Maria Andersen / Uncategorized

Don’t Let the Grinch Steal Your Holiday Shopping Spirits (Maria Andersen)

I’m dreaming of stress-free Christmas shopping. Holiday shopping is enjoyable but it also has the potential to avalanche into a nightmare. There are too many ornamental balls in the air to juggle at once — finding the perfect gifts, staying within your budget and preserving your sanity. I have learned that if gift shopping is approached strategically, it becomes possible to maintain your holiday cheer. With a bit of economic sensibility, it’s possible to efficiently manage your naughty and nice list.

The first step is to confront the Ghost of Poor Christmas Management. Remember when he haunted you last year? It was the weekend before Christmas and you were scrambling around a hectic mall, tongue flailing and your mood hanging on a string. Learn to shop in a fashion that minimizes costs and maximizes benefits. Hitting the mall last minute is costly. You don’t spend your time well, and out of sheer stress, you are more likely to purchase mediocre gifts whilst exceeding your budget. If holiday shoppers easily perturb you, consider online shopping, as this minimizes the stress and overspending. Your mood will benefit, as will your recipients who receive your carefully considered gifts.

Next, familiarize yourself with the commodity you’re dealing with — the gift. If you can understand the economics of gifts, you will be able to manipulate the act of gift giving to your own advantage. Here’s what economist Joel Waldfogel found:

He asked students two questions at the end of a holiday season first, estimate the total amount paid (by the givers) for all the holiday gifts received; second, apart from the sentimental value of the items… how much would you be willing to pay to get them?

Waldfogel noticed that the students valued their gifts at a dollar value lower than the actual price paid by the givers. On average, a present was valued at 90 percent of the actual price (i.e., If a gift cost $100, the students would have paid $90 for it themselves). That means 10 percent of the value of the gift is a deadweight loss (i.e. $10 could have gone unspent and neither giver nor receiver would have been worse off). Keep this in mind when you consider going over your budget for a gift. Sometimes, going that extra [10 percent of a] mile is just not worth it!

The act of gift giving is difficult because it boils down to pure guesswork. The giver does his best to guesstimate the preferences of the receiver. Does my dad have a high preference for a new sweater? Would my mom like to own a new bracelet? As economist Chris Coyne asserts, gift giving is tough because of asymmetric information. If we had perfect information (meaning our friends tell us exactly what to buy), gift giving would be a piece of cake. The problem of asymmetric information is lower when we purchase for our friends, because we have already intuitively gathered much information about the preferences unique to our age group. With grandparents and acquaintances, we’re aimlessly shooting in the dark.

Instead of guessing others’ preferences, reflect on yourself and try to recognize your comparative gift giving advantage. Do you travel a lot for work, relative to your other friends? Then your gift giving advantage may lie in giving duty free fragrances that fall out of all your friends’ price ranges. Are you the only crafty one in your friend circles? DIY all your gifts.

Presents signal how much we value the recipient. As the saying goes, gifts are a token of our appreciation. Harvard economist Greg Mankiw made an interesting observation regarding gift signaling, noting that, “People care most about the [gift giving] custom when the strength of affection is most in question.” Mankiw explains that the reason we agonize over what to purchase for our boy/girlfriend but not our parents, is because “The parents’ love is less likely to be in doubt, so the recipient probably won’t interpret the cash gift as a signal of lack of affection.” But let’s be honest. If we want to score points with our significant other, we will buy them a thoughtful gift to signal both how much we value them, but also to signal how much he/she should be valuing us. We’re self-interested and splurge on gifts because we realize that our reputations are on the line.

Mankiw and Coyne both contest that money is the most efficient gift. If you give someone cash, it is guaranteed that they will purchase an item that is completely in line with their preferences. On the flipside, when you give someone an envelope stuffed with dollar bills, you’re trading off the value of a sentimental gift. As the saying goes, “it’s the thought that counts”. In the world we live in, it’s part of our social norms and culture to give gifts to others; not cash. If we hand someone $20, we’re unintentionally signaling laziness and inconsideration. During the holidays, most people place a higher value on sentimentality than efficiency.

Luckily, there exist gift options that embrace both efficiency and sentimentality. One way of spotting these gifts is by remembering that the scarcity is part of nature and humans respond to scarcity fairly equally. The scarcer a good is, the higher we value that product. Sure, diamonds and gold cufflinks are expensive because these resources are scarce, but you don’t necessarily need to turn your wallet inside out in order to exchange a valuable present. Think back on some goods that are particularly scarce in your life. Chances are they’ll be scarce to your friends as well. A classic example is leisure. We’re busy bees and rarely splurge on a day off. Express your consideration for a friend or relative by giving them a Living Social spa deal or movie tickets. We don’t treat ourselves to a massage often enough, so it’s a luxurious treat when the opportunity is gifted to you by someone else.

Here’s a true Christmas miracle: it’s feasible to give a gift that keeps on giving, thanks to the theory of diminishing sensitivity. The logic goes as such: if we are presented with the same value in two different ways, we will always choose the option that sounds like a bigger gain. For example, gaining $1 from $0 feels like a larger increase than earning an extra dollar when you already have $100. In the words of social economists Kahneman and Tversky: “value is assigned to gains and losses rather than final assets.”

Gentlemen — this means you could get her one unique orchid plant for Christmas, or you could subscribe to a flower service that allows you to send her a bouquet a month for the same price. The cost to you is the same, but to her, she will receive the same gift twelve times over (the assumption here of course is that she values all floral gifts equally).

Finally, don’t underestimate the value of giving gift cards. If your best friend is struck by a serious case of wanderlust, buy her a gift card to CVS, so she can splurge on travel size toiletries and magazines for a long flight. If your brother-in-law recently bought a house, give him and his wife a card to a home goods store that offers a wide variety of products. When deciding the dollar amount of the card, think again in terms of diminishing sensitivity. For example, to the receiver, $12.50 sounds like a lot more than $10, but to you, spending a couple extra bucks is marginal. A good tip is to stay away from round numbers ($10, $20, $30) and settle instead on amounts ending in “5” ($15, $25, etc.) as our mind has been trained since elementary school to round upwards when we see the number five.

At the end of the day, Christmas comes but once a year, so quit pulling your hair over the shopping. Last Christmas, the retailers may have broken your heart, but this year, keep mental distance from all the madness and approach your Christmas by shopping economically. You’ll find that both you and your recipients are made far better off.

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