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The economics of gift giving

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‘Tis the season for family, friends, food, and oh yeah, gifts. Deciding what holiday presents to buy and who to buy them for can be stressful. We’d all like to buy everyone their dream gift if we could. Joel Waldfogel, an economist at the University of Minnesota and author of the book “Scroogeonomics: Why You Shouldn’t Buy Presents for the Holidays,” says we need to re-think the gift-giving process.

“The problem with gift giving has nothing to do with the intentions, those are all good. But when we allocate resources through gift giving, we do it in a kind of perverse way. I’ll only spend $100 if I see something that’s worth at least $100 to me. Normally, $100 worth of spending produces $100 worth of satisfaction. With gift giving, I can go out and spend $100 on you, let’s say, and I don’t know what you want, my expenditure of $100 can produce $0 worth of satisfaction. So it’s just potentially a very, very bad way to allocate resources,” says Waldfogel.

Waldfogel says most people do a good job buying gifts for family and friends they are close to. But he says there’s an opportunity to make the process more”economically efficient.”

“In the U.S. we spend about $80 billion on holiday gifts and it would be nice to get $80 billion of satisfaction out of it,” he says.

But it can be difficult to measure that satisfaction. Everyone appreciates gifts, but they don’t always enjoy the item.

“In those situations where we know we have to give, but we also realize that we have no idea what to give, there are some alternatives to shooting in the dark and choosing an item,” says Waldfogel.  “A very popular alternative is gift cards. In the last 15 years, these have grown from a very small share of giving to now at least about one-third of holiday gift giving is in the form of gift cards. What’s nice about them is that they surrender the decision-making authority to the recipient so he or she ends up with something that they actually want — at least from the store where you got it.”

Waldfogel says while gift cards can seem less thoughtful than buying an actual item, they are a good option when the gift giver doesn’t have enough knowledge to buy something they know will truly satisfy the recipient — like in a Secret Santa exchange.

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