Bryan Caplan  

Gifts, Efficiency, and Social Desirability Bias

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Is cash the only efficient gift?  Pure economic theory points to two contradictory answers:

1. Yes, because of the receiver's demonstrated preference.  Suppose gift X costs $100.  If you gave the receiver $100, would he still have spent the money on X?  Almost certainly not, so he must prefer whatever he bought with the $100 to X.

2. No, because of the giver's demonstrated preference.  Suppose gift X costs $100.  The giver could have given $100 instead of X, but gave X instead.  So he must prefer giving X to its cash equivalent.

When polled, economists on the IGM panel heavily favor some version of #2.  Many even ridicule #1 as psychologically obtuse.  Angus Deaton quips, "This is the sort of narrow view that rightly gives economics bad name."  But neither side on the IGM even mentions a massive body of psychological research on Social Desirability Bias (SDB) that weighs heavily in #1's favor.  Quick version: When lies sound better than the truth, human beings often lie. 

Consider "I enjoy finding the perfect gift for all my friends and family" and "It's the thought that counts."  Such statements sound great, but the power of SDB suggests that such protestations are often balderdash.  Shopping for the perfect present for an uncle who drives you crazy does not fill your heart with a warm glow.  Neither does getting CDs from your grandma who's never even heard of iTunes, much less your favorite bands.

Once you grasp SDB, economists' case for cash presents starts to sound a lot more plausible.  Yes, non-pecuniary preferences argue against cash; but SDB suggests that a lot of professed non-pecuniary "preferences" are, in fact, lies.  Why don't these liars jointly agree to stop exchanging (non-cash) presents?  SDB once again!  The first person who proposes an End This Miserable Charade Treaty sounds like a jerk.

Does this mean that the pro-cash economists are right?  Not quite.  The pro-cash economists are correct to see - and courageous to point out - a lot of gifty inefficiency.  But SDB is only a tendency, not a universal law.  Some people some of the time really do feel the spirit of Christmas.  When they do, traditional gift-giving is efficiency-enhancing.

When is this most likely?  Two obvious factors:

1. How much affection the donor and recipient truly feel for each other.  Your kids, your spouse, and your go-to friends are probably very dear to you.  Your second cousins, your brother-in-law, and the co-workers you never see outside the office probably aren't so dear. 

Corollary: Giving presents to kids tends to be more efficient because kids (a) inspire more affection than adults, and (b) exhibit less SDB than adults.  If giving a child a toy makes you feel good, and the kid smiles when he gets it, you probably gifted efficiently.

2. The kind of person you happen to be.  If your Five Factor personality test says you're high in Agreeableness and low in Neuroticism, you probably savor both giving and receiving gifts far more than people low in Agreeableness and high in Neuroticism.  Christmas is fun for the former, pain for the latter.

In adage form: Exchange gifts with your close family and friends, especially kids - and leave your favorite Grinches in peace.

P.S. None of this applies if you're giving the gift of economic literacy to your entire family at holiday dinner.  Giving and receiving economic enlightenment is always a joy for all people at all times.  :-)



COMMENTS (15 to date)
Pat writes:

I like giving and receiving gifts when both sides are trying to give you something you didn't know you'd like. The value of a true gift is much more volatile than a gift card.

You might get me something worthless or you might introduce me to something I didn't know about that gives me great pleasure. There's no loss aversion when someone else is doing the buying so we're willing to get lots of clunker gifts for the chance of discovering something we wouldn't have discovered for ourselves.

There's nothing efficient about trading dollars. It's a waste of time. It may be less efficient than trying to give someone something they didn't know they liked but that all depends on the value of the home run gifts that actually can change lives.

Hans Pufal writes:

Clearly I am low in Agreeableness and high in Neuroticism ;-)

The whole problem with Christmas is the pressure both psychological and financial it puts us under to find gifts for friends and family.

I give gifts when I see an appropriate opportunity, not when societal pressures says I am supposed to. It makes for more relaxed giving and makes the receiving that much more pleasurable because of its unexpectedness.

nl7 writes:

Gifts in kind demonstrate personal intimacy and time spent. My partner got me gifts I didn't ask her for, showing personal knowledge of me and demonstrating time spent. So the value of a gift is not just its cash value.

Also, gifts in kind distort the numerical ranking of cash. If everyone gets cash, then the only difference is how much. But with gifts in kind, this direct ranking is obscured because individuals place particularized values on gifts.

I'm not against cash or gift cards. But gifts in kind are entirely rational and efficient, where you know the recipient's tastes sufficiently.

