From a standard economic perspective, gifts are a waste of money. Imagine that you invite me over for dinner one day and I decide to spend $50 on a bottle of wine. There are a bunch of problems: To start, I am not sure what wine you would like the most. And besides, maybe you’d prefer something else, like a book, a DVD, or a blender. This means that the bottle of wine that cost me $50 might be worth, at most, $25 to you.
If gift-giving were rational I would come to dinner and tell you, “Tom, thanks for inviting me for dinner. I was going to spend $50 on a bottle of wine, but realizing that this might provide you with only $25 of benefits, here is the cash instead and you can decide how best to spend it.”
(Or even better, maybe I would split the cost and offer Tom $37.50, making both of us better off.)
But, despite the realization that gifts are economically inefficient, I don’t suspect that many people will follow this advice. Why? Because even though a cash gift is more economically efficient, it will in no way endear you to your host.
For example, if the day after the dinner party you find yourself in a bind and need some help moving a sofa, the odds are that a host that you gave a gift to will step in to help. But what about the host that you gave the efficient cash gift to? Wouldn’t his logical response to your request for help be, “How much are you offering me for my time?”
The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. They are in fact efficient because they help us create the social fabric we so depend on.
It turns out that sometimes a waste of money is worth a lot.