What giving good gifts and designing better social programmes have in common

In what is fast becoming a mini-tradition itself, it feels as though every year we get a fresh round of the ‘economists vs gifts’ row.

Just within the pages of UnHerd, for example, last week Tom Chivers tackled the subject, following on from Polly Mackenzie who wrote about it last year. Here’s the crux of the argument, as Chivers explains: “People are less good at buying things for other people than themselves, so they end up wasting money” when they get them presents.

Unless you’re an extraordinarily good gift giver, I suspect you’ll feel the force of this argument. Most of us will probably at some point have frantically rummaged through the gift aisles in panic, trying to find some tat to pass off to an office Secret Santa or a distant relative, and recognised that the whole endeavour was entirely pointless. But unless you’ve been exceptionally unlucky, you should also be able to think of occasions when the economists have got it wrong: gifts that perfectly hit the mark and that the recipient would never have bought for themselves. I think it’s worth working through the economists’ insight and what it misses, not just because it might help us give better gifts, but also because it tells us something about the benefits and perils of applying economic thinking to social and political life.

At the root of economists’ objections to gift giving is a simplifying assumption made in basic economic models, but which has in many cases hardened into a sort of psychological dogma: the idea that people are rational utility maximisers, that they always know and pursue what is in their own good. In other words, if you give someone £100, they will unfailingly spend it on the thing that they want most and makes them most happy. An entire sub-discipline – behavioural economics – has painstakingly demonstrated the falsehood of this claim and identified the systematic ways in which people fail to achieve the best outcomes for themselves. And our experiences with gift giving can help illustrate some of its principles.

Basic economic models assume people are fully informed. In practice, though, that is an ideal that no consumer could ever hope to achieve. Suppose I want to buy a new shirt. There are too many retailers, too many brands, too many designs for me ever to hope to appraise all of my options. In that context, if you have a decent sense of my tastes, it seems quite plausible that you would be able to find a shirt that I would like but would never come across.

Behavioural economics also recognises that people aren’t fully rational in the way they spend money – they engage in ‘mental accounting’, budgeting differently for different sorts of goods and services. For example, some people treat ‘luxuries’ quite differently from other purchases and so have certain things that they want, but would feel guilty buying for themselves. That creates an opportunity for an enterprising gift giver – get them the thing they’d love but consider too extravagant.

The assumption of rational utility maximisation casts a long shadow over public policy. Taken up eagerly by free marketeers and libertarians, for many it grounds a near instinctive scepticism towards ‘paternalistic’ measures that interfere with individuals’ choices on everything from pension savings to gambling to alcohol consumption. After all, if people generally know better than anybody else what is good for them, we are likely to make things worse by blocking them from acting on that self-knowledge.

Gift giving demonstrates that this is not a universal truth: it is possible to benefit others in ways that do not involve leaving them to help themselves. But it also shows that this is very difficult task. Surveys suggest that on average, Christmas presents are worth less than 10-15% of their cash value to those that receive them.

The great advantage policymakers have over gift givers is that it is much easier for the government to just give people money without coming over as crass. They should probably use that option more often. There are debates to be had on whether in-kind provision or subsidies of everything from food and period products to childcare and education are better than direct financial transfers. But insofar as policymakers want to develop programmes that can ‘beat’ cash, they confront a similar challenge to the one facing gift givers.

In both cases, the optimal approach involves asking the same questions. Are you familiar enough with the preferences, interests or needs of those you are trying to benefit? Do you have an informational advantage over them: are there products, services or markets that you understand (or are willing to research) better than them? Can you identify an irrational bias in their behaviour? If so, you might be able to find a great gift or design a social programme that really improves their lives. If not, make sure to keep the receipt.


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