Chris H writes:

I take a slightly different tack. The point of Christmas gift giving is supposed to be a signal that the giver understands and knows enough about the receiver to be able to pick a gift for him/her. If I give someone cash, I'm effectively signalling that I don't really know that much about the person and I just want to either cynically gain favor or that this is some burden for me that I feel obligated to do, but not obligated to really put effort into.

Of course cash benefits anyone, but gift-giving is about signalling close social relations, not actually materially helping another person.

drobviousso writes:

Giving gifts to kids is also efficient because (and this is based only on my observations of my 4 year old an 20 month old) the utility of a toy to a child is about infinity. Ask my son about his new Superman shirt with velcro cape, and he says it's his favorite thing ever. Next ask him about his new batman shirt with velcro cape, and he'll say it also is his favorite thing ever. Same thing with his new bug-catching net. (Only a child could spend hours playing with a bug-catching net when there is a foot of snow on the ground...)

But this is all academic sophistry now. Technology has solved the problem. You can now send an Amazon gift card for the exact retail price of a suggested purchase, allowing all the social signalling you want attached to a practically fungible medium of exchange. http://www.amazon.com/gp/feature.html?docId=1000630871

Andrew writes:

Seems like the time to add that I received Myth of the Rational Votor for Xmas.

The price was too high for me to buy it myself but it was just the right price for me to ask for it from someone else.

Also, if you give me cash, then I have to go to the store and buy the item. If you buy what I wanted, I don't have the errand and I can spend my time doing something better.

Philo writes:

With most potential recipients it would truly be inefficient to (attempt to) give the gift of economic literacy. But do keep giving to *us readers of Econlog*, in accordance with our revealed preference for receiving such gifts from you!

MingoV writes:

Efficiency isn't everything in gift giving. A giver may buy a gift that the recipient loves but never would have bought for herself. The giver feels good because his superb choice is greatly appreciated, the recipient feels good because she got an unexpected and excellent gift. Efficiency is not high for the giver, because he had to think of and buy the gift, but efficiency is excellent for the recipient.

Brian writes:

Neither points 1 nor 2 get at the true advantages of gift-giving, many of which have already been noted by posters.

A gift shows that you care enough to think about the person's preferences; the receiver is spared having to buy the gift himself; receivers sometimes receive things they never knew they would like; giver and receiver alike enjoy the surprise of opening something unknown; the giver enjoys seeing the look of surprise and appreciation on the receiver's face, which confirms that the giver really does know the receiver's preferences; a gift given continues to serve as a memento of the giver. Almost all of these things are lost by giving cash.

I don't mean to dismiss your point about SDB, but I think it's very low on the list of things that explain why people give gifts instead of cash.

That said, I don't like giving gifts, mostly because I hate shopping and I don't have any confidence that I can guess other's preferences. My wife does all that much better, so I'm happy to let her.

Raymond Tseng writes:

I agree with many of the posts, especially the first one by Pat.

I feel that economists often misunderstand topics like gift giving, rely on radical simplification, and don't give enough credit to common sense norms.

While revealed preferences might show that someone who is given $100 in cash would not have bought the $100 gift that was given to them and this suggests that their value of the item is less than $100; there can be other reasons why the person doesn't purchase the item.

It could be the converse that their value of the item is more than $100 and that is why they don't purchase the item. Especially when you factor in different types of transaction costs: search costs, time costs, etc. and also when you think of different people's comparative advantages that $100 item can cost much more for a specific person than $100.

For example, my parents profess to enjoy art, but don't have the requisite knowledge/information and aren't a part of a culture where they can easily obtain it. For them to devote the time and energy to obtain that piece of art that I can get for $100 would cost them much more in those other costs. Those extra information, time, transaction costs will only get larger as choices proliferate and also as we become wealthier.

Although many economists might listen to this, but internally say well that doesn't apply to me because I typically don't like what I get; I would say this is atypical. Also, like many above have stated people get utility from giving and perhaps more when they can connect with someone by indirectly stating I know what you like; I'm on your team.

Lastly, I'll just quote a part of the revealed preferences wiki that Bryan linked to.

"In the real world, when it is observed that a consumer purchased an orange, it is impossible to say what good or set of goods or behavioral options were discarded in preference of purchasing an orange. In this sense, preference is not revealed at all in the sense of ordinal utility."

chipotle writes:

You know, I think this problem has basically been solved.

Having attended a spate of weddings in the past five years, I have spent a perhaps inordinate amount of time thinking about wedding registries. And my conclusion is that they're almost perfect. (Few things in life are truly perfect. There are trade-offs everywhere!)

