The Wisdom(?) Of Gift Giving

by: Jacob Rothman, CFA

Summary

Some economists decry gift giving as "value destructive," as recipients value gifts at less than givers paid.

Receiving gifts can create intangible value, not necessarily included in the economic value of the gift.

7 Tips for wise and rational holiday shopping.

As we go from Thanksgiving into the Christmas season, our inboxes and mailboxes are inundated with sales, and our minds are full of chores to be done – one of the biggest of which is buying gifts for everyone on our list. This time of year, an assertion of Chris DeMuth, one of my favorite financial writers, comes to mind - that gift giving is irrational. Would we be better off to agree with our friends and family to shop for ourselves instead of each other? Joel Waldvogel, who literally wrote the book on this topic, argues for this approach. In an interview with Vox, he said “Let's just think about the thing I get, not sentimental value. My research found that a dollar spent by me on myself produces roughly 20 percent more satisfaction — the thing that I get is worth 20 percent more to me per dollar spent — than when people buy me a gift.” Results vary, however. He concedes that generally when people find something that makes them think of a loved one and buy it is a gift, it is highly valued by the recipient. The worst results come when we buy many gifts out of obligation on a short deadline for people we do not know well. In an interview with Slate, Waldvogel states, “Gifts from givers in daily or weekly contact are, on average, about 10 percent more satisfying, per dollar spent, than those from givers in only monthly or yearly contact.”

While Waldvogel claims the evidence shows that gift giving destroys value, (and economists call value destruction irrational), he does find that the groups that select the worst non-cash gifts are also the most likely to give gift cards or cash. This appears to be rational behavior within the context of an irrational practice (gift giving). However, even giving gift cards carries dead-weight loss. A shopper expends effort to find and purchase a gift card for cash that limits the recipient to the cash value the giver paid, but only at one merchant. A quick check of Gift Card Granny on 11/25/17 showed almost 300,000 gift cards being resold for discounts up to 54%. One would expect this to be the peak buyers’ time, with even more inventory after Christmas. Gift giving is not just a debated topic, it is a “problem” that some seek to solve. Giftster seeks to improve the efficiency of gifting through an online gift registry.

If gift giving is such a poor allocation of resources, why does the practice persist, and why is it so ubiquitous across cultures? Perhaps the key is in Waldvogel’s caveat, “not sentimental value.” His research focused on the tangible value the recipient placed on the item. This overlooks at least three sources of intangible value. First is the value the recipient gets from giving the gift. Jesus famously said, “It is more blessed to give than to receive.” (Acts 20:35, KJV) Did He mean this in simply a moral or religious sense? Probably not. We all know from experience the joy we get in seeing a loved one delight in our gift. A Scientific American article cited a research study in which participants hooked up to FMRI machines exhibited greater signs of neural stimulation in the brain when giving money away than when winning prize money. The article concludes: “Generosity of time and thought may actually pay off in more ways than we think. Not only is the gift recipient likely to be appreciative, but we ourselves may benefit. Generosity—which in this definition actually includes generosity of time and generosity that is both unexpected and spontaneous (in stark contrast to the list-variety of present)—is one of the top three predictors of a successful marriage... It can make us feel better about ourselves. It can help us actually be happier and see the world as an overall better place. In short, it might be an initial investment that is worth making.”

This conclusion mentions the second intangible benefit of giving – improved relationships. This is nuanced as some people resonate with gifts more than others. Gary Chapman, in his book “The Five Love Languages,” lists gift giving as one of the primary ways some people express or perceive love. To people whose spouses feel loved by receiving gifts, he counsels, “To invest in loving your spouse is to invest in blue chip stocks.” The Scientific American article referenced a powerful story I remember from High School Literature class called The Gift of the Magi, which is well worth reading. The young couple in the story gave gifts that, from an economic standpoint, destroyed utility, but they made exquisite expressions of love that could not help but build up their relationship.

The third intangible value of giving is the sentimental value to the recipient. A Business Insider article entitled, “Why Buying Presents for the Holidays Makes No Economic Sense” conceded: “…a good gift not only aims to please, in the sense of satisfying the consumer preferences of the recipient. It also engages and connects with the recipient, in a way that reflects a certain intimacy.” In this way a gift can be worth far more to the recipient than the cost to acquire it. My wife’s favorite gift is a rubber bracelet I gave her shortly after we met. It cost me nothing, but was special to me, and I wanted her to have it. It was the first gift I gave her and she wears it constantly.

Conclusion: Giving gifts can be stressful, expensive and wasteful, but it doesn’t have to be. It can be thoughtful, sweet, fun and can help build stronger relationships. The difference really lies in the relationship and how we approach the gift giving. When we see gifts as something we simply exchange out of obligation, it becomes a burden, and tends to destroy value. When we give thoughtfully, out of a desire to express love to someone and to bring them happiness, gift giving can be powerful and bring joy to both us and the person we love. I’m sure Ebeneezer Scrooge would agree. “… and it was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge. May that be truly said of us, and all of us! And so, as Tiny Tim observed, God bless US, Every One!”

The keys to smart gift giving:

  • Remember the why – don’t lose sight of the relationship as the basis for the gift.
  • Know the person for whom you are buying gifts. Pay attention to what interests him, what sorts of gifts he gives, and what gifts especially resonate.
  • Watch for that perfect gift. By purchasing opportunistically instead of desperately, you can enjoy the process, express love and thoughtfulness and avoid the stress that can accompany a long gift list with a short deadline.
  • Start early. This allows more time for thought, creativity and bargain shopping. It takes the stress out of shopping. Start by making a list of people to whom you want to give gifts. Then add ideas as you go, or mark what you bought.
  • Think creatively. A gift does not have to be a tangible item. It could be an experience, a subscription, a meal or some other intangible idea. To make it more special, give something you can do together. It does not have to be purchased, either. It can be a handmade item, or home-cooked meal. For a particularly close friend or relative, consider giving something that is precious to you. A very close friend once gave me his watch, which I will always treasure.
  • Consider your edge. Gifting is similar to investing (and many other things in life) in that we should adeptly capitalize on our advantages, minimize our disadvantages and prudently discern between the two. The greatest value of a gift is its expression of love and thoughtfulness. When we are able to wisely choose a gift for a person, we should do so. Think about where you might be able to buy something better than the recipient. My sister often buys me clothes, which she can pick out much better than I can (a low bar, to be sure). You might know about something the recipient has never heard of, but would really enjoy. When we have no idea what to give, enlist the help of a friend who knows the recipient, or look at a gift registry, or simply keep the gift generic, such as a gift card. (Just be sure the gift card is to a place the person wants to go.)
  • Don’t borrow to give, if you can at all avoid it. Giving generously is loving, but we do not have to be unrealistic and give beyond what we can afford.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Rothman Investment Management, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Jacob Rothman and do not necessarily reflect the views of Rothman Investment Management or other members of the firm's staff.

The information in this article is not intended to be used as the basis for investment decisions and should not be construed as advice intended to meet the particular investment needs of any investor. The information in this report should not be considered as a representation or warranty and is not an offer or solicitation of an offer to buy or sell any security.

The opinions, data, and statements contained in this report have been obtained from sources believed to be reliable but have not been independently verified and are not guaranteed as accuracy nor does it represent a complete analysis of every material fact. This report is for informational purposes only as of the date appearing on the report and are subject to change without notice.

This post is illustrative and educational and is not a specific offer of products or services.

Any positive comments should not be construed as an endorsement of my abilities to act as an investment adviser. Negative comments are not restricted either.