Is It Irrational To Give Gifts?
Many of my economist friends have a problem with gift-giving. They view the holidays not as an occasion for joy but as a festival of irrationality, an orgy of wealth-destruction.
Rational economists fixate on a situation in which, say, your Aunt Bertha spends $50 on a shirt for you, and you end up wearing it just once (when she visits). Her hard-earned cash has evaporated, and you don’t even like the present! One much-cited study estimated that as much as a third of the money spent on Christmas is wasted, because recipients assign a value lower than the retail price to the gifts they receive. Rational economists thus make a simple suggestion: Give cash or give nothing.
But behavioral economics, which draws on psychology as well as on economic theory, is much more appreciative of gift giving. Behavioral economics better understands why people (rightly, in my view) don’t want to give up the mystery, excitement and joy of gift giving. In this view, gifts aren’t irrational. It’s just that rational economists have failed to account for their genuine social utility. So let’s examine the rational and irrational reasons to give gifts.
Some gifts, of course, are basically straightforward economic exchanges. This is the case when we buy a nephew a package of socks because his mother says he needs them. It is the least exciting kind of gift but also the one that any economist can understand.
A second important kind of gift is one that tries to create or strengthen a social connection. The classic example is when somebody invites us for dinner and we bring something for the host. It’s not about economic efficiency. It’s a way to express our gratitude and to create a social bond with the host.
Another category of gift, which I like a lot, is what I call “paternalistic” gifts—things you think somebody else should have. I like a certain Green Day album or Julian Barnes novel or the book “Predictably Irrational,” and I think that you should like it, too. Or I think that singing lessons or yoga classes will expand your horizons—and so I buy them for you.
A paternalistic gift ignores the preferences of the person getting the gift, which tends to drive economists crazy, but it may actually change those preferences for the better. Of course, you might mess up by giving a paternalistic gift that someone hates, but that doesn’t mean you shouldn’t try.
A holiday gift can straddle these categories. Instead of picking a book from your sister’s Amazon wish list, or giving her what you think she should read, go to a bookstore and try to think like her. It’s a serious social investment.
The great challenge lies in making the leap into someone else’s mind. Psychological research affirms that we are all partial prisoners of our own preferences and have a hard time seeing the world from a different perspective. But whether or not your sister likes the book, it may give her joy to think about you thinking of her.
My final category of gift is one that somebody really wants but would feel guilty buying for themselves. This category shouldn’t exist, according to standard economic theory: If you really liked it and could afford it, you’d buy it.
For me, fancy pens meet this description. I don’t use pens that much, but I’d be pleased to get a really nifty one (a Porsche 911 would be OK, too). When my students defend their dissertations, I ask everyone on the Ph.D. committee to sign the required forms with an expensive pen, and then I give the pen to the student. It’s a prototypical good gift, because it’s something that they would probably feel guilty about buying for themselves, plus it has positive associations as a memento of the day.
Behavioral economics has one more lesson for gift givers: If your goal is to maximize a social connection, don’t give a perishable gift like flowers or chocolates. True, people enjoy them, and you don’t want to impose by giving something more permanent. But what are you trying to maximize? Is your goal to avoid imposing on them or for them to remember you?
For a durable impression, better to give a vase or a painting. Even if your friends don’t like it that much, they’ll think about you more often (though maybe not in the most positive terms).
Better yet, give a gift that gets used intermittently. A painting often just fades into the attentional background. An electric mixer, when used, gets noticed.
I like to buy people high-end headphones. They get used intermittently, so I can imagine that every time you put them on, you will think of me. Also, they’re a luxury—the kind of thing that people have a hard time buying for themselves. Best of all perhaps, they’re intimate: When I give someone headphones, I can think of myself whispering in their ears.
And maybe, when they use the headphones, they’ll remember you whispering to them or even kissing their ears. Has anyone ever thought of a kiss after you hand them cash?
Happy holidays — Dan
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This post first appeared on WSJ.com

My latest book, The Upside of Irrationality, explores some positive and some negative ways that irrationality plays out in our lives.

Hey Dan,
Do you know any papers off hand about paternalistic gifts? I would love to see the existing literature on this.
Can you please define rational so that we can have fruitful comments about your posts on irrationality?
What I suspect is really the issue when economists discuss gift-giving is not whether actors are rational, but rather whether the value of the gift is objective or not.
All the examples you provide simply highlight the fact that value is subjective.
While that is an important point, which I’d hope all economists would have internalized by now, why go in such a convoluted way of saying it? Simply title your post “The subjective value of gifts”.
