Economic After-Action Report: "The Deadweight Loss Of Christmas"

From Bruegel:

The microeconomics of Christmas
Review of major contributions to the literature on the controversial topic of the deadweight loss of Christmas.  

In 1993, Joel Waldfogel made the well-known seminal contribution in the American Economic Review, outlining the problem of the “deadweight loss of Christmas”. Waldfogel argued in favour of shifting the festive focus from the effects of Christmas spending on the economy onto the microeconomic implications of gift-giving. At the micro level, gift-giving is prone to a potential deadweight loss problem, because the best the gift-giver can do is to replicate the choice that the recipient would have made. While it is possible that the recipient may value the gift more than its price, it is more likely that the recipient will be left worse off compared to a situation in which he were to have made his own consumption choice with the same amount of money. In support to his thesis, Waldfogel ran a survey among Yale undergraduate students and estimated that gift-giving destroyed between 10% and a third of the value of gifts.

Waldfogel followed up with another paper in 2002, showing on the basis of a survey of both holiday gifts and items consumers purchase for themselves that consumers’ own purchases generate between 10 and 18% more value, per dollar spent, than items received as gifts. These estimates, Waldfold argues, support economists’ faith in consumer sovereignty, place some limit on the reach of the behaviouralist critique of economics, and, in addition, confirm the substantial deadweight loss of Christmas. A 2006 paper by Lerouge and Warlop compounds the argument by stating that many buying decisions require predictions of another person’s product attitude but consumers are often inaccurate predictors, even for familiar others. They provide evidence that target familiarity can even hurt accuracy in the presence of attitude feedback.

(**Note: Waldfogel then went on to publish a book titled “Scroogenomics: Why you shouldn’t buy presents for the holidays”. Available from Princeton University Press, it would make for an nicely inefficient Christmas gift.)

Again in 1993, John L. Solow wrote an opposite take titled “Is it Really the Thought that Counts?: Toward a Rational Theory of Christmas”. While acknowledging that as a social institution, the exchange of goods as gifts is difficult to reconcile with the theory of rational choice, Solow argued that when individuals' utilities depend on others' consumption of particular goods, gifts of goods can be preferable to gifts of money. Solow’s is therefore an externality-based argument, according to which gift-giving can indeed be a Pareto-superior equilibrium of non-cooperative individual behaviour. Altruism - defined in economic sense in the work by Beker (1981) - does not suffice to explain Christmas gift-giving, because it implies that cash is still optimal. The explanation, Solow argues, is to be found in the concept of paternalism (or “paternalistic preferences”, as in Pollak [1988]), i.e. the notion that the utility of one individual can depend on the quantities of goods consumed by other individuals.

Sara J. Solnik and David Hemenway responded to Waldfogel with a comment in the AER issue of December 1996, arguing that the non-representativeness of Waldfogel’s sample (above-average intelligence, wealthy, young, economics students) limits the generalisability of its result. Using a larger sample and a different method, Solnik and Hemenway found opposite results: more than half of their respondents valued the gift above its retail price, suggesting that Christmas giving actually represents a gain in social welfare. In another comment published in AER in 1998, John A. List and Jason F. Shogren argue that both Waldfogel’s and Solnik and Hemenway’s estimates can be challenged on two fronts: first, their loss estimates are hypothetical; second, the surveys were not framed as demand-revealing auctions. Re-estimating the deadweight loss with a different method, List and Shogren find a welfare gain to gift-giving.

A 2009 dissertation by Lydia Yao attempts at providing a rational theory of gift giving, in light of the  frequency of (supposedly inefficient) non-monetary gifts compared to more efficient cash transfers. She examines a model based on the idea that the sentimental value of a gift can be measured in terms of the time and energy the donor spent to select a desirable gift for the recipient and demonstrates that under a variety of circumstances, individuals choose to give non-monetary gifts over cash in order to signal to the recipient that they exerted this effort. Carlos Alvarenga notices that while in 1993 Waldfogel did not suggest a way out of the deadweight loss trap, in a 2013 interview with Paul Solman he seemed to have come to a position closer to that outlined in Yao’s by suggesting that “the thought is very important and doesn’t need to be communicated with a lot of money”. So, Alvarenga suggests, the key to the puzzle may be that by spending a little and thinking a lot, we can maximise the economic utility function of gift giving and minimise any potential deadweight-loss at this special time of year.

George Loewenstein and Cass R. Sunstein want to draw attention to the behavioural economics of Christmas. Behavioural economics - they argue - provides some straightforward lessons for gift-givers and gift-recipients alike. When people try to predict how another person will respond to a certain situation, they begin by imagining how they themselves would respond, and then make adjustments for differences between themselves and the other person. At both stages, they make big mistakes. Gift-givers should therefore beware of projecting themselves and their current mood onto your purchasing decisions. For gift recipients, the lessons is that psychologically astute recipients should realise that they risk disappointing people who are trying to please them and should avoid the common mistake of failing to display enthusiasm commensurate with the giver’s hopes. In other words: even if the gift confirms your worst fears, under no circumstances should you display these feelings....

....MUCH MORE

Confirming our worst fears, that Sunstein's take on behavioral economics is at its core a philosophy of deceit.

Bah, humbug.

If interested see also:

Cass Sunstein and the Nudge People
From Tablet Magazine:

Neoliberal Twee
Cass Sunstein’s latest TED Talk of a book offers the kind of technocratic whimsy that left and right can agree to hate

Related:
Professor Gelman Is Not Impressed By The "Nudge" People

Andrew Gelman is Professor of statistics and political science at Columbia Uni., the guy who tells the other social scientists how to get their numbers right so they can at least give the appearance of being a science. He has a very tart tongue which, combined with a high level intellect is fun to watch taking on sacred cows and shibboleths. As long as you aren't the target of said intellect and/or sharp tongue.
Here he is looking at Cass Sunstein as Sunstein's new book rolls out....

Nudge Guy Say Nudges Good, Critics Bad
Have I mentioned I don't like the nudge people?
Ah, I see I have. More below
Cass Sunstein via the Social Science Research Network...[many links]

Also:
Book Review: "Cass Sunstein’s Latest Combines Banal Insight with Pernicious Intent"

Humbug I say.  

Here's the Waldfogel American Economics Review paper via the New York Times' servers:

https://graphics8.nytimes.com/images/blogs/freakonomics/pdf/WaldfogelDeadweightLossXmas.pdf