Wednesday, January 10, 2007

Does Christmas Make Economic Sense?

Given the fanfare and billions of dollars in spending it generates, you might think Christmas is the best thing to happen to the economy all year. But some economists say we would be better off without it.

Prof. Waldfogel estimates that if everyone bought gifts only for themselves this holiday season, the added satisfaction would be worth more than $10 billion. He derives the number from a study in which he asked college students to place a value on things they bought on their own and on the gifts they received for Christmas. On average, they valued their own purchases 18% more highly than the gifts.

In-laws were among the most unsuccessful givers: Recipients tended to value their gifts about 40% less than they did their own purchases.
Doesn't look so good for Christmas. How about a second opinion?
In 1998, economists John List of the University of Chicago and Jason Shogren of the University of Wyoming wrote "The Deadweight Loss of Christmas: Comment" in the American Economic Review, a continuation of Waldfogel's research. Their experiment was designed to identify the value that students at the University of Central Florida placed on gifts they received. The economists found, as did Waldfogel, that when students were asked to hypothetically value their gifts, the gifts appeared to be losers. But List and Shogren went beyond the speculation and allowed the students to auction off the items to other students. They found that students were much more attached to their gifts when confronted with the possibility of having to sell them. Students exposed their gifts to auction only if the minimum price they would receive was about 27 percent higher than the true cost of the gift. If that psychological value is applied to all gifts in the United States, then the net gain each year from holiday gift giving is about $123 billion.
Well that is a little better. Interesting idea to try and quantify sentimental value. But, this concept seems kind of a stretch for economics, could we get a second opinion, say, maybe from somebody with a Nobel Prize?
Strikingly, sentimentality has been found to apply even to gifts given randomly in an experimental setting. In one famous study, "Experimental Tests of the Endowment Effect and the Coase Theorem" by Nobel Prize-winning psychologist Daniel Kahneman and two coauthors, published in 1990 in the Journal of Political Economy, students at Simon Fraser University in Canada were given coffee mugs from the college bookstore and then asked whether they would sell the mugs at prices ranging from 25 cents to $9.25. A second group was asked whether they would buy a mug at the same prices. Those who received the gifts were possessive of their new treasures, and were coaxed into giving them up only at prices above $7.12. But those who did not receive the mugs as gifts found them unattractive, and were willing to buy them only if they cost less than $3.12.

That $4 difference is attributable to the psychological value of a gift. The recipient experienced a thrill when he or she received the mug, which became the apple of their eye. Those who were offered a chance to buy a mug experienced no such thrill.
Alright, I am sold.

via The Wall Street Journal and The Washington Post


crush41 said...

Marxist explanations on cheap consumable economic valuations related to the Christmas season are not satisfactory, as you point out.

However, the ever-expanding use of giftcards should cut down on the deadweight loss (though it may also have negative implications on the sentimental value of things).

Fat Knowledge said...

Good point on the gift cards, I think the articles actually look at that.

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