George “Ebenezer” Will

The Joy of the Season… is Lost on Him

The children are all snug in their beds with visions of Wii’s dancing in their heads, and after four weeks, we finally have the chance to finish a post that we started on Thanksgiving Day, when we read a very silly column by George Will.

His column was entitled, “No gifts, please.” In it he discusses (and approves of) a pamphlet called Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays by Joel Waldfogel. Based upon both Mr. Will’s column and the book’s title, it seems that Mr. Waldfogel believes that buying Christmas gifts destroys value, i.e., the collective satisfaction in the economy (and perhaps the world) would be greater if Christmas gift-givers spent the money on themselves instead of on loved ones and others.

Before criticizing that conclusion, we do want to mention a few caveats:

1. We’re not sure if Mr. Will wrote the column in a tongue-in-cheek manner, but there is no indication that he is anything but serious, and the column was published on Thanksgiving, not April Fool’s Day.¹ Also, we do realize that he is constrained to only a certain number of words per column, and that relatively low number may make complete and clear communication difficult. Or, maybe a dim editor unknowingly hacked the wit out of the column.
2. We didn’t and don’t have the time or interest to locate, buy, and read Mr. Waldfogel’s book, so it may be more nuanced and sophisticated than Mr. Will understands it or cares to explain it. If that’s the case, then we apologize to Mr. Waldfogel for grouping him with Mr. Will.
3. Similarly, Mr. Waldfogel may have written the book in either a tongue-cheek-manner or–using rhetoric and exaggeration–in an instructive way to educate his students. If that’s the case then, again, we are sorry for criticizing him, and we note that Mr. Will did him no favor by publicizing his work in such a poor manner.

That being said, using common sense and a little knowledge of economics, there are at least four ways to negate their conclusions:

1. Revealed preference of gift-giving actions..
2. The preferences, including the risk preferences, of gift givers and receivers and what that means for collective satisfaction.
3. The existence of uncertainty as it relates to the level of enjoyment.
4. Whether one truly knows ones own tastes and how they will change through time and if others know better.

The first three can be discussed within the context of standard microeconomics and utility theory, while the fourth one involves the violation of one of the most common and basic assumptions in economics.

Revealed Preference

This is the simplest argument to follow. Revealed preferences means that  actions speak louder than words–i.e.,  what people do is what matters–not what they say.

The fact that rational folks voluntarily buy presents for others means that they have concluded it is the best use of their money (or credit). Otherwise, one must assume that those being studied are irrational and/or that factors other than their own consumption affect their well-being or satisfaction. Both are easy to believe, but once an economist assumes irrationality it becomes very difficult to draw any conclusions.

In fact, if they are irrational, telling them so isn’t likely to have much of an effect on them or their behavior.

For example, if folks are irrational, then what can Mr. Waldfogel say? “Many people can’t think clearly and waste money.” We have no doubt that it is true, but that’s not very insightful or new. In that case, they don’t just waste money at Christmas but during every other season. (Perhaps they waste less at Christmas than they otherwise would (without the emphasis on peace, love, and joy and shopping for others).

Now it is possible that Mr. Waldfogel has a game theoretic model–similar to, say, the Prisoner’s Dilemma–in mind, where some “bad” equilibrium of gift-giving obtains by everyone behaving rationally. But, for a variety of reasons, every Christmas people stop buying presents for other folks. So, unlike a textbook problem that involves incarceration or commitment, it seems that real people can and walk away in the middle of the “game” if they want.

Thus, when he states that value is destroyed, given the fact that folks continue to do it, it may simply be the fact that Mr. Waldfogel may have mis-measured the overall satisfaction folks get from giving and receiving.

Risk Preferences

Presumably, to conclude that value is destroyed by Christmas gift giving–and to assign a dollar amount to it–some measure of satisfaction, like utility, must have been assumed–at least implicitly. Moreover, that measure, e.g., utility function, must be invertible (from satisfaction to dollars) .

Again, without reading the book, there seem to be a number of ways to defeat the assertion that value is destroyed. Here are a few.

First, collective satisfaction can be aggregated and weighed any arbitrary number of ways. For every setting that shows value is destroyed, one can weigh the satisfaction of recipients in such a way that valued is created.

Secondly, obviously individuals may have different preferences for different goods and services, and they may have different preferences for the same good or service at different levels of (their own) wealth and consumption. Most economic models keep things simple and assume that individuals have relatively constant preferences, i.e., that they are either risk-neutral, risk-loving, or risk-averse for the entire range of consumption.

For a simple world where there is only one good, economists generally assume that satisfaction increases (or at least doesn’t decrease) as more of that good is consumed. So, in a “single period,”

• Risk-neutral means that preferences are linear with respect to the good. That means that regardless of the number of units consumed, each additional unit brings the same level of satisfaction, i.e., the 31st hamburger is as satisfying as the first.
• Risk-loving means that preferences are convex with respect to the good, i.e, the more units consumed, the greater the marginal satisfaction. It is very rare to see such behavior. It means that in a world consisting only of hamburgers, eating the 31st burger brings more satisfaction than eating any previous one, including the first one.
• Risk-averse means that preferences are concave with respect to the good, i.e., the more units consumed, the lesser the marginal satisfaction, i.e., the 31st hamburger eaten is the least satisfying–although still positively satisfying.

Now it is possible in multi-period, over-lapping generation models, for folks to get satisfaction from both consuming and giving–by following the Golden Rule of giving this period in exchange for receiving in the future, but that’s not what Christmas is about. The young don’t give presents to the old in hopes of getting presents when they are old.

