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The Economics of Gift Giving

Written by Nickel - 18 Comments

With Christmas now in the rearview mirror, I thought it would be interesting to talk about gift giving strategies. According to a recent blurb in Money Magazine, Joel Waldfogel (Wharton School economist) has argued the following about gift-giving:

“The problem with buying presents is that it’s economically inefficient. When I spend $100 on myself, there’s a good chance I’ll get something that will produce $100 worth of satisfaction to me. If somebody else spends $100 on me, and he doesn’t know what I like or what I already have, the gift is likely to be worth less to me — at least 20% less…”

Because of this, Waldfogel recommends giving gift cards instead of physical gifts to those that you don’t know very well. He goes on to say that:

“Presents are fine for close family and friends, but if you’re obligated to give a gift and have no idea what the person wants, you’re much more likely to destroy value by choosing the wrong present.”

So… I’ve written before about the disadvantages of gift cards. Now that you’ve just given and received a bunch of gifts, what do you think?

Speaking for myself, I just received a great gift in a “Secret Santa” gift exchange, but several people didn’t. Beyond this, we actually gave a couple of Amazon.com gift cards because we weren’t sure what the recipients would want.

In the end, this turned out to be a good decision, as the recipients loved the freedom that came along with their gift cards. Had we bought them actual gifts, I doubt they would have derived nearly as much value from whatever we picked out.

Published on December 28th, 2009 - 18 Comments
Filed under: Miscellany

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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18 Responses to “The Economics of Gift Giving”

  1. 1
    PA Mom Says:

    Amazon, Ebay or restaurant gift cards are always good. I think most people will use those. If I know the person doesn’t use or like using the computer, I go with restaurant. Otherwise, I often go with Amazon or Ebay. I have also encouraged family members to start Amazon wish lists so I have a better idea of what they’d actually like to receive.

  2. 2
    H Lee D Says:

    “When I spend $100 on myself, there’s a good chance I’ll get something that will produce $100 worth of satisfaction to me.”

    Given the sheer volume of Stuff that most people have accumulated, I’m not entirely convinced that this is true…

  3. 3
    kev Says:

    Some people view gift cards as being somewhat impersonal, but I love getting them – I would rather receive gift cards than almost any other type of gift.

    I view gift cards differently than I do cash. If I receive a cash gift then I feel obligated to use it for something purposeful and it ultimately ends up in savings. I place no restrictions on gift cards though – I can use them for whatever I want and I don’t feel any remorse when I use them for a “want” rather than a “need”. In that sense they really are a true gift – a way to treat myself without feeling badly about it.

  4. 4
    lostAnnfound Says:

    At that point of giving money for presents, why don’t we all just keep the money & buy whatever is it we want/need?

    Gift cards are a little bit better. At least the person buying the card to give as a gift thought about you & what you would be interested in shopping for. I love getting a gift card from my favorite garden center so when spring arrives I can get something special for the yard. Teens like gift cards to favorite stores so they can buy clothes or iTunes cards to load up songs on their iPod.

  5. 5
    LeanLifeCoach Says:

    Does Joel Waldfogel (Wharton School economist)realize that 27% of gift card recepients have not used a gift card they received last year?

    Does that shoot a small hole in his argument?

    Economically speaking, if somebody else spends $100 on him they have helped the economy by $100 whether he likes the gift or not.

  6. 6
    N. Avery Says:

    I think he’s neglecting to factor in the value that is gained by someone putting thought and effort into picking out a gift, even if the actual item is only at 80% value of what you would have spent the money on.

    There’s a tangible value in relationship building, and he didn’t incorporate that.

  7. 7
    ColombianCoffee Says:

    I gave my boss an Amazon card for Christmas because he has a Kindle he uses on a daily basis. One of my favorite gifts has been a Starbucks gift card. I think cards are definitely the way to go nowadays, even family has become difficult to shop for. I prefer Visa gift cards that can be spent anywhere, bc it allows the recipient to use them as they best see fit in their current situation. They might buy themselves something, or it might help them pay a bill that month or buy groceries. With the recession, you never know, someone might need groceries more than a new sweater, or help with bills more than the new ipod. The gift card not attached to a store allows each recipient unparallel freedom and the giver is happy knowing their friend got exactly what they wanted.

  8. 8
    Caro Says:

    I agree that a gift card is a good gift, but if you want to ride the middle line, you can get a gift at a local store that has easy returns (Target is a favorite of mine) and then attach a gift receipt. The person can either keep the item or turn it in for a gift card.

  9. 9
    mz Says:

    The negative effects of choosing the wrong gift can be minimized if everybody buys a “generic gift” valued at some agreed upon dollar amount. Then, each gift giver draws a number (1-# of gift givers). The first person to draw #1 picks a wrapped gift and keeps it. The second person can pick a wrapped gift and keep it or steal any already opened gift. If he steals an opened gift, the person he steals from can pick another wrapped gift.

