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
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The behavioral roots of deadweight loss
Why do we give so many gifts that deliver poor value? This annual deadweight loss is spurred by a few social tendencies:
The obligation to give
In a Vox interview, Waldfogel explains that it’s only the obligatory nature of gift-giving that creates these inefficiencies.
Holiday gift-giving runs on an annual schedule, and it continues over a long period of time: for most of us, gift-buying season kicks off in November with Black Friday sales, and culminates in a December rush to buy at least quasi-meaningful items for all of your family, friends, and those who fall under the obligatory-gifting umbrella. If gift-giving were spontaneous and unexpected, our gifts would likely be more thoughtful and intentional - no more mad dash to the department store to find something that might (fingers crossed) appeal to your nephew this year.
Imperfect knowledge of our receivers’ preferences
We don’t always have superb visability on what our loved ones really want or need for the holidays. Think of your friend from high school, who still makes your annual gift list. Do they still run? Did they already invest in a high-quality croquet set? Do they even read comics anymore?
Most of the time, we lack perfect knowledge on the preferences of others, even those we gift to. The odds of creating deadweight loss increase when we don’t know what our loved ones want.
Of course, our knowledge of preferences varies widely based on the nature of our relationships. According to Waldfogel’s study, those that tend to give the most inefficient gifts are extended family members—- aunts, uncles, and grandparents — while those closest to us tend to fare better. The deadweight loss is almost nonexistent for gifts given between close friends and partners, and fairly low for parent and sibling gifts.
The stigma against cash gifts
Cash gifts aren’t uncommon, but we tend to view them a bit differently than material or experiential gifts. Social norms dictate status quo behaviors, and giving cash comes with its own set of etiquette rules.3
While some gift exchanges can be adequately subbed for cash — like your grandparents slipping a crisp $50 into your birthday card — there are some that feel . . . off. Giving money to your 7-year-old nephew or your childhood friend might be, as Waldfogel puts it, “socially awkward.”
A less utilitarian take on gift-giving
The theory of holiday deadweight loss works under the assumption that gift-giving is a form of resource allocation — perhaps the Scroogiest of takes on the holiday season.
But as a real, live person who exists in the world, you might have an inkling that gift-giving usually serves as more than a mere reallocation of resources.
Gift-giving is nothing like a market transaction (or at least, we’d hope so). It’s symbolic.4 It’s a bonding practice.5 It creates trust and commitment between the giver and the receiver.6,7
And not only does it strengthen our relationships - it makes us feel good, too. Part of the reason we love giving gifts can be attributed to the ‘warm glow’ we get when we’re generous towards others.
“Warm glow giving” is a well-documented economic theory that suggests the reason we do nice things for others is because, put simply, it makes us feel good. It’s been documented across cultures and is present as early as toddlerhood.8 And since it releases a ton of the ‘happy’ neurochemicals — like serotonin, dopamine, and oxytocin — giving to others can also reduce our blood pressure and decrease stress levels.5
That “warm glow” feeling, combined with the sociocultural bonding that comes with a gift, explains why giving gifts makes us feel so darn good. For some of us, the excitement that accompanies the holiday season is rooted in our excitement for generosity and gifting.
Finding the optimal gift
So how should we best balance social bonding and that “warm glow” feeling with deadweight loss and our wallets? If giving up annual gift-giving practices is too “Scrooge-y,” fear not. There are always better ways to give.
Instead of gifting your cousin a $40 sweater, destined to lose half its value in the gifting process, try donating that $40 to a charity they’ll resonate with.
Charitable donations are a prime source of “warm glow” feelings. In fact, most research on “warm glow” is regarding the nice feeling we get after donating to charities. And as a bonus, your recipient might even get that “warm glow” too, by swapping their present for a donation in their name.
Give gift cards (but choose wisely)
The classic response to the deadweight loss dilemma of gifting is the gift card route. Letting someone pick their own gift circumvents our lack of knowledge on exactly which style of jeans your preteen niece is wearing these days.
But gift cards come with their own, albeit lower, deadweight loss: Over 47% of gift cards aren’t claimed each year, totaling their own staggering deadweight loss of around $21 billion.9 If you choose the gift card method, be sure to pick a business they frequent. This way, you can be confident that they’ll put the money to good use, and that they’ll spend it on something that’s valuable to them.