Without presenting anything close to a formal model, consider a case where everyone is risk-averse. If they have the same utility function, then wealthy individuals forsake less satisfaction (from, say, the 31st hamburger) by giving or donating to less wealthy folks who gain by receiving such benefits. (Remember with similarly-preferenced, risk–averse agents, wealthy folks give up less (marginal) satisfaction or utility than poorer gain. Draw an increasing, concave function, like a square-root function to convince yourself that satisfaction increases with consumption but at a decreasing rate.))

The last time that we checked, there were not a lot of models that incorporated donations and giving, but even if the net spenders lose some satisfaction by consuming less due to their gifts–let’s say they are compelled to consume less or donate–then those acts do not destroy value if the recipients are particularly grateful and derive more satisfaction from the gift than to givers lose by not behaving selfishly.

Of course, Mr. Will and Mr. Waldfogel may be surprised that individuals enjoy giving of themselves and their resources–whether to family, friends, or strangers. The fact that such acts are outside of many economic models, doesn’t make such people irrational, it makes them kind and generous.

Moreover, if economists have a difficult time modeling such behavior, that’s not a short-coming of generous individuals, it is a short-coming of economics (and note that we are extremely sympathetic to the difficulty of modeling such social phenomena).

Now, parsimonious readers may disagree with our conclusion that net satisfaction is higher because of Christmas gift-giving and exchanging because they may argue that the giver may not know what the recipient wants. We’ll rebut that position with two related, but separate points: (1) in uncertain environments, you don’t always get what you want or pay for, and (2) in real-life, you don’t always know what you want–i.e., what makes you happy or what’s best for you.

The Presence of Uncertainty

Who knows? It may simply be the case that no one cares enough about Mr. Will to have given him a present that he wanted, and that may have caused his Scrooge-like column, or maybe he was told one too many times that “you’ll shoot your eye out.”

That scene from A Christmas Story of the ricocheting BB breaking the Ralphie’s glasses perfectly illustrates that in real life, random, uncontrollable events affect the enjoyment of any every good and service consumed.

So, when combined with bad luck, getting exactly what you want can be disastrous, and far worse than getting a safer, less-desirable version of the good or service or a substitute. For example, think of the teenage boy who would prefer a sports car to a large sedan, but is far more likely to harm himself and/or others in a new Corvette as compared to a new Suburban.

So, before one can conclude the net value is destroyed, one must be able to aggregate the actual satisfaction received rather than the expected satisfaction when the gift is received. In other words, it is important to know the range of outcomes and their probabilities–when they are knowable–to measure how things worked out.

More precisely, for risk-averse individuals, it’s not just the mean that matters, but the distribution matters, too, and others may understand (or have better information about) that distribution than the recipient. That means that their gifts may be more appropriate, and have a higher conditional expected value.

Does that mean that others always give better presents than items purchased by ones self? Of course not, but it means that in some cases, the difference might be smaller than supposed or negative.

Know Thyself, or Not

We’ll readily admit that our three counter-arguments are not very precise. However, each implicitly assumes that (at least) the recipients, know what’s best for themselves.²

As we mentioned above, with uncertainty (and different priors and signals, which generate different posteriors) it is possible that givers may have better knowledge of the environment, i.e., the distribution of (possible) outcomes, and, therefore, they may be able to select the most appropriate gift for the recipient.

In this section, however, we have something a bit different in mind. It is possible that on certain dimensions, others know you better than you know yourself. Thus, they may be able to select more appropriate (useful, valued, appreciated) gifts than the recipient could have selected for him or herself.

We suspect that like us, most readers didn’t always get what they asked for, but on some of those occasions ended up liking the substitute better than the original. We also suspect that sensible readers will agree that until a certain age, parents definitely know better than their children what will maximize the child’s expected, discounted, satisfaction.

The question is: at what age does that change? Is it when a twelve-year-old wants a Wii, or is into adulthood, when the child wishes to marry. (In some cultures, with arranged marriages, it is at least that age.)

In most mathematical models of preferences, individuals know their own preferences. Otherwise, it is difficult to sole the individuals maximization problem, i.e., what does one maximize or optimized?

In real-life that isn’t always true. Moreover, preferences do change. Do you, dear reader, eat the exact same foods that you did as an infant; as a high-metabolism teenager; as a college student? While some folks are surprisingly consistent, most aren’t, and a favorite restaurant one day is no longer visited the next.

So, if one is willing to admit that one doesn’t always know what one will like in the future and one cannot completely specify how to order likes and dislikes (preferences) today, is it that much of a stretch to imagine that others may know certain aspects of your preferences (and behavior) better than you, yourself, especially how those preferences may evolve through time? We don’t think so.

Thus, is it that difficult to believe that the net result of informed gift-giving increases collective happiness despite the fact that many inappropriate gifts are received (and regifted)?

Merry Christmas!

Now we mention our objections to Mr. Will’s silly column in the spirit of true Christian gift-giving, especially as we belatedly publish it on this Christmas morning.

There’s another small book–very thin and short–that both Mr. Will and Mr. Waldfogel may wish to read. It takes an hour or two for most adults to complete, or a few hours more if read to a child (presuming that the men like and/or have children or grandchildren). It’s called A Christmas Carol by Charles Dickens. Our readers may have heard of it, and it is available free on-line at many sites.

We strongly encourage all our readers to read it every year so that they don’t end up like old Marley, er, we mean Will.

God Bless us all, and we wish you a Merry Christmas and a Happy New Year.

–Andy, Jill and the gang

P.S. It’s late and there are probably several typos. We will correct them tomorrow.