    This way each person can pick the gift he most values from a large selection of gifts because no one gift is given to any one specific person.

  10. 10
    John DeFlumeri Jr Says:

    It’s hard to know how much a gift will be appreciated. We don’t really know what’s in other people’s minds.

    John DeFlumeri Jr

  11. 11
    Greg Says:

    If efficiency is the key to good gift giving, this Dilbert sums it up perfectly:

    http://www.dilbert.com/strips/comic/2009-12-25/

  12. 12
    Noadi Says:

    I just don’t get why you would give gift cards in the first place? A nice card with cash or a check is better, it can be spent anywhere. Unless I knew someone really loved a certain store or restaurant I’d never get them a gift card.

    Last year I was saving up money to buy a telescope. My parents knew this and that it was something I’ve wanted since I was a kid. Instead of buying me presents they gave me money to put toward the telescope and I was able to buy it a few months earlier than planned. It was the best present.

  13. 13
    Olivia Says:

    In our family we ask people what they want or follow a known like. We’re careful to think $20 or less. Not only does it avoid killing someone’s budget, it makes us more creative. The only kid that’s truely hard to buy for is an autistic nephew. Generic gift cards are given to the few relatives who are always strapped.

  14. 14
    Rosa Rugosa Says:

    I’m trying to get away from xmas gift-giving (or receiving). I have nothing particularly against gift cards, but when it all turns into a big gift-card swap, I think that’s a good indicator that it might be time to stop with the gifts. When I do give a gift card, I always include a small something with it to show that there was some personal consideration involved.
    I think age/stage of life and life’s circumstances are a factor in the gift-giving puzzle. Many of us reach a stage where we just don’t need a bunch more stuff, and swapping lots of expensive, un-needed stuff is a waste of money. Better to get together for the nice meal, drinks, and companionship and skip the gifts. Yet to others, this is heresy. There’s no one right answer for everyone.

  15. 15
    H Lee D Says:

    The problem with gift cards if you don’t really know someone, or generic gifts, is that they’re not really generic.

    I don’t drink alcohol or coffee, I don’t like lotions or smelly “girly” things. But wine, coffee, and lotion are the generic gift set.

    I have received countless gift cards to Starbucks. I regift them to people who I know buy drinks there.

    If you don’t know someone well enough to have a clue, you don’t “owe” them a gift…

  16. 16
    Wojciech Kulicki Says:

    At the risk of sounding like Scrooge, I’ve been quoting that article to many of my friends and family this holiday season (of course, always clarifying that THEIR gift was 100% satisfying).

    Personally, I love getting gift cards for all the reasons outlined, but I’m tempted to side with H Lee D on this one–maybe even complete control over our gifts doesn’t quite get us to 100%.

  17. 17
    Ethan Says:

    Christmas is dead. Theres only 1 thing more brutal than shopping for gifts and the guilt trip of being outspent for an equally crappy gift. Gifts are about forced thought; have you ever said im not doing gifts this year? Some idiot always whines about how they already bought you a gift. Its impossible. This christmas I explained why I hated every gift in the hopes we could end my unwilling participation. Instead I get replacement giftcards. They all totally miss the point. Gifts are as fake as the people getting them. If it was really something awesome you would keep it for yourself and not give it to another. That means its no longer a gift. All these gifts requiring you to wear this, use this, go there. Enough. How about the gift of death from you to me. Thanks.

  18. 18
    John Says:

    Many years ago a friend/coworker got me a pair of fancy socks for Christmas. He insisted that I not give him a gift in exchange because doing so would erase his gift to me. I think it was one of my top ten bits of wisdom received.

    The modern world, with thousands of choices and options, is no longer conducive to gift giving. When there were, for example, 4 different models of cell phones you would have at least a 25% chance of giving them the phone they have chosen for themselves. When there are thousands of different combinations of phones, colors, features, and plans you now have less than a 0.01% chance of getting them the one they want. This same degree of choice applies to nearly all products.

    We are also a very impatient society. If we feel a need for something we go buy it now rather than wait for the next birthday, Christmas, anniversary etc.

    For the last several years for Father’s day I go buy the things I want/need, wrap them up, and let the kids know where I’ve “hidden” them in their rooms.

    Scrap gift giving and let people buy what they want. If you give someone a gift make sure they don’t give one back to you. If they must buy a gift in response they should give it to someone else like that “Pay it Forward” movie. If someone close to you has an immediate need/want get the gift for them then instead of waiting for an artificial celebration date.

    One last thing, unless you are a serious Christian should you even celebrate Christmas?

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