Maximising Yuletide Happiness: The Economist's Christmas

by Miranda Worley

Inefficient gift-giving

Purple stripy toe socks – WHSmith vouchers – flowerpot-people ornaments – what do all these things have in common?  They all represent inefficient gift-giving.

As I am always telling my pupils, Economics is the study of efficiency. Efficiency means getting the most happiness (utility) from the scarce resources that we have.  So here is the dilemma: how do we maximise happiness at Christmas?  More specifically, how do I give gifts that generate the most happiness?  It has been estimated that each year Americans spend $100 billion on giving gifts which are perceived as having only $80 billion value by the recipients. A waste of $20 billion a year of utility.

Now the general rule about utility (happiness) is that it is maximised when the (opportunity) cost of the action is much less than the benefit gained.  So the ideal (Economist’s) gift would be (almost) free of cost to give, but generate much joy in the recipient.  As an example: I visited my sister; on the way, I stopped at a Starbucks and noticed that they were giving away, for free, old coffee grounds neatly packaged up, which reduces the firm’s waste and represents good corporate social responsibility.  It allowed me to give a gift to my sister that shows I know her and her current passion of composting; not only was she happy with her gift, which could go straight in the (compost) bin, but it also filled her house with happy coffee smells all that day and prompted a good shared experience in her garden examining her plants-manship too. Now, I’m not suggesting we should all give each other old coffee grounds all the time – that would be boring - but the idea is that we should know our recipient and give them a gift that yields them more utility than the lost utility to us of acquiring the gift in the first place. 

And so we come up against the main problem of gift-giving: knowledge (information) of what will give joy ... how do we really know what the recipient desires?  I have tried to overcome the information problem in various ways: from intercepting letters to Santa to recalling what the recipient gave me last year (surely a good indication of what they really wanted themselves?).  But none of these tactics is perfect.  Faced with demands for “a real unicorn” (?) or the biannual arms-race of mutual scarf exchange with sisters-in-law, perhaps we should stop and contemplate the joy that we are trying to give, not the stuff.

Efficient gifts:The most efficient gift is one that the recipient will value more than the cost of the gift to ourselves. We can begin to solve this problem by thinking about how much we know the desires of the recipient.  My third favourite gift, one that shows the giver understands that they don’t know me very well, it is the one that has a gift receipt in the bag – it says “I think you’ll look good in this, but if you don’t agree, then get what you really wanted”.  Which is at least an acknowledgement of the problem of gift-giving.  My second favourite gift is one that gives me something that I would never have bought for myself – perhaps because it would be difficult to find – or perhaps because I actually hadn’t realised that I needed this item, until now.  My absolute favourite gift is something unique, usually homemade, such as the photo collage of a party we both went to, some homemade biscuits, a poem written for me.  The financial cost of the gift is negligible next to the value it generates.

So here are my suggestions for gifts to avoid this Christmas:

Inefficient gifts: where the utility to the recipient is less than the cost to the giver:  Basically, anything that is purchased as a “Christmas gift”, which the recipient could have easily bought themselves, because, if they don’t already own it, then this is a pretty good signal that it has less value to them than the cost of buying it.  So this includes vouchers, anything from a chain store, or that can be ordered online.  The point here is not that the gift is unwelcome, or useless, but that this gift is inefficient – you do not know that the recipient would have chosen this gift from the many available, and therefore you are not maximising their happiness.  The solution is to just give them the money you would have spent on the gift instead – then they can make the efficient choice for themselves.  Even vouchers are an inefficient gift, and not nearly as good as money – recently, I found a stack of W H Smith vouchers, given to my kids over several Christmas seasons by well-meaning relatives.  These vouchers cost my relatives real money, but yielded my children negligible utility as we don’t regularly visit W H Smith, and have no immediate desire for the products sold there.  Hence the vouchers still lie un-used in a drawer.  I am absolutely sure real money given to them instead would have yielded greater utility by now.

But in the end Christmas isn’t about efficiency.  We love this winter festival: the parties, the log-fires, the excuse to eat and drink a little too much, the time with family and friends, the long nights and crisp walks, for themselves.  But perhaps, if we thought about the efficiency of the gifts we give as well, we might end up less frazzled in the run up, and with a happier Christmas all round.

Have an efficient Christmas!   (…don’t tell my kids they’re getting used coffee grounds this year!)

With thanks to Marginal Revolution University for the idea and data.   https://www.youtube.com/watch?v=UH28iJ7lVfg