Julian – although Dan acknowledges the subjectivity of preferences I don’t think his examples rely just on that.
The essence of economic rationality is to suppose that people know their own preferences, which are stable across different contexts, and that the choices they make over scarce goods are ones that accurately and optimally reflect those preferences. The examples in the post – things that people want but don’t buy themselves out of guilt, or things that you think people _should_ want and buy for them to try to change their preferences – are good examples of valid challenges to that view of rationality.
There are lots of good articles about defining economic rationality (and about whether we should expect or want people to behave according to its precepts) – search for “definition of rationality” and you’ll soon find the standard usage in economics and psychology, which is what Dan is normally referring to. There are a few particularly good articles – look out for one by Tyler Cowen which I very much like.
Leigh,
That is a nice theory, but why on earth would economists make such a postulate about human actors?
The problem with this idea of consistency is that it is not compatible with changing circumstances and generally situation where people change their minds and preferences. Also, if there is inconsistency, the observer or economist too often seems happy to break the tie and decide which of the two ‘inconsistent’ positions reflects your ‘real’ preference.
Sometimes I want water and sometimes not. Sometimes I feel I should do more of a certain activity, and at other times I chose not to perform that activity. Sometimes I change my mind permanently, and sometimes temporarily.
Finally, regarding a commonly accepted definition of rationality, I suggest you follow the steps you recommended. You will not find such a useful definition, which is exactly why I asked. The only solid definition I found so far is that of Mises, and that one excludes the notion of irrationality by its tautological nature. Regardless, I’d expect an expert such as Ariely to easily answer such a simple question of defining his topic…
Nice coverage on the subject. I have only 2 comments: 1) Heartfelt and well-intentioned gift giving is always good. 2) Just as important is remembering to accept gifts with grace and enthusiasm!
I like the way you think Dan! Handmade gifts have long been an important tradition which best express the intentions that you describe here.
An interesting view. I must say that I tend to side with classical economists on this one, but I do like the last category. In my case, I have to say that I still side with standard economics. If I can justify it, I will buy it, if I can’t justify it I wouldn’t ask for it as a present. Furthermore, I would probably think that it’s been a waste of money for the gift giver.
Reblogged this on sophiescott's Blog and commented:
I’ve read this post and I’m looking at the Christmas presents I’ve bought, trying to categorise them.
I think I tend towards wanting economic gifts because I don’t want to think that somebody has wasted money on something which has languished in a drawer, or been given to charity, so I have a list of ‘always welcome’ gifts for myself (perfume, facecream, Yves St Laurent mascara).
My nephews are always asked what computer game they want rather than giving them another pair of pyjamas and socks. I have strayed into vouchers for Top Man. because they’re getting to that age.
We have been married for 49 years now, we still remember the person who gave us a simple plastic tray. We hardly remember those who gave us money gifts.
Dan,
As always, some of the most insightful lessons for life, I learn through your work. Those are great gift inspirations that I will take to heart when trying to find something for people who really do have everything they need. Love the pen idea for grad students.
Methinks some economists spend a little too much time in their heads and not enough time in their hearts.
Take a load off and watch “It’s a Wonderful Life” again and consider yourself blessed you can afford to buy gifts.
If you have time find the correlation between the price of a gift and how much it can have been previously used. I fail to understand why many insist a gift must be new for holidays but a gift out of randomness is acceptable even if previously owned.
I believe that at a certain cost (a car for example) will never be judged inappropriate regardless of previous ownership unless the people receiving it are above the financial bracket that would normally drive such a car.
I prefer to buy used items when I am able to use that money to get the person additional things or to improve the item itself. Obviously there is being cheap and I wouldn’t buy obviously used pants for someone just to get them a used shirt also.
Most people I ask about this feel rather crummy that they appear materialistic when I mention the car scenario but this is not my goal. How could i develop an effective study to test that Christmas is heavily influenced by the market norms you spoke of? I keep hearing that it is the thought that counts but I disagree to a certain extent.
Advice and/or comments from anyone is appreciated.
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I’ll be honest my German linguistic skills are not all that great but are you trying to tell me that this author wrote about the subject in his book or are you comparing his concept to my own? Or perhaps this is a type of insider joke a a jab at capitalism, Either way I require more information or a translated transcript of the thesis you are referring to if I am to truly understand what you imply.
“Give a gift to the King”!
Latin-regale(m),agg. di rex
Have a lot of joyful gifts!