Wedding registries ensure that newlywed couples get only gifts that they'll truly love. Most couples in my social circle (I'm fairly young) include gifts at all price ranges presumably in consideration of budget-constrained guests.

Of course, cash would plausibly be equally welcomed as would additional gifts. (The latter would be acceptable provided that you gave either cash or something from the registry first.)

This solution is not only great in theory, it's operational right now. With the vast range of merchandise available at Amazon ("The Everything Store") I think that this is close to the perfect solution, e.g., if gift-giving must be a big deal, then the recipient should at least put in the minimal effort of providing a Wish List/Gift Registry.

I see no drawbacks. Am I missing something? Dr. Caplan? I'm serious; I think this is minor social problem that has been solved.

Raymond Tseng writes:
You know, I think this problem has basically been solved.

Having attended a spate of weddings in the past five years, I have spent a perhaps inordinate amount of time thinking about wedding registries. And my conclusion is that they're almost perfect. (Few things in life are truly perfect. There are trade-offs everywhere!)

Wedding registries ensure that newlywed couples get only gifts that they'll truly love. Most couples in my social circle (I'm fairly young) include gifts at all price ranges presumably in consideration of budget-constrained guests.

Of course, cash would plausibly be equally welcomed as would additional gifts. (The latter would be acceptable provided that you gave either cash or something from the registry first.)

This solution is not only great in theory, it's operational right now. With the vast range of merchandise available at Amazon ("The Everything Store") I think that this is close to the perfect solution, e.g., if gift-giving must be a big deal, then the recipient should at least put in the minimal effort of providing a Wish List/Gift Registry.

I see no drawbacks. Am I missing something? Dr. Caplan? I'm serious; I think this is minor social problem that has been solved.

There are a couple problems with your suggestion.

First, as economists that believe in the inefficiency of gift giving have pointed out; if we transition to a world where people give cash instead of gifts, this would basically destroy the institution of gift giving itself. Why?
Because between friends or equals, I give you $50 and you give me $50 is a waste of time. And between people of different means I give you $50 and you give me $100 has some negative social consequences (resentment, fairness considerations).

Transitioning to a world where everyone has their own registries is just a disguise for trading cash. If you buy my $50 gift and I buy your $50 gift, what is the point of that? It's an indirect way for me to buy myself a gift. It is very similar to just giving cash and I would suspect do away with the whole institution of presents/gift giving in general like the economists I mentioned would insinuate.

Now, the example you brought up of wedding registries is a little different and aren't applicable to personal registries. There are multiple reasons for wedding registries/baby registries that are a little different than general gift giving. I think thesee are cultural norms that had practical functions in the past such as dowries and high cost presents.

Also, traditional weddings are extremely expensive and the guests of weddings get a kind of free party/entertainment/dinner that might cost the wedding couple ($400 per head) let's say. The registry is a way to get the guests to indirectly pay part of the expense of the wedding. You wouldn't want to ask people for $100 a person to attend my wedding (this would probably keep people from going to weddings), but having a social norm where they are expected to buy a gift of $100 and through the couple's registry is a much easier compromise.

I think it is similar with baby showers in a sense. It would be very hard for an expecting mother to ask for $100 from all her friends for her new baby because of the resentment or social outrage of explicitly asking people to subsidize your choice of having a baby. Having a norm where people buy you a gift before you have a baby from a baby registry seems like a much easier way for people to navigate this.

chipotle writes:

Raymond Tseng,

Thank you for answering my comment. I was afraid no one would.

Transitioning to a world where everyone has their own registries is just a disguise for trading cash. If you buy my $50 gift and I buy your $50 gift, what is the point of that? It's an indirect way for me to buy myself a gift.

I disagree about this. Sure, from a neo-classical/rationalist perspective, this is true. But from the perspective of behavioral economics--analyzing how humans actually act in the real world--it isn't. Let me give you a real example from the other night. I went to dinner with a friend who, at the beginning of the meal, insisted on paying for it. Now, I normally have a mental limit on how much I will pay for a dinner entree--but the entire menu didn't have such an option. So I just got entree I wanted.

Now, sure, I could afford to buy myself entrees at a higher price than I'm actually willing to spend. In other words, my friend didn't buy me anything I couldn't buy myself. He bought me something I wouldn't have bought myself. And it was great!

