Take a moment to sift through your memories of Christmas past. What’s the best present you’ve ever received?
It is unlikely that your answer is cash. And from an economic perspective, the fact that it is unlikely to be cash is interesting.
That’s because a core tenet of classical economics is that people generally make choices that maximise their own welfare, or ‘utility’. And that individuals know themselves and their preferences better than anyone else.
So why, every Christmas, do we bother guessing what might make our friends and loved ones happy when we could simply give them money to purchase something that they know will make them happy?
As the economist Joel Waldfogel has argued, playing this guessing game comes at a cost. In the US alone, he estimates that $16 billion of economic value is lost through the exchange of gifts every year.
Waldfogel arrived at this figure by asking subjects – all of whom were economics students – how much (in cash) they valued gifts that they had received during the most recent Christmas period. He reported that on average recipients valued their gifts around 20% less than the market price.
In other words, for every grandparent that spends £10 on socks, there is a grandchild who values those socks at only £8. Which means £2 has gone up in smoke. According to Waldfogel, we would be better off spending the money carefully on ourselves.
This observation is both intriguing and problematic, because most people who’ve ever received a dodgy pair of socks at Christmas recognise the problem, but rarely conclude the answer lies in gifting money. It prompted several researchers to look back at classic studies as well as to conduct their own research and experiments on the exchange of gifts.
Together, this body of research has highlighted how the power of gifts cannot be explained solely from an economic perspective. In fact, researchers who asked a representative sample of respondents to rate the financial value of Christmas gifts found that a substantial minority (26%) rejected the question as impossible to answer.
We can only really understand the true value of giving and receiving gifts if we apply two additional lenses.
The first is the sentimental value that gifts hold. Many of us intuitively understand the role of sentimental value of gifts, which can easily supersede the economic value of the items being exchanged.
A young child’s artistic creation might, for example, hold negligible financial value and yet be considered priceless by their parents. Likewise, a homemade jar of chutney holds sentimental value that an equivalent shop-bought item could never possess.
What marks out these kinds of gifts is the importance attributed to the effort that has gone into creating them. As well as the person who has made it. The very same product made by another individual (someone else’s child, say) or with less effort (the chutney was ‘made’ by pressing a button on a chutney-making machine) would necessarily carry less ‘value’.
The second additional lens relates to the social value of gift giving. Many of the founding tracts of social anthropology, such as Marcel Mauss’ The Gift and Bronislaw Malinowski’s Argonauts of the Western Pacific, show how social relationships are created and strengthened by the exchange of gifts. And how the act of giving creates a social obligation to reciprocate.
If you receive a gift from someone, you feel obliged to give something back in return. And this set of actions creates social ties between the individuals involved. If you get invited to a dinner party, for example, social convention dictates that you invite the hosts to an event you are organising at a future point in time. You do not reach into your wallet at the end of the evening and pay the hosts for their hospitality plus a 10% tip if they have served good food.
So how do we reconcile these three lenses of economic, sentimental and social value? By realising that our obligations to reciprocate (the social lens) also require us to pay attention to the sentimental and economic values of the gifts we are exchanging. An expensive bottle of wine at Christmas should be reciprocated with something of equivalent economic or sentimental value. Not a packet of peanuts purchased from the petrol station.
So have a great Christmas – and keep up the gift giving (and receiving)!