub to pick up the phone. But it turns out we’re dead wrong: separating yourself from a dreaded task makes coming back to it a lot harder, and gets you through the painful process of starting it again. But getting back to something good reignites the pleasure, leaving you with a greater overall satisfaction that cancels out the annoyance of the interruption.

It gets worse. You might think that when evaluating an experience, like a vacation, you rationally weigh all factors and take everything into account. In fact, we tend to judge experiences mostly on how they peaked and ended. This is called, not surprisingly, the peak-end rule and it’s vastly counterintuitive. To imagine this, think of taking a vacation to Hawaii for a week, in two different scenarios. In the first one, you nearly miss your flight because of traffic and, when you get to the islands, it rains for three straight days. But then a gorgeous sunshine comes out, you enjoy the remaining four days, and on the flight back you get bumped to first class for free, arriving home nice and rested. In the second scenario, you get upgraded to first class on the way to Honolulu and enjoy four days of fantastic weather, but then the rain starts. As you grudgingly step off the plane on the way back after having spent the last three days indoors, your find out that your luggage has been lost and you spend an hour filling out forms at the airline desk. Which of the two experiences do you think would leave you more satisfied?

Great psychologist and Nobel laureate Daniel Kahneman coined the idea and conducted a famous study about this in the mid 1990s, focusing on the rather displeasing procedure of colonoscopy, in which a probe is inserted through the anus to inspect the bowels for tumors; the study investigated ways to increase the likelihood that a patient would accept a follow-up procedure in the future. Remembering the peak-end rule and knowing that the discomfort is felt mostly when the instrument is moving, Kahneman suggested that doctors leave it in for a few more minutes at the end, motionless, instead of immediately removing it. Patients treated this way rated the procedure as less painful, even though they had the instrument inside them for longer.

Fortunately, there are ways to fight back. How can you escape the hedonic treadmill, for instance? By buying experiences rather than objects. Research shows that spending money on transient rather than constant experiences will leave you with a much greater level of satisfaction. The memory of something you’ve done or learned can be revisited and stays with you forever, whereas the appeal of a brand new purchase soon fades away. So if you were undecided between that concert ticket and a new pair of shoes, you know what to do now. Happy memories.