Why You're Spending Too Much on Holiday Gifts (and How to Fix That)

We’re nearing that most wonderful time of the year. No, not the holiday season, but the season adjacent to it: when econ writers bring out Joel Waldfogel’s infamous 2001 paper, The Deadweight Loss of Christmas.

But giving gifts does bring us joy, despite what homo economicus might say. Fortunately, there are ways to balance our conflicting rational and emotional desires when it comes to gift-giving. 

Deadweight loss and Scroogenomics

Joel Waldfogel’s (in)famous paper — and his aptly-titled follow-up book, Scroogenomics — details a microeconomic theory of gift-giving that highlights the overall loss in value that occurs when we participate in gift-giving culture.¹

Think of the $50 scarf your aunt gifted you last year. While it was a nice gesture, you would have only paid, at most, $30 for the scarf if you had seen it in a store. A gift that costs your aunt $50 but only provides you with $30 of utility (i.e. warmth, happiness, and style) comes with a deadweight loss of $20. This sum went into the market without extracting any value for the purchaser or recipient. 

The estimated costs of our mismatched giving is astronomical. Waldfogel posits that between a tenth and a third of all money spent during the holiday season becomes deadweight loss. In the U.S. alone, that’s tens of billions of lost value each winter.²