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18 September 2010

Not All Gifts Are Created Equal

I have a ton of blog posts I should write that I never do because I'd get in trouble if anyone other than my usual three readers ever read them. This isn't quite there but it's certainly on its way.

I recently got married and received a plethora of gifts. A lot of them were things I actually wanted and came from the registry my wife and I created, others were cash and checks, a few were gift cards, and a lot were random gifts that people thought I'd want – even though I had the opportunity to make a registry and ask for anything I could possibly think of. Giving someone a gift is, in many cases, an extremely poor form of wealth transfer. Why? Because the person may not want it and there are costs associated with gift giving – wrapping it, driving a car to go buy it, spending free time thinking about what to get, etc.

I do not mean to imply that I am ungrateful for the gifts we received. I'm merely pointing out that somewhere between other people opening their wallets and us receiving these gifts a lot of money was essentially lost - that is - a deadweight loss occurred. Basically, the gift giver paid n dollars for something and we received a marginal benefit that is almost always less than n. There are cases where something can be worth more than you paid for it. Think, cold beer on a warm day, but by and large your marginal benefit is less than what was paid. Sometimes your marginal benefit is actually negative (thanks for the knick knack that I now have to take time to throw out because I don't want to move it from house to house and dust it for the course of the next 50 years).

Best to worst gifts in relation to value retained after transfer:

Cash – 100% minus the cost of deflation while held... so right now, nothing.

Checks – We all have to pay taxes and it's not like you're deducting it.

Asked for/Registry gifts – One has to question the efficiency of this (see below)

Gift cards – Like cash but worse.

Random Gifts – Throwing dice.

Let's start with cash. It must pain people to give cash because almost no one does it – yet, when you receive cash as a gift don't you love it? Seriously. It's the perfect gift. The recipient can spend it on whatever they want and they'll use their full discretion in doing so (more on this later). Plus it's not taxed. Most of the people who gave me cash were younger people. I hope it's a trend but I doubt it.

Checks aren't far behind. There is the small headache of depositing it and figuring out the tax part, which to be honest I'm not even currently sure how that's treated, but I'm sure it'll be okay.

Gifts you've asked for – here's where it gets interesting. It's true, I asked for the gifts on my registry and for my birthday up until the age of 15 or whatever – but if I were given its equivalent value in money and told to spend it however I wish would I have purchased the same items? Sometimes but certainly not always – which begs the question – is this really an efficient form of wealth transfer? Add that to the fact that people have to go and buy the stuff and there's the possibility for a sizable loss of opportunity cost and the like. Think of it this way – if instead of receiving all the stuff on your registry you could receive a check for its equivalent value, would you accept?

Gift cards are like cash that you can only spend in one place and you have to carry around just for that special store. Add to the fact that they sometimes expire or charge fees and now you've got a deadweight loss. There's also the fact that people tend to spend more when given non-cash money equivalents (I'm not providing proof – go look it up, there are a ton of studies on it, or you can just think about credit card debt). Also, as is often the case, you end up spending the remaining balance and paying out of your own pocket just to forgo throwing out a gift card with value still on it. This is probably an example of sunken cost fallacy.

And last and usually least – random gifts. Sometimes people hit it right on the mark and give you something really nice that you didn't know you wanted, but more often than not you receive something that you feel bad throwing away but don't really want. A lot of these that we received were clearly re-gifted items, but the most common random gift was something that someone clearly thought they themselves would like and thus bought for us. This follows a phenomenon which psychologists observe by which people buy others gifts that they themselves would want. Well, I know this is a shocker, but people are different and I'm not sure there's room in my house for glass plates that can't go in any appliance that would make them remotely useful. Even eBay doesn't want some of these items so guess where they go? Trash or “good”will (regifting for people who hopefully don't own microwaves or ovens lest they like the taste of shattered glass).

And one more observation – stores like Crate&Barrel are ridiculous. Sure, they have a few nice overpriced items that I like, but by and large they sell stuff that people imagine themselves using in some idealistic world were we all have free time, limitless cabinet space, and are showered with fresh organic produce on a continual basis. Take for example their wooden salad plates with matching bowl and salad utensils. Who actually makes salad often enough to justify a dedicated set of plates that provide no benefit over regular plates? You know what I actually need? Double A batteries, some milk, and toilet paper. This is very similar to the practice of “staging” used by real estate agents and advertisers. Real estate agents will actually hire people who come into a home and clear it out of personal items and place certain goods throughout the house in a very specific manner. Houses that are staged usually sell for several percent higher than they otherwise would have. One of the most common is the bottle of wine and cheese in the refrigerator next to some produce. Who lives like this? No one of course but respondents often say that they can imagine themselves leading such a life when they move in. Nobody wants to see a pantry stuffed with TP and off brand cereal – it's just not sexy.

You know what is sexy? Opening an envelope filled with cash. Everyone likes that.


Vincas said...

Scratch another one onto your typical three readers; you officially joined my Google reader list. By the way, Baraka was awesome!

benjamin franklin said...