Dec 17

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