BTW, both these points were made by other commenters above (e.g., that there are things you would like but wouldn't by yourself.)

~~~

I also think that your own central point (that gift registries are the equivalent of exchanging cash) is undermined by your final two paragraphs where you justify the norms of wedding registries and baby shower registries.

Traditions often have semi-mystical origins and it may not be good practice to go around overturning them on a whim.

On the other hand, traditions come from somewhere. We are perfectly able to change social norms through collective action if the will is there!

My conclusion: Universalizing the Gift Registry norm will make everyone happier without turning the world into a soulless, commercial place.

Raymond Tseng writes:
I disagree about this. Sure, from a neo-classical/rationalist perspective, this is true. But from the perspective of behavioral economics--analyzing how humans actually act in the real world--it isn't. Let me give you a real example from the other night. I went to dinner with a friend who, at the beginning of the meal, insisted on paying for it. Now, I normally have a mental limit on how much I will pay for a dinner entree--but the entire menu didn't have such an option. So I just got entree I wanted.

I think there is some misunderstanding here. Let me try to clarify. Your example is different than mine because it is not a gift exchange. My example is if we both are getting each other gifts (x-mas) and we both know the prices of the wishlists we will try to coordinate on price (guess what the other person is spending on you), otherwise there are negative social consequences (resentment, guilt). But, when we do coordinate on price that is when the institution of gift exchange falls apart. Put another way, for your example to accurately describe my scenario would be... If your friend insisted that he'd buy you anything you wanted for dinner and you said yes. And then, you also insisted that you would buy your friend anything he wanted for dinner and he agreed. You can see in this scenario how you guys would basically be trying to match your dinners and that it is not that different than buying your own dinner.

In this scenario, it is still possible for unidirectional giving to persist (as you've described) just not gift exchange. Bryan and other economists would argue that unidirectional giving should be cash based because it is more efficient. I made a separate argument earlier that it is possible that others can actually buy you things that are worth more to you than their monetary value when you factor in transaction costs and comparative advantage.

Unidirectional gift giving which you are describing, I would argue is already moving in the direction of cash/giftcards. Especially if you think about impersonal unidirectional giftgiving, it is almost exclusively cash/giftcard based already; think gardeners, door-men, day-care workers, and postman.

I would also add that Chinese already practice what economists say is efficient in our main gift-giving holiday (Chinese New Years) with red envelopes (hold cash inside). This holiday does meet my criteria in that it is unidirectional (from old to young) and this is probably important but is strictly between people of unequal means and is a pure cash handout.

Also another thing to note, most of my Chinese relatives also just give you red envelopes for most other times as well: birthdays, weddings, baby showers, etc.

I would also add though that this comes at a price that I don't think economist's acknowledge and reinforces stereotypes of Chinese as uncaring robots. When I get red envelopes of cash from Chinese relatives at my birthday; on the one hand it's great because I get to buy whatever I want with it, on the other hand it's a little disappointing as it signals a kind of impersonality or social distance. It makes you think, well I guess we're not that close, they barely spent any time on this. Maybe like wedding rings, presents are more a sign of sacrifice than about the actual gift and are an important part of civil society.

I also think that your own central point (that gift registries are the equivalent of exchanging cash) is undermined by your final two paragraphs where you justify the norms of wedding registries and baby shower registries.

My argument is that registries lubricate the process of asking for cash in big life events that are very expensive and where it is hard to just ask friends for $100. I am saying that registries are an indirect cash transfer in the last two paragraphs and it is because a registry makes it easier to get cash from friends.

I don't know if we're talking past each other here, but I don't see how my last two paragraphs undermine my first ones.

Scott Saliency writes:

In defense of gift giving, the gift of information.

Every year Joel Waldfogel, and his book scroogenomics or some variant gets rehashed. I mostly agree, deadweight loss, etc is a problem. What I find mostly glossed over is the gift information. Thoughtful gifts, that hit the mark, are not at best break-evens; they are surpluses.

For example buying a person a CD, and exposing them to an artist they do not know about, but will love is very valuable; far more valuable than cost of the CD. The gift is not only the CD but the service of having someone find you a new artist you will like. How much would you pay for this service; that is your consumer surplus. Such surpluses must be weighed against deadweight losses.

This surplus is missing from the discussion. It is assumed that when giving gifts we only can lose, that good gifts simply break even. People who know each other well and exchange thoughtful gifts profit from each others comparative advantage arising from situational knowledge.

If a pal and I exchange equally priced gifts and spend the same time picking them out. We benefit from from each others comparative advantages. I might pick for my friend a popular economics book while they pick for me the popular book on basketball. If we know each other, the subject, and to be safe, pick one of the best books in the genre; we will probably have produced a surplus.

In closing, though poorly picked gifts may create deadweight losses, thoughtful ones potentially create huge surpluses.

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