Spero Consulting

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 31^st 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 31^st 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 31^st 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 31^st 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.