Christopher tm Herdt (cherdt) wrote,
Christopher tm Herdt
cherdt

Wharton Professor is Bad at Math

In a recent opinion essay in The Seattle Times, Stop blaming Grandma for cruddy Christmas presents, Joel Waldfogel, a professor at The Wharton School of the University of Pennsylvania, argues that our families spend more on gifts for us that the gifts are worth to us. In his mind, this means that gift-giving is a predominantly losing proposition:

Over the years I've done many surveys on people's gifts and things they had purchased for themselves, and I've learned that we value items we receive as gifts at 20 percent less, per dollar spent, than the items we purchase for ourselves. These poor gift choices turn holiday spending into an orgy of value destruction. In the U.S. alone, ill-chosen Christmas gifts banish about $13 billion per year to economic oblivion. Worldwide, the number is twice as large.

(What's the big deal, right? Worldwide, that's not even 4% of the TARP. But let's humor him and say that 26 billion dollars is a lot of money.)

26 billion dollars! Gift-giving has terrible economic consequences! 26 billion dollars--wasted! We must put a stop to this. You might think that Waldfogel is a Scrooge--he even wrote a book called Scroogenomics: Why You Shouldn't Buy Presents for the Holidays--but the solution he proposes in the article is decidedly more upbeat: spend more time with the people who are going to buy you gifts so that they make gift decisions better suited to your tastes (and therefore the gifts are of greater value to you). That is sound advice. And I'm not here to argue that you shouldn't call your grandmother. But I think that Waldfogel's equation is lacking a few key measures.

For one thing, all of us know a sure-fire way we could give someone something that is worth as much to them as we spent on it: cash. This also reduces transaction costs that Waldfogel does not factor into his equation: the costs of shopping, deliberating, choosing, wrapping, and delivering. Maybe you still need to get a card at the drugstore and slap a stamp on it, but your non-monetary costs are greatly reduced.

Yet, we persist in giving people gifts other than cash. Why? Sure, maybe part of the reason is that giving cash is a little weird. An asymmetric exchange of cash is awkward for both parties, and a symmetric exchange of cash is pointless. Maybe the question is: why exchange gifts at all?

Waldfogel's equation:
Gift Price * Gift Value Factor = Gift Value


Let's imagine that we're talking about a scarf. A $20 wool scarf your receive that, by Waldfogel's logic, you value at only 80% of its price, or $16. $4 has been lost in the exchange!

This is basically true of any gift within your means: if you placed a value on it as high or higher than its cost, you would have purchased it already. (This is why my father is so difficult to shop for--anything that he genuinely wants, he has already bought for himself.) Gifts that are out of your price range--unless they are from your parents or grandparents--usually come with a fair amount of guilt or weirdness. The only time this is not true is if you receive a gift that you would have already bought for yourself, only you had no idea such an item even existed.

First, Waldfogel's assumption--which he does not state in the article, but I believe is implied--is that the Gift Value Factor is always less than or equal to one. This is flawed, as I believe that it is easy to value a gift from a loved one as worth more than its monetary cost. It might be hard to test this, as any item, once in your possession, seems to be more valuable than an identical item not in your possession. Would you trade your favorite sweater for an identical sweater? Probably not. But I imagine that same sweater, given to you as a gift, has additional significance: this is my favorite sweater, and it was given to me by someone special who loves and cares for me. Would you sell that sweater for its sale price? Twice its sale price? Will you value the gift even after the sweater has worn through and is gone?

Let's face the facts: how often has your grandmother given you a sweater that you consider your favorite? Maybe she gave you the sweater with the reindeer on it that you keep in a box in the closet of your old room at your parents' house, available to wear on Christmas Eve when your grandmother can see you wearing it, but is otherwise invisible to the world. Fair enough, Waldfogel, maybe the net Gift Value Factor really is less than one.

What I really think Waldfogel failed to factor in is the value to the giver. People derive satisfaction from giving gifts to people they love. People regularly give things to children--children who are notoriously ungrateful, children who have no concept of quid pro quo, children who have neither income nor assets to return the favor--and why? Because it brings them joy to see the joy that the gift brings, because it makes them feel good to show outwardly a sign of what they feel inwardly.

Waldfogel's Equation, Revised:
(Gift Price * Gift Value Factor) + Gift Giver's Satisfaction = Gift Value


If we assume that the gift giver derives at least $5 satisfaction for giving the somewhat under-appreciated wool scarf, we discover that the gift exchange provides a net gain!
($20 * 80%) + $5 = $21


But the giver does not always derive satisfaction directly from giving a gift. Nowhere is this more apparent than at holiday office parties. Everyone is asked to bring a unisex gift, appropriate for anyone, that costs 10 dollars or less. Such parades of random junk! The purchaser isn't thinking of what the recipient might like best, because no one even knows beforehand who the recipient is. Fortunately, many such gift exchanges offer the opportunity to steal or trade for gifts that you do genuinely like, but even so, you often end up with a gift that you value less than what it cost to purchase.

Office party gift exchanges must be, according to Waldfogel's logic, a terrible economic loss, percentage-wise! But what is the value of a room filled with laughter as your boss opens a package and, inexplicably, discovers a large glass fish wrapped in tissue paper?

Tags: christmas, gift-giving, gifts, joel waldfogel, office holiday parties, scrooge, wharton
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