Christmas is a very special time of year, where people spend time with loved ones and exchange gifts. Across the world children will hang their stockings for Father Christmas, loved ones will dart across high streets for the ultimate gifts and teachers will be swamped by presents from thankful parents (likely more generously after experiencing home teaching). However, finding the right present is a large task and one that does require a lot of thought. You don’t want to be finding yourself muttering ‘but you always love scarfs’ as Alan Rickman and Emma Thompson do in Love Actually but nor do you want to go over the top and risk morphing someone into a real-life Dudley Dursley from Harry Potter. It is a difficult puzzle, as buying a present for someone is essentially an exercise in evaluating whether or not someone will enjoy a high level of utility from that good. The higher the level of utility, the better the present. Therefore, some economists, such as Joel Waldfogel, suggest that the best present is the gift of money, as we value items we receive 20% less per dollar spent than items we buy ourselves. This is because we are best at determining what items we will derive the maximum utility from, no matter how well-intentioned your friend was when they gave you knitted mittens for Christmas.
The economic rationale for this chain of reasoning follows the concept of deadweight loss. This concept states that a deadweight loss is a cost to society created by market inefficiency and as a result, the Christmas deadweight loss, is created by the inefficient allocation of resources due to presents failing to create the highest level of utility. Whereas, if the money used for that present was transferred to the recipient, it would allow them to choose their own good/service and as a result gain a higher level of enjoyment out of their purchased good/service. Admittedly, this economic rationale is very un-Christmassy and does take the magic out of the festive season. However, these economists are not followers of scrooge or in league with the Grinch in stealing Christmas. They aim to allocate resources according to the highest level of utility enjoyed by the consumer. I will explain this with the help of Jude Law playing Graham in the Holiday. If someone, let’s say Cameron Diaz, were to give Jude Law a new turtleneck jumper costing £120 for Christmas, the utility he will derive from the present will be less than the value Diaz paid for it because he already has a favourite turtleneck. What this means is that although the turtleneck was valued at £120, he may only value it at £60 because he was not needing a new jumper and worse, he may feel obliged to wear the new one despite getting higher utility out of wearing his old one. Therefore, the deadweight loss of that present is £60. It is found that Grandparents give gifts with the lowest value to recipients, with 37% of the cash value of the gift disappearing once it is opened. Following grandparents is aunt and uncles, with 36% of the cash value of their gifts disintegrating upon the recipient opening the present. Therefore, money seems like the most effective present as it corrects deadweight loss.
However, this way of measuring the utility of presents ignores the value of giving. The person who gives the present does so because of the joy of witnessing someone they love open a gift they have put thought into. In equal measure, although the present may not exactly be what they want, it opens people to things they would have never purchased for themselves. It could be that they were hoping for a PlayStation 5 but instead received a cricket bat. This could get them outdoors, benefiting from better health and a love for a new sport (of which is hard to measure at the opening of that gift). Then there is the spirit of Christmas itself, would it be the same if we replaced ambiguous wrapped boxes with a healthier balance on your Monzo account? In fact, by reducing Christmas to utility, fiscal values and economic efficiency we undervalue the very magic that Christmas creates. So, what is the perfect present? The answer is not in the present but Christmas as a whole.
The whole team at ABM alliance wish you a very Merry Christmas.
Written by Henri Willmott