Did the Three Kings Bear Gift Receipts?

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By Kevin Hassett
Sunday, December 10, 2006

When Caspar, Balthazar and Melchior arrived at the manger on the first Christmas, they set a precedent that would withstand the test of time for every Christmas to come. Most of the gifts they brought were, at first glance, terrible.

Caspar, what were you thinking? Myrrh? The resin from a tiny shrub was used for embalming. It would be like presenting your bundle of joy with Dr. Science's Junior Mortuary Kit.

Balthazar hardly did better. His gift of frankincense was the first of many billions of thoughtless perfume presents. If you want to show someone you love them and have less than a minute to shop, buy them perfume or cologne.

But fortunately for Caspar and Balthazar, Melchior came through. The third king presented the Holy Family with the gift that classical economics has long suggested is best: gold. In other words, he gave them the money.

The merits of this seemingly wise decision, as opposed to those of giving specific gifts, have been hotly contested in economic research circles of late. If you're scratching your way through a holiday gift list, you may want to enter the latest evidence into your shopping calculations.

Some social scientists make the case that too few of us take Melchior's logical step. One survey found that only about 9 percent of Christmas gifts are cash. Gift cards, which are like cash, have been surging in popularity but will probably account for only 5 percent of holiday sales this season. This drives economists crazy for a simple reason. Perhaps the most important tenet of their science is that people know their own preferences best. If you give someone money, she can go out and buy exactly what she wants. If you give her a gift, you may luck out and pick just what she would have purchased herself. Odds are, though, that you'll give her something she values less.

So holiday gift giving is highly inefficient. Wharton School economist Joel Waldfogel came up with some staggering numbers in his 1993 study, "The Deadweight Loss of Christmas," published in the American Economic Review.

Surveying college students, he found that people tended to prefer their own choices to gifts they received -- 10 percent to 33 percent more, in fact. So up to 33 percent of holiday sales can be thought of as wasted. Based on a National Retail Foundation (NRF) holiday sales forecast of $457 billion for this year, this amounts to an annual loss to Americans of a whopping $152 billion because of the scourge of holiday gifts. And people seem to give particularly disappointing presents during the holidays. According to the NRF, 8.8 percent of gifts will be returned after the holidays, up from the average of 7.3 percent during the rest of the year.

If Waldfogel's numbers were the end of the story, the scale of the loss caused by Christmas would be so enormous that a law banning Christmas gifts could deliver about as much economic benefit as significant tax reform. After all, $152 billion is about 1.4 percent of the total U.S. economy. While the proposal may seem extreme, my informal poll of Washington policy analysts suggests that such legislation is more likely than Social Security reform.

Fortunately for those who love Christmas presents, some of the most interesting work at the frontier of economic research suggests that holiday gift giving may be far more beneficial than economists had previously believed.

The key insight of this new line of research is that people do not always behave like the super-rational automatons that traditional economic analysis makes them out to be. If you want to understand why holiday gift giving persists, psychology may be more important than economics.

Strikingly, sentimentality has been found to apply even to gifts given randomly in an experimental setting. In one famous study, "Experimental Tests of the Endowment Effect and the Coase Theorem" by Nobel Prize-winning psychologist Daniel Kahneman and two coauthors, published in 1990 in the Journal of Political Economy, students at Simon Fraser University in Canada were given coffee mugs from the college bookstore and then asked whether they would sell the mugs at prices ranging from 25 cents to $9.25. A second group was asked whether they would buy a mug at the same prices. Those who received the gifts were possessive of their new treasures, and were coaxed into giving them up only at prices above $7.12. But those who did not receive the mugs as gifts found them unattractive, and were willing to