I agree that it is perfectly rational to give somebody a gift for the holidays, because it would take all of the fun out of them, should you only recieve cash.
Cheers,
Andrew
Hey Dan,
Great Post. You missed out on another aspect of gifting. The gifts you give in lieu of the gifts you received. Happens often between friends, family etc. e.g. a friend went to India and brought a handmade carpet so the next time i travel to a destination, it becomes an obligation/love to reciprocate/genuinity of remembering a friend and gifting but i do get a gift back..
We got so sick of the whole thing that now the entire extended family (kids still get presents), give to charity. I still shop- for under the radar non-profits where I know my donation goes a long way. Do you have a name for that kind of giving?
Well said John – that’s exactly what we try and do. It feels so much more relaxed and is more satisfying at the same time. Instead of big gift/token charity donation, we’re going the other way around this year. A small value gift requires creativity and shows that you still gave a lot of thought to the other person, while the main part of your budget goes to a place where it is more needed.
Leigh- This is a good response to Julian’s post. the idea of economic rationality is that there is a lot of conflicting research on whether it is even a valid concept.
People do not make choices because of a set of preferences. From a more behavioral point of view, they make choices because of the contingent reinforcement or punishment of those behaviors (in this case gift giving).
A good example is people not purchasing certain items for themselves because they feel guilty doing so. We typically feel guilty for a variety of reasons, like potential being judged socially for spending money poorly. Also, when we buy such items, we know it may not be practical. It both senses, when we buy these items (behavior), we are punished (consequence), and therefore do it less.
This isn’t irrational, it is simply human behavior responding to reinforcement and punishment. It also illustrates that it can be difficult to really use central preferences for one individual across all decision making.
I wish you keep out the word ‘economists’ from the phrase “economist friends” for there are far large number economists, who are not your friends, and are okay to give gifts or enjoy holidays.
>If your goal is to maximize a social connection, don’t give a perishable gift like flowers or chocolates. … Is your goal to avoid imposing on them or for them to remember you?
A contrarian position: the best gift for a wedding is something they won’t have to fight over in the divorce, best if used up in the first year of the marriage. You don’t want to get remembered as the person who gave that hideous whatsit that even the charity wouldn’t take…
Gifts of money are not really gifts, they are just a lazy way out of having to put some effort into giving a gift with thought. Money gifts are no better than charity dressed up for Christmas. If we gave money outside birthdays or Christmas many people would be suspicious or offended.
I like to receive a gift that has had some thought put into it, the monetary value is unimportant.
Many people buy expensive gifts to show off their status.
And lastly many people give gifts with strings attached to them, the worst form of giving of all.
Gift giving is not irrational for any person with a heart. Furthermore, even material boys and girls do this for expected benefits. But truly, there is such a thing as practicality. I only give gifts that are useful and will not be one of those displays in an ever-crowded cabinet or desk.
One of the most eye-opening guides on social competence: http://goo.gl/obiC
The book is a bit one sided and plain silly in places but it is refreshing to see some sort of response to the feminist argument.
The author refers to the Game of Social Interaction. Well, that’s all it is, so play it and stop whingeing!
Of course there is a lot of unfairness but that unfairness is on both sides so in one way the author is no better than the feminists in matters of balance.
I have to disagree with the people claiming that cash isn’t a real gift, or that it is somehow less special, at least in the general case. I almost universally prefer cash to purchased products or services, except in the cases where it would be difficult for me to obtain the gift myself (including cases where the gift leads to social bonding) or where the gift has some special sentiment attached to it. Furthermore, I generally do think of the people who gave me the money when I spend it, or when I use products I bought with that money.
Of course, other people have different value systems. Some people feel shame in accepting money; some people think money is a thoughtless gift; some people prefer more surprise. I tend to think of money as a gift of free time–my time being one of the most valuable things to me–which recognizes my preference for efficiency, avoids the possibility of an under-used gift, and is (nearly) maximally considerate (since it grants me exactly what I want, except when I feel guilty about buying something, which I rarely do).
Paternalistic gifts are interesting if the giver has an interest in modifying the receiver’s value system beyond the potential for making the receiver happy as a result of the modification because the giver has to factor the amount they care about the value system change into their decision about whether to give the gift. In some cases, it might make sense to give a gift even with a fairly low expectation that the receiver will like it, on the chance that they will, since in many cases the downside of a bad gift is just the wasted time/money/effort in giving it. Of course, there can be some downsides for the receivers of bad gifts: added clutter, guilt or feelings of obligation, even shame or humiliation (think unrequested diet pills). Really, you have to judge these things on a case-by-case basis.
