Economists Have Discovered the Optimal Gift to Give This Holiday Season

The news: You might not realize it, but economists actually determined the mathematically optimal Christmas gift to give a loved one as far back as 1993, and it's cold, hard cash.

In 1993, economist Joel Waldfogel asked 86 undergraduate students whether or not they liked their Christmas gifts. But being an economist and having that subconcious urge to decontruct and ruin everything that only social scientists have, he decided to dig a little deeper. Waldfogel asked how much those students would have paid for those gifts and how much they guessed those same presents were worth.

The results were not pretty for the gift-givers; while the students estimated their total worth of gifts at $438.20, they would have paid at most $313.40 for them. And months later, he rounded up 58 more undergrads who said their gifts cost $508.90 on average (this group must have been legacy students). But they said they would have just as well preferred $462.10 in cash.

Ultimately, Waldfogel concluded, Christmas had a severe "deadweight loss," or useless transactional costs to the gift-giver. "Between a tenth and a third of the value of holiday gifts is destroyed by gift-giving," said Waldfogel, adding that "Deadweight losses of in-kind government transfers are thus no larger, and in many cases are smaller, than the deadweight losses of holiday gift-giving." According to Waldfogel, cash is a better option for a gift, if you choose to give one at all.

That ruins the Christmas spirit! No doubt. Waldfogel's book is even called Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.

Some other economists agree. "This is the sort of narrow view that rightly gives economics bad name," said Princeton University's Angus Denton. "There's obviously a point here. Money would be better than a gift if you define the problem narrowly enough. And that insight, like a lot of insights in economics, is valuable to have. But stopping there is the problem."

But even Waldfogel gives gifts:

PAUL SOLMAN: Nor, we should be clear, is Waldfogel a dope who opposes all gift-giving. He actually endorses gifts, so long as you think you really know the recipient's tastes, or she tells you, as his own wife does.

JOEL WALDFOGEL: Sometimes, she drops hints. Same with my children. But with people who are more distant from me, I feel very uncomfortable choosing items for them.

PAUL SOLMAN: But wait. If even you give gifts, then doesn't that sort of undermine your entire theory?

JOEL WALDFOGEL: Well, not necessarily. First of all, I'm not against spending. I'm just against spending that doesn't produce the requisite amount of satisfaction.

What Waldfogel's study didn't factor in — and in fact deliberately ignored — was the sentimental value of a gift. That's what bridges the transactional costs of gift-giving and narrows the deadweight loss. The undergraduates surveyed were purposefully instructed to ignore how much they appreciated or liked the gifts, which undermines the point of gift-giving — that you're receiving something you might not have thought to get or been able to purchase yourself.

The trick, apparently, is to dial back your gift-giving; don't purchase presents irrationally or in excess. If you don't know what to get, or you think a gift card or cash might be just as good, it might be best not to guess. But for most occasions, the thought still counts.