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Christmas Deadweight Lossism

January 5, 2016

People don’t value gifts as much as they do things they buy for themselves, with a couple of exceptions: goods the recipient didn’t know about, luxuries that they don’t allow themselves to buy because of self-imposed rules, and gifts they would have trouble financing themselves (many people chip in to buy something big, gifts to people poorer than you, or gifts to children). For the most part, from a strictly homo-economicus maximize-utility perspective, the recipient would be better off getting cash. But that is emphatically not the same as a gift having a deadweight loss.

When theory and practice disagree, it’s the theory that’s wrong. The actor is the gift giver, not the recipient. It’s not the opportunity cost of the gift to the recipient that matters, but the alternate uses of the giver’s money. When you buy someone a present you are revealing that their affection is worth to you than anything else you could buy for yourself. Outright bribery for affection is normally a faux-pas, but for a few times a year. People engage in rituals to strengthen social bonds. Your family is not governed by the same norms that more distant economic relationships are.

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within the different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e. of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once.” – Hayek, from The Fatal Conceit

Why would a giver give?
1. Signal how well you know someone by getting a gift they want.
2. Signal how well you listen to them by getting them what they ask for
3. Watch them say thank you, appreciation.
4. Every time they use the gift they think of you, so strengthening a personal connection
5. Signalling group loyalty and generosity by giving nice presents
6. Getting a gift in return
7. Give a gift to someone less materially well off than yourself
8. Children don’t generally buy things for themselves.

1-5 are all about using money to strengthen social ties. You can’t buy that for yourself, no matter how much you spend. 6 is prehaps the most “selfish” but doesn’t really make sense. Gift giving is very costly relative to buying yourself things. You wrap presents, wait for a particular day (birthday, Christmas, etc), try to be secretive. All of this suggests signalling is the key reason, not efficiency. 7 seems plausible to me, but most social groups are fairly equal, socioeconomically. The biggest use of 7 is probably to reduce jealousy of more successful members, so once again, you’re back to strengthening social ties. Children (8) is also mostly about social ties. Children are often more materialistic than adults, they don’t have the information or opportunities to buy things as much as adults, they aren’t as opposed to being paid for affection, and they just seem to get much more excited about presents than adults. So, it seems to me that gift giving rituals are all about signaling and strengthening social ties.

Is gift giving euvoluntary?
(1) Conventional ownership – Yes
(2) Conventional capacity to buy/sell – No
(3) Absence of regret – Yes
(4) No uncompensated externalities – Yes
(5) Neither party coerced by human agency – Yes
(6) Neither party coerced by circumstance; the disparity in BATNAs is not “too large” – Yes

So, generally speaking, gift giving is euvoluntary. You can’t buy and sell presents freely, but since the whole purpose is signaling about relationships, that’s not surprising and it would defeat the whole purpose. You can resell presents, or take them back to the store (many people include receipts so the recipient can do just that). For the rest of the criteria, the answers seem obvious, but if readers think I’m wrong about any one of them, feel free to comment.

Dreaming of Better Worlds
Technically, a deadweight loss occurs when there is something preventing trades from taking place at the free market equilibrium price. It has nothing to do with there being a higher possible utility that exists only in the imagination of some third party observer. There aren’t price floors or ceilings for gifts. There is such a thing as a gift tax, but it’s not really applicable for Christmas presents for most people.

But Christmas deadweight loss isn’t about any of that. It’s a new animal.

Suppose I valued a red shirt at $5 and a blue shirt at $6, and someone gives me a red shirt, which cost them the same either way. Is that (this new kind of special) deadweight loss?

Information is scarce and costly. In a world of perfect information, the giver would’ve gotten me a blue shirt, but that’s not really meaningful outside of an economic model. Literally every purchase you make, theoretically there could have been a better thing to buy if you had perfect information. Maybe you bought a Honda Civic and you should’ve gotten a Toyota Corolla or vice versa.

Regret really isn’t critical, because all that means is that you found out about a better option in the future. Suppose you have three options A, B, and C, but you don’t know about A, so you pick B. Later on you find out about A, which is better, so you regret not picking it. But since you didn’t know about it, it’s irrelevant for the economic model of decision making.

All human action faces the uncertainty of the future. You buy things because you think it might bring you utility (whatever that means). All purchases face information problems. That gift giving has more information problems than normal spending isn’t really that insightful. People already know that. That’s why it’s so hard, and that’s why it’s a good signal. That’s also one of the main reasons why people mostly buy things for themselves.

What are the actual insights?
Get people things you know they will like (what they ask for, what you have seen them buying for themselves on special occasions).

Don’t lecture people about how their choices are wrong because of some model you just made up. Instead, observe the real world and try to explain what you see.

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