Support local artisans or small-business owners (i.e. vote with your dollar)
Let’s be real, some might feel like the spirit of gift-giving is tarnished when all we have to wrap (or unwrap) is a piece of plastic or a card. One way to come to terms with the inevitable deadweight loss of gift-giving is to buy from a retailer you want to support — even if your recipient might not value the gift quite as much as you spend on it.
Waldfogel speculates that the “puzzlingly high” rates of deadweight loss may come from utility gained by the giver. In other words, maybe your aunt derives $20 of value herself from gifting you that $50 scarf, something she wouldn’t get if she handed over a wad of cash instead.
Maybe your friend from college is an up-and-coming artist with affordable ceramics or prints. Or maybe your community garden is selling honey from their new apiary. Most of us can identify a few causes that we’d be happy to put our money towards - gift-giving is the perfect time to do so.
When planning out your gift-giving, it’s best to fall somewhere along the spectrum between contributing to the mountain of deadweight loss that piles up each year and being a cold-hard-cash-giving Grinch. But at the end of the day, you know your recipients better than any econ paper does. To paraphrase some received wisdom, one man’s deadweight loss is another man's treasure.
- Waldfogel, J. (1993). The Deadweight Loss of Christmas. The American Economic Review, Vol 83, No 5, 1328-1336.
- Probasco, J. (2022). Average Cost of American Holiday Spending. Investopedia, Dotdash Meredith Publishing. Retrieved from https://www.investopedia.com/financial-edge/1112/average-cost-of-an-american-christmas.aspx
- Weliver, D. (2019). Financial Gifts: The Etiquette of Giving and Receiving Money. Money Under 30, XLMedia. Retrieved from https://www.moneyunder30.com/financial-gifts-the-etiquette-of-giving-and-receiving-money
- Sherry, J. F. (1983). Gift Giving in Anthropological Perspective. Journal of Consumer Research, Vol 10, No 2, 157–168.
- Moss, J. (2021). Why the act of giving just makes you feel so darn good. CBC News, CBC-Radio Canada. Retrieved from https://www.cbc.ca/news/canada/kitchener-waterloo/jennifer-moss-happiness-well-being-columnist-giving-1.6279007
- Hyde, L. (1983). The Gift: Imagination and the Erotic Life of Property. New York: Random House.
- Swanson, A. (2015). Why cash is the worst gift. The Washington Post, Nash Holdings. Retrieved from https://www.washingtonpost.com/news/wonk/wp/2015/12/18/why-cash-is-the-worst-gift/
- Dunn, E., Aknin, L. and Norton, M. (2014). Prosocial Spending and Happiness: Using Money to Benefit Others Pays Off. Current Directions in Psychological Science, Vol. 23, No 1, 41–47.
- Mendoza, J. (2022). Check your wallet: Nearly half of Americans have $21 billion in unused gift cards, survey finds. USA Today, Gannett Satellite Information Network LLC. Retrieved from https://www.usatoday.com/story/money/2022/09/06/unused-gift-cards-21-billion/8005788001/
About the Authors
Sarah Chudleigh is passionate about the accessible distribution of academic research. She has had the opportunity to practice this as an organizer of TEDx conferences, editor-in-chief of her undergraduate academic journal, and lead editor at the LSE Social Policy Blog. Sarah gained a deep appreciation for interdisciplinary research during her liberal arts degree at Quest University Canada, where she specialized in political decision-making. Her current graduate research at the London School of Economics and Political Science examines the impact of national values on motivations to privately sponsor refugees, a continuation of her interest in political analysis, identity, and migration policy. On weekends, you can find Sarah gardening at her local urban farm.
Katie MacIntosh is Lead Editor at The Decision Lab. She is interested in the intersection of behavioral science, culture, and new communication technologies. Before joining The Decision Lab, she contributed to research on the neurochemical bases of memory and the social psychology of the internet. An aspiring polyglot, she has studied a number of languages, including as an exchange student in Germany, Japan, and South Korea. Katie graduated from the University of Toronto with a Bachelor of Science in psychology and linguistics.