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Gurus, Holiday Waste

Gurus, Holiday Waste

Holiday gift-giving is often a waste of money, says a Wharton economist.

The National Retail Federation tosses virtually all retail sales for the months of November and December into the holiday spending bucket, so it estimates Americans spend about $450 billion in year-end gift giving. Joel Waldfogel, an economist at the Wharton School of the University of Pennsylvania, says the actual number is much lower, since December is the month when retail sales truly spike; he estimates holiday spending at more like $65 billion per year. But no matter how you slice it, it's inefficient spending, he says: “Massive holiday spending has the potential to do a terrible job matching products with users.” Waldfogel makes the case in his book, Scrooged: Why You Shouldn't Buy Presents for the Holidays, that it's often better (more efficient) to simply give cash or pre-paid gift cards.

Registered Rep.: What's the problem with holiday gift giving? What do you mean, it “destroys value?”

JOEL WALDFOGEL: Normally, when I buy something for myself, I'll only spend, say, $50, if I look it over and decide it's worth at least $50 to me. When someone else sets out to spend $50 on me, they're at a real disadvantage. They don't know what I like. They don't know what I have. There's just no guarantee that what they buy will be worth at least $50 — or more — to me. And what the data show is that, on average, stuff that other people buy as gifts is worth 20 percent less per dollar than the stuff we buy for ourselves. And so, in that way, when we go out and spend money on gifts, we're destroying a lot of value.

RR: How do you calculate that? What data?

JW: I've done a lot of surveys, mostly with students after the holiday season in January. I'll give students a survey that says, “Write down a list of the items you received as gifts in the holiday season just gone by. And for each item, write down how much you think the giver paid, how much it was worth to you, and how much you would have been willing to pay for that item, not counting sentimental value. Who was the giver?”

And then, in the last ten years that I've been doing this, I've also asked them to write down a list of things that they purchased for themselves. “What did you pay for it? What's the max you would have been willing to pay for it?” Then I can compare both, and value the stuff you got for yourself versus the stuff you received as gifts.

RR: Can't you be an informed consumer for somebody else? Let's say you're married, you've known your wife for many years, you know her tastes, what she wants or needs?

JW: Oh, absolutely. But there's a range of people: Some of them we know well, some of them we don't know so well. And it is true that for the people we know well, we can do pretty well in selecting a gift. So we do very well with our spouses and significant others. We do well with friends who are roughly our own age. We do well with people we see frequently.

But the real recipes for disaster are the situations where we have an obligation to give a gift, but we don't know what they want — the people we don't see very often. In those cases, a lot of value gets destroyed. So unfortunately, it turns out it's the grandparents, the aunts and uncles and others who don't see their recipients very frequently who really destroy a lot of value when they choose particular gifts.

It's not so much that people shouldn't give gifts, period. It's that you should give gifts when you have a fair shot at doing well. And so those are the people you know well and, frankly, the people you care about.

RR: But isn't spending money on silly gifts to distant relatives good for the economy?

JW: Transactions have buyers and sellers. And of course, spending is good for sellers, because spending gets sellers revenue in excess of cost, and that produces profits. And that is a good thing. But spending also has buyers. And the idea of spending from a buyer perspective is to produce as much satisfaction as possible.

Again, the problem is when someone other than the ultimate consumer is doing the spending; then, yes, it does generate the benefits for sellers, but it doesn't generate the magnitude of benefits for buyers that we expect from spending. So it only is sort of partially good for the economy. After all, buyers are part of the economy too, and their well being is really what motivates their behavior in the first place, for eleven months of the year.

RR: Describe your comic book example and the concept of transcendent giving.

JW: I give two examples of transcendent giving. One is, you see something that I would've liked and I didn't see it, and you get me this thing, and that's wonderful. So for me, that comic book, Our Fighting Forces, that I have looked for for so long would have been a wonderful thing if someone had stumbled across it. Even if it wouldn't have cost much, it would've created an enormous amount of satisfaction.

Another kind of transcendent giving that I think is an interesting way for gift-giving to even be better than cash is what I call permission. And this is especially true inside a family. Take my wife and me; there are some things that she may want but doesn't feel comfortable spending money on. Similarly, there are things I might want. And she could say, “You know what? You have permission. Go ahead and buy the fancy camera,” or whatever. And that's better than what I would've done for myself.

RR: Otherwise, giving cash is the way to go?

JW: I don't want to advocate that. Giving cash has an “ickiness” to it. Psychologists have studied this. It's frankly a stigmatized activity, particularly from younger to older people. There's an exception; it's okay to give cash from older to younger, like grandparents and aunts and uncles, the same folks whose gifts tend to miss the mark. They are allowed to give cash.

But I wouldn't want to say, “Go out and give cash,” because it feels icky, I think, both for the giver and the recipient. The interesting thing is, in the last 15 years, a certain funny kind of cash has become de-stigmatized, and that's gift cards. Gift cards have become about a third of all gift-giving in the economy, and they're a highly desired gift by recipients. They're on the sort of Most Wanted Gift list. And they seem to avoid this ickiness factor. And people who have been buying them are the ones who normally would be destroying value — people who may not know what you want. So in a way, it's almost a somewhat self-correcting problem.

RR: Do we spend too much? Are we guilty of rampant consumerism?

JW: I'm agnostic about that. I may have a personal view, but the book really doesn't have a view about that. Because, I mean, again, one of the interesting things is that, as much as we think we consume, it turns out we're way behind a lot of other countries. I think the northern Europeans are ahead of us. The French are ahead of us. The UK is ahead of us. The good news is we're not the leaders in sort of vulgar holiday consumption. About $12 billion a year in value destroyed in the U.S., but it's like $25 billion a year worldwide. But what we do spend on gifts, we should do efficiently.

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