When I was 50 I lived in a 1975 Chevy van with my Rottweiler and a cat for 18 months. Another homeless woman I met online sent me a hand-knitted cap to wear so I could stay warm in the 0 degree Denver, CO temps. I still have it. A stranger doing something for another stranger. Irrational. She spent $2.80 of her own money to mail it to me. No strings attached. Gifts are just that-gifts. I’ve received many gifts in my lifetime, but the ones I remember most were the ones with thought behind them—a grocery gift certificate, a basket of fruit, even (thank you Yahoo) a laptop computer and cell phone! If you talk gift giving costs you have to factor in the emotional dollars, not just the financial ones. http://www.ted.com/talks/becky_blanton_the_year_i_was_homeless.html
I have advocated the give cash or give nothing concept for a few years and illustrate the reason why by discussing the concept of economic waste. This is of course from a homo economicus perspective and has nothing to do with social value. In doing my own Christmas shopping this year I came to the realization that I was simply exchanging gift cards with my family in Ohio and even though I was giving “cash” I was still creating economic waste by paying for postage to mail the cards. Clearly my decision to exchange gift cards is more economically rational than sending a chia pet but the act of actually sending something is a social norm and nothing else. If I were truly economically rational I probably wouldn’t even send a gift card but we can never under-estimate the power of good-will created by the act of giving and the joy of receiving.
that seems fair, but consider that the act of giving a gift card (not cash) forces the recipient to shop;
however, if you give cash, the money will go into their purse/wallet/kitty and become effectively forgotten (unless it was a very large amount or for someone with very little, whereby the charity becomes the remembered part);
if being remembered is your primary goal, give nothing or give something odd that you know they will dislike; the same is true for weddings, where the only gift givers who are remembered are those who didn’t purchase from the bridal registry and instead bought something eccentric, tacky or odd.
this article sidesteps the two alternatives:
* commercial charity gifts (i.e. spend $50, charity telemarketer = +$44, poor african family = +$5 to buy a goat, gift recipient = +$1 card);
* hand made items, made specially for the user/occasion, these are potentially the most appreciated gifts of all, provided the workmanship is adequate and the gift was appropriate/useful (e.g. making a pair of knitted socks every year wouldn’t be a valued winner, when you can buy a better quality Chinese factory made pair for a few dollars).
people would get used to the memory of you handing them the headphones or whatever, wouldn’t they?
they can’t remember you with the same “intensity” each time they use the gift you made them
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I really like your gift categories here. I think a lot of people don’t think of the ‘why’ behind gifts nearly as often as they should. I wonder how gift giving has changed in this economy, not the amount given but the types of gifts people are giving. Makes me want to take an informal survey.
Its true, i made a agreement with my wife a long time ago that we dont give each other presents. and it works fine for us. just try it and think of somethink else to give somethink from the heart.
There are some people I never get around to giving prezzies at Christmas or their birthdays. However during the year I’ll get a sudden urge to buy them something or treat them. Then it truly is a thoughtful (IMO) present and not an obligatory one.
As someone said to me, “Always hand back a present that’s given with bad grace.”
Another aspect of gift-giving that I haven’t seen mentioned is that it takes the burden of decision off the recipient. This winter I bought myself a new snowboard, but couldn’t decide whether I wanted new goggles (vs my old sunglasses) or a helmet (now I know!) While I had the money available to buy some accessories, I put off prioritizing which ones I needed most. I received some of these as holiday gifts. They were certainly economical gifts but also very much appreciated as thoughtful and personal.
Most of the time I hate the choice of gift givers and I always go online to check the price of the gifts I receive. I think for all, even if they don’t check the price always, it is purely economical. In general gift is totally a waste and promoted with different fake celebrations and newly invented customs by sellers. Whenever I am supposed to give gifts, I waste a lot of time deciding the price to be wasted on ‘something’ and being a ‘rational’ person I try my best to find something useful. However, most of the things that can be given as ‘gifts’ are over priced and useless.
Justifying ‘gifts’ with ‘social’, ‘emotional’, and other such connotations by Dan has to be viewed suspiciously; may be he just wants to be a nice person by not telling the real truth (according to Behavioural Economics).
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You forgot regifting. That is when a sister-in-law wants to get rid of something that she doesn’t like. Christmas is great!
Re-gifting is probably the only useful thing one can do with a gift they didn’t want in the first place. At least in this way it hasn’t been wasted completely