Deadweight Loss Of Gift-Giving

How To Minimize Holiday $$ Waste

We love Christmas. There is something about the season. Lights. Family. Presents. Even before we had our own kids, Christmas had an air about it.

We could listen to Christmas music all month and not grow tired of it.

We watch all the stop-motion claymation Christmas specials.

If you listed out 1,000 things about Christmas, we would love 999 of them. There is 1 thing that we don’t like though.

Getting gifts.

We don’t like any part of receiving presents. It could be that we are simple and don’t like a ton of clutter. It could be that anything in a price range that is giftable is cheap enough we would just buy it if we wanted it. It could also be that we understand the deadweight loss of gift giving. Or the answer is all 3.

[Note - best gifts are sentimental items from the family or the spouse giving a little extra during the sexy time. Those are things that we can’t buy for ourselves…well at least the poorly drawn kids pictures we can’t buy]

But people will continually make negative value gift decisions based out of tradition. Let’s see if we can’t start some new traditions with this post.

Deadweight Loss

Deadweight loss is an economic concept. It is a good college word to throw out when trying to sound smart. And it basically just means waste. In economics, any intervention in a perfectly competitive market introduces a deadweight cost.

It is used often in libertarian arguments against taxes. Taxes introduce a cost that adds inefficiency. If a supplier is willing to sell for $5 and a buyer is willing to buy for $5, but then the government introduces a $1 tax. Now the seller needs to sell for between $5 - $6 depending on how elastic the demand is. The more the price goes up, the lower the demand and there is a loss to society from taxes as less of the item is sold and at a higher price point but with that extra money going to the gov’t to squander.

If you remember your supply and demand curves, deadweight loss is shown by a triangle of inefficiency. (Shown in Yellow below)

Source: Wikipedia

We won’t paraphrase here because wikipedia nails it:

Harberger's triangle, generally attributed to Arnold Harberger, shows the deadweight loss (as measured on a supply and demand graph) associated with government intervention in a perfect market. Mechanisms for this intervention include price floors, caps, taxes, tariffs, or quotas. It also refers to the deadweight loss created by a government's failure to intervene in a market with externalities

With all the technical stuff out the way, you probably already have an idea what deadweight loss of gift giving is…

Deadweight Loss of Gift Giving

If you value an item at $10 but it cost $20, you wouldn’t buy the item. Your utility is higher with $20 in your pocket than the item in your hand. (Utility is just an economic term meaning your happiness or well-being).

Most of you reading are hopefully well off enough that any item you really want that is giftable (< few hundred) is affordable. If you want an item, you would just buy it.

For instance, if we wanted whiskey stones and they were worth the price to us, we would just purchase them.

[F’er Note - the worst articles around the holidays are the listicles for “21 gifts your [insert relationship] needs this year”. It is always generic stuff that we have never heard anyone ever ask for. Maybe we hang with the wrong people, but no guy needs whiskey stones, overpriced pocket knives, and quirky ties.]

Holistically, that means that someone in your immediate circle spent $20 on something that you only value for $10. That is a net loss of $10 to your circle.

Least Efficient Gift Givers

In 1993, someone did a study to see who the least efficient gift givers were. It basically reached the conclusion that most people who have ever got a gift know. In general the older and less close the gift giver is, the more inefficient the gift is.

Do you have a grandparent you only see once a year for Christmas? They are giving gifts 40% or more below the utility you want.

Do you have a best friend? they are likely within 10% threshold for inefficiency.

Researchers found that, by their measures, friends and significant others gave the best gifts, parents and siblings gave slightly worse gifts, and aunts, uncles, and grandparents gave the worst gifts. Gifts got worse when the age difference between giver and recipient was greater, and when the relationship was more distant. So, while age alone would indicate that parents give bad gifts, the effect is mediated by how close the relationship is. Since parents are immediate family members who know the recipient well, they give better gifts than aunts or uncles, but not as good gifts as siblings or spouses, who have both close social distance and age in common. Grandparents were also by far the most likely to give cash gifts, followed by aunts and uncles.

