Christmas time is here and many of us will be collecting presents for loved ones, friends and perhaps the obligatory secret Santa. By applying a touch of economics to the process, we can give better presents, save everyone a portion of their Christmas bonus, and trash the planet a little less with unwanted junk.

When you know exactly what someone wants, finding a gift is generally quite easy. When you aren’t so certain of someone’s preferences, present shopping is a risky operation where we often opt for something generic and hope for the best. As a result, billions of dollars of unwanted gifts are bought each year. Amplified by our obligations to reciprocate, gift giving is enormously inefficient.

Studies in the UK found that more than a quarter of Christmas gifts are unwanted.  According to surveys by MasterCard, New Zealanders spend over $500 on gifts in the festive season. As a result, if we are anything like our British counterparts, New Zealand Christmas shoppers waste more than $100 on yuletide gifts each year.  The amount we spend at Christmas increases each decade – do we really have to waste all this money? (see this cool infographic here). 

A proposed solution to this inefficiency is to give someone the most efficient gift of all: Cash.  A study by Waldfogel suggests that on average, a recipient values a gift between ten percent and a third less than its cost.  Naturally, most people giving the gift want to provide something that aligns with the receiver’s preferences, but this has a high frequency of not working out. 

The inefficiencies of gift giving is a problem of asymmetric information.  The recipient often has a better idea of their preferences than anyone else.  Consequently, unless the giver has a firm idea of what these preferences are, they take on a significant amount of risk with any option they choose.  To avoid any waste and disappointment at the recipient’s end, it is suggested that we just give the value of the gift in cash and let your recipient decide what they like.  

Not many people like the idea of giving someone money instead of a gift.  Probably because it sounds heartless, cold or ill-thought-out.  Our social norms tell us that cash doesn’t show you care, unless you have nothing to prove. Familial ties are unconditional, so we often don’t find money from a grandparent or aunt for Christmas as an especially uncaring gift – they just don’t know what you want. However, gifting money to a friend or ‘significant other’ is a little more frowned upon. According to Greg Mankiw, a friend or ‘significant other’ has to prove they care by listening to or observing the recipient’s preferences and giving a suitable present.

But this isn’t the full story.  Another line of reasoning shows that givers of cash might care more than anyone else.  If you’re given cash, you get something that you want and are far less likely to throw it out.  You could argue that a cash giver simply wants you to get the maximum satisfaction out of a gift (Matt Nolan talks about this here).  In this way, cash is a relatively more effective and environmentally friendly type of present than an unwanted item. 

Giving at Christmas time is a social norm for many of us but we could probably eliminate a number of Christmas woes if we did away with the gifting process entirely.  To quote Sheldon Cooper “the foundation of gift giving is reciprocity, you haven’t given [me] a gift, you’ve given [me] an obligation”.  We have an expectation of ourselves, and of others to give presents by the time Santa hits our chimneys.  Furthermore, when we give gifts we often expect something in return.  Perhaps if we didn’t feel obliged to reciprocate, or obliged to give gifts at Christmas, we could give gifts when we were certain we had found something the recipient would like.

However, given that we’re unlikely to stop giving Christmas presents altogether, we need to look at how we can give more bang for our buck.  If we know what someone wants, gifts can be equally as efficient as cash.  

Recipients of gifts play an important role in maximising their own satisfaction from the exercise.  Gift givers rely on information from their intended recipient to guide their decision making.  It is therefore up to the recipient to make sure these signals about what they like, want, or need, are very clear.

What many people miss about the Waldfogel study is that it is possible for recipients to get as much or more satisfaction (in monetary terms for measurement) from a gift than the cost of the gift itself.  Cash gifts limit the recipient’s satisfaction to what they can get for themselves with your kindly donated financial backing.  The upwards bias in satisfaction comes from receiving certain gifts that you wouldn’t, couldn’t or didn’t think to get for yourself.

There are some things people like to receive but probably wouldn’t buy if you gave them the cash to do so. Flowers and chocolate come to mind for this category.  I personally, much prefer to receive flowers than to buy them for myself.  I understand that many people enjoy a box of chocolates free of guilt if they were given the chocolates rather than if they bought them for themselves.  Being half Belgian, I can’t really ascribe to this category, but I can sympathise.

Secondly, you may have better access to a particular item than a recipient.  This ‘access’ factor encompasses a number of things, from being able to get the gift with an employee discount, to bringing something unique from another country – how many of you have sent pineapple lumps to homesick kiwis?  Givers of gifts can use their unique talents to give the recipients access to some things recipients find difficult to obtain. 

Perhaps the best gifts of all are the ones that you would have never thought of yourself, until you were given them.  Being given a book you never thought you’d read or tickets to a concert you wouldn’t have otherwise paid to go to, yet enjoy beyond expectations, are the gifts that help us broaden our horizons. 

But this still doesn’t mean recipients can be blasé about what they want for Christmas.  Signalling plays a more important role in the process of finding a perfect surprise gift because, like youtube, people have to know what you like, in order to figure out what else you could like.