This is the midterm review assignment of a course I’ve taken “Bias and Wisdom in Decision Making”. It would make a lovely blog.
Btw, there’s a limite on word count and I got it done within two hours. Cheers to efficiency!
Introduction
Bias and wisdom are not only involved around life-pivoting decisions. In the domain of gift-giving, economic thinkings matters. This review delves into the economic and behavioral aspects of gift-giving, primarily through the lens of two seminal papers: Joel Waldfogel’s “The Deadweight Loss of Christmas” (1993) and the subsequent analysis by Solnick and Hemenway (1996). These works challenge our conventional perceptions of gift value, offering a unique possibility on decision-making biases, where biases in perception and valuation can shape economic efficiency and personal satisfaction of a small act of loving gifts.
Academic Review
Waldfogel’s Analysis (1993)
The AER paper titled The Deadweight Loss of Christmas (Waldfogel, 1993) introduced this concept highlighting the economic inefficiencies in holiday gift-giving. It occurs when the gifts given do not align with the recipients’ preferences, resulting in a lower overall satisfaction compared to if the recipients had made their own consumption choices with an equal amount of cash. The paper conducted empirical experiment on a field study among undergraduate students at Yale and estimated the deadweight loss to be between 10 percent and a third of the value of gifts (~87.1% in total). As holiday expenditures average $40 billion per year (around 1990s, according to the paper), the deadweight loss of Christmas, if estimated correctly, is tenth as large as the deadweight loss of income taxation. It’s kind of weird to see Santa Claus to be more economic-inefficient than Uncle Sam.
The study underscored the role of relationship closeness in gift efficiency. Gifts from friends and significant others were found to align closely with recipients’ preferences, while those from extended family members were often less efficient, and are found to be the least efficient and can destroy a third of their value. This finding reflects a decision-making bias wherein the giver’s perception of the recipient’s preferences is clouded by their relationship distance.
Solnick and Hemenway’s Follow-Up (1996)
Solinick and Hemenway from Harvard University, who were intrigued enough by Waldfogel’s results, sought to replicate his experiment on general public interviewed at train stations and airports. Contrary to Waldfogel, SH find that gift-giving is actually welfare improving with an average yield of 214% (median yield 111%), so gifts created positive value rather than a deadweight loss.
Analysis of the Inconsistency
This discrepancy in findings can be attributed to differences in survey methodology and participant demographics, raising questions about the influence of cognitive biases in gift valuation. Yet I would propose that the difference is caused by the design of the query in the first place. The problem lies in the way these two experiments ask for two major numbers in their survey: (i) how much money does the gift cost (retail price) and (ii) how much does it value to you. However, they framed it differently:
In Waldfogel’s paper, the question is worded as follows:
How much do you think the gift cost?
Apart from any sentimental value of the items, if you did not have them, how much would you be willing to pay to obtain them?
While in SH’s paper, the questions is framed, this way:
How much do you think the giver spent?
Aside from any sentimental value, if, without the giver ever knowing, you could receive an amount of money instead of the gift, what is the minimum amount of money that would make you equally happy?
Despite both experiments stressed the exclusion of sentimental value, SH’s paper described the gifts’ valuation as “the minimum amount of money that would make you equally happy”. Their plain objective of this framing is to elicit the utility notion of general people without proper economic training.
But potential question arise. First, the inclusion of the word “happy” would still make participants difficult to separate pure value with sentimental add-ons. Second, SH’s paper state the value as “receive money in exchange for the gift” as Waldfogel’s paper state as “willingness to pay for the same item”. Hey, endowment effect warning here!
Therefore, in conclusion, the Gift’s Value in these two researches are, actually, not the same thing, hence their results are incomparable in the first place, at least in some strictest sense.
Yet, combined the result of these two papers, insights arise. The mismatch of pure monetary utility of gifts creates a gap of its cost and perceived value of the recipients, while (even partial) sentimental value compensates the value and makes the gift more valuable, in terms of economic as well as emotional gain.
Implications and Conclusion
The intersection of gift-giving with the themes of bias and wisdom in decision-making is multifaceted. The bias, or more precisely, the emotionally re-evaluated value of gifts is an intrigue topic of behavioral economic study. Previous research were conducted under mainstream Western cultural context. However in Chinese culture, cash as gifts (red packages) are more accepted, and due to the practicality of people’s mindset, we can expect some interesting future direction and results lying here.
The resolution of deadweight loss in gift-giving could involve more universally acceptable gifts, like gift cards, balancing flexibility and emotional value. However, this strategy may inadvertently reduce the personalization and emotional impact of gifts, underscoring the complex interplay between economic efficiency and emotional satisfaction in decision-making.
From a personal decision-making perspective, the wisdom lies in understanding and adapting to the recipient’s preferences, thus maximizing both economic value and emotional impact. A gift doesn’t have to cause absolute emotional devastation (in a good way) in order to be successful, nor does it have to be super expensive. According to the Waldfogel study, you’ll already be surpassing 98% others if you can match the value of your beloved ones even approximately. Just think, can I introduce someone to something they might not otherwise know about? Can I get them a nicer version of something than they would buy for themselves? Or can I make them feel seen? One of the three box ticked, and you’ll nail this upcoming Chirstmas and later Spring Festival.
One more thing to care about, is that one might extend your generosity to those on the periphery of your usual gift-receiving group, who might not have initially crossed your mind (as explained in yesterday’s blog). A small, thoughtful gift can have a high emotional impact at a relatively low monetary cost can be a lovely surprise for the people who aren’t expecting your gift, thus enhancing a social connection with a very low cost.
In summary, the study of gift-giving through the lenses of Waldfogel and Solnick and Hemenway offers profound insights into the biases inherent in our perceptions and decisions. It reveals that while economic efficiency is a valuable metric, the emotional dimensions of gift-giving embody a more complex and human aspect of decision-making, blending bias with wisdom in a tapestry of cultural, economic, and personal factors.