-Yahoo post reviewing the study

On average, it looks like ~25% of the value of the gifts given is deadweight loss.

Or said another way, for every $100 in gifts your family is giving each other, $25 of it is wasted.

Think about all the money you spent and your family spends buying gifts and take 1/4 of it. Would everyone be better off if you found another way?

Gifts That Work

Don’t worry, we won’t leave you high & dry. Here is our ideal list of items for the economic minded:

1) Socks & Undershirts & Underwear (Nearly break-even)

We are going to start with gifts that get ragged on a lot, but are actually one of our favorite gifts to get.

Mainstream personal finance writers really are the worst kind of midwits….

Why?

We can always justify putting off purchasing socks…or more likely just forget to buy them. You have 20 pairs of socks and a bunch have holes. Your sock drawer looks full, and then one day you can’t find any without a hole. So you make a note to buy more.

Who actually remembers to buy socks? It is so low on the priority list it keeps falling through the cracks.

If someone drops $20 on gifting you socks, the value of those socks is near $20. Socks are socks, they are a commodity, its not like whiskey stones where we aren’t going to use them. Those socks will get used.

Arguably, the value to us is >$20 since:

1. You took an errand off the to-do list

2. They will 100% get used (unlike the 5 sets of whiskey stones in our pantry still unopened)

3. We now don’t have to just wear a pair with holds in it.

[F’er note - don’t at us about fancy socks. We are aware how good a nice pair of socks are. The point stands. Even getting fancy socks we wouldn’t pay the price for over generic socks, it nearly break-even in terms of a gift.]

2) Subscription Boxes (Not break-even, but at least exciting)

Subscription boxes are a net negative for sure. But at least a 'flower of the month’ is something that your wife/gf will get some value out of due to having something to look forward to.

We really like automation to free up time. And these services charge you for the convenience of not having to make a special trip every month.

Lots of these services are full [redacted] or criminally overpriced (like junkfood of the month where you can look up the price of the snacks and see its $10 of items in a $50 box). The ones that seem all right are the ones that send something not available locally and send a new variety each month.

Tropical flowers of the month so your spouse has a convo starter.

Tropical fruit of the month so you can try some weird alien looking produce as a family.

You get the idea. Not our favorite option, but it works in a pinch.

3) Money (Break-even)

Society has been psyop’ed that giving cash is ‘inconsiderate’ and ‘not thoughtful’. But you want to know what is the best way to ensure that the value of your gift = the value...by gifting cash. Obviously, handing your spouse $100 isn’t likely to fly, but normalizing cash as gifts to extended family is a net benefit to your bloodline.

Even for kids, we would prefer people gift $ to buying cheap toys. We get it, every relative wants to buy the ‘hot’ toy of the season and see the kids fawn over it and feel like a superstar.

But think about your childhood. How many toys do you truly remember? Do you know what would have been more beneficial to you? Getting $100k in your 20s from years of family contributing to a UTMA account that was invested. (Unfamiliar with UTMA? Read about 8 accounts for minors here).

3a) College Funds

Still, people don’t like cash gifts. One route that has worked well for us is asking for ‘college money’. Aunts & Uncles may not want to hand out cash, but contribute to a college fund seems noble.

It is easy enough to set up a 529 plan and family can contribute directly to it. Or give you money to deposit for them (which you should then put in a UTMA instead for added flexibility most of the time).

3b) Gift Card (Huge negative don’t buy gift cards)

“Gift cards are just as good as money”, right?

No.

You just gave us a chore. We now need to:

1. Go to whatever place you chose

2. Plan for it (since you don’t travel with a bag of gift cards just in case you happen to stop at a particular place)

3. Go into the drawer and find the gift card before leaving

You know what allows us to eat at that restaurant besides gift cards? Cash.

No idea where this idea of “cash is inconsiderate” but “cash-like instrument that is less user-friendly and adds more things to remember” is acceptable thing came from. But let’s kill it.

3) Sentimental Gifts (Positive)

Coming full circle, sentimental gifts are a net positive.

That crude drawing that your kid spent time on for you, its cost is in the pennies, but the value of it is much more.

Another good gift is photos. One of our favorite gifts is photo books. And it serves a dual purpose.

Mrs. F’er gets gifted 4-5 ‘professional photo shoots’ a year. And she gifts us a photo album from the shoot.

Candid pictures with a cell phone are cool and all. But trying to take a picture of a full family of different heights (6’4” F’er, 5’6” Mrs. F’er and kids from newborn to <8 height) by holding a camera out at arms length and capturing everyone and a background is like putting your balls next to nail and hammering it in…sure you get the job done, but it isn’t going to be pretty.

So F’er buys the Missus a shoot where the whole family can get in a picture nicely, and in return F’er gets a nice mini photo album to look back and see the kids over the years.

Whether its a date night or family activity, sentimental gifts are positive.

4) Charitable Gifts

We think its generally pretentious when people ask for charitable donations for events. (Again, cash works. If we gift cash and you want to donate it, that is wonderful. Making us log on to some site to donate to a cause on your behalf (after the site takes fees), is a chore. When we go to a wedding and they ask for a donation to some dopey charity it is annoying.

Good charities would be less of a problem. The issue is most of the people who do this come from wealthy families and tend to be low IQ so they choose crap charities:

• Climate Change

• National charities that take huge fees out of donations

• Charities with spotty records (PETA euthanatizing dogs)

• Politicians - Yes, we went to a wedding where the request was a donation to the national political organization (DNC or RNC). Talk about lighting money on fire.

Good charitable gifts are things like “we purchased clothes for the homeless/battered woman’s shelter/orphanage”. Especially around the holidays, most churches and places of worship do giving trees.

If you are unfamiliar, they go to a local orphanage and the kids fill out a tree for the items they want. Usually you can get all the items listed for <$50.

[F’er Note - if you want to be humbled, go and read the items. Kids 6 years old asking for warm socks and a pillow.]

Summary

This is a bit of a Scrooge post, we know.

And before anyone says “Holidays are not about the gifts” or “Its the thought that counts”…both of those are double edged sayings.

• If holidays are not about gifts, then everyone should be cool with sharing in the company without giving gifts.

• If it is the thought that counts, then everyone should be cool agreeing that you are all thoughtful enough to recognize everyone is better off skipping the big gift giving spectacle.

We will finish this post up with a few other options you may want to consider that both allows for giving and doesn’t waste money.

1. Group vacation - Agree to take a group vacation. Most people do a few getaways a year, so just choose a long-weekend and go away together. You pay your way but everyone does it together. Give the gift of more time together. Since you are likely going to be taking a vacation anyway, the cost to you is immaterial (it was money already spent).

   1. This is especially useful when you realize how little time you have with your parents and grandparents. If you see your parents 5 times a year and they are in their 60s. You maybe have 100 more visits with them before they die. Making a 3 day weekend every year with them significantly increases that. And as a parent, time with your kids is worth significantly more than anything

2. Secret Santa - secret santa is when everyone chooses 1 name and buys 1 gift for that person. This way there is still gift exchanges, but the damage is limited to only 1 gift

3. Events - Does your family all like a band, a sportsball team, or an activity. Get tickets and spend an extra day together at the event. Even going out to a nice fancy meal together can be a better use of money than physical gifts.

We know that having the conversation can be dicey. Everyone wants to think they give valuable gifts. But in the end, the payoff is worth it. Remember if your full family is dropping $10k in gifts and there is a 25% deadweight loss, that is $2,500 of waste every holiday for all your loved ones. Do you want more stuff or want your entire family tree to be better off?

At a bare minimum, it frees up your wife from having to re-gift presents from one side of the family to the other every year (or maybe that is just us?)

Good Luck Anon & an early Merry Christmas (or holiday of your celebration)

PS - If you buy anyone whiskey stones, baby Jesus cries.