Economically Rational Holiday Shopping

Understanding how the concepts of economic waste and self control apply to gift-giving could bring some welcome rationality to the holiday season.

By Justin Reckers and Robert Simon

Originally published by MorningstarAdvisor.com on October 20th 2011

You may have noticed Christmas stores and decorations popping up in shopping malls in your community. (There seems to be plenty of empty space in strip shopping malls these days, but that is for another writer to discuss.) It’s mid-October and the retailers are ready to sell you holiday merchandise. You may buy decorations for your home and office and gifts for everyone you know, including your nuclear family, aunts, uncles and cousins, friends, clients, neighbors, and even office mates.

There are two main behavioral concepts that come to our minds when we consider the excess that is the holiday shopping binge: Economic Waste and Self Control. Getting a handle on both could bring some sanity back to the season.

Economic Waste: We are not here to be curmudgeons or penny pinchers or play the famous character Scrooge. Rather, we are the ghosts of economic rationality past. Do you really think we need to have stores that sell nothing but Christmas and Hanukah decorations, or are the retailers on to something else? Maybe they are using our self control against us. In times of great holiday cheer, why wouldn’t you want to go into credit card debt in order to buy a bunch of Chia Pets for your office mates? Chia Pets are the gift that keeps on giving, and it is the thought that counts after all. Or maybe this is just a saying that a marketing executive came up with.

The point is, they are trying to help you rationalize buying more crappy gifts in the future after Cousin Steve was rude enough to tell you the gift you gave him was a waste of money. Was it a waste of money? It is, after all, economically irrational to waste money. So wouldn’t it stand that buying gifts for ungrateful Cousin Steve in the future would be economically irrational?

We think it might be. You may never know what Steve would choose to spend that $20 on if given the opportunity, so no matter what gift you give, there will be a difference between what you pay for it and the value Steve gains from it. That difference is economic waste, and wasting economic resources is economically irrational. So why do we do it every year?

It is the thought that counts. Each and every human being derives pleasure from giving gifts at least as much as, if not more than, receiving them. The ones who derive exponentially more pleasure and joy from giving are called saints and have their names on plaques in civic centers, zoos, and places of worship. The ones who get caught up in the moment and let their emotions lead them into buying crappy gifts and overspending are called human beings.

Self Control: In the days of economic rationality past, it was not uncommon for a family to give fruit or whatever their family farm produced as holiday gifts. We can probably all derive relatively the same level of enjoyment from eating a pear. Certainly there are the outliers who just don’t like pears, but we all need the nourishment that is provided by the food and grains created by our neighboring farm, or the warmth of a sweater woven from the wool of your neighbor’s sheep.

Those were simpler times. Christmas stores and credit cards didn’t exist, and I would have to assume most people did not feel obligated by the office Christmas party to buy a gift for their cubicle neighbor whom they otherwise would make an active choice to avoid on most days.

Over time the progressive erosion of human self control has played a role in creating the version of holiday celebrations we all now experience. As economic prosperity has become more widespread, the invention and production of lifestyle and luxury items have become more common. Instead of functional and important gifts such as carpentry, food, and clothing, we all now give entertainment, jewelry, and gadgets. Instead of working hard to create a gift, we go in debt to buy one.

Consider having these conversations with your family, friends, and clients in the coming weeks as shopping season kicks into full gear. Ask yourself whether your $20 would be better spent on a gift card to a store you know your friend frequents compared with the pocket knife flashlight combo on blue light special at your local department store. If you are not positive they will get the same enjoyment value as you put in, then you should default to buying a gift card. If anyone tells you gift cards are impersonal, tell them you believe the exact opposite because you know the $20 you give will be spent on exactly what the recipient wants. After all, they will be the ones making the purchase.

Also put yourself, your family, and your clients on a holiday shopping budget. Map out the spending goals exactly how you see them. Self control seems to run away just as quickly when buying gifts as it does when buying things for ourselves. Some people report it being even worse because they think the feeling of giving will stick with them longer than the feeling they get from consuming. A budget will help everyone avoid picking up that extra item they see in passing.

Lastly, consider the White Elephant party. Wikipedia says “the term white elephant refers to a gift whose maintenance costs exceed its usefulness.” Most of us go to White Elephant gift exchanges with the understanding that they are a big joke, and we don’t think about the underlying idea. But if we stop and consider the premise behind these comical exchanges, I bet most of us will realize we participate in a lot more White Elephant gift exchanges than we think.

We will continue our Applied Behavioral Finance series next month with some incredible and sobering real world examples of how others may be taking advantage of you and your clients’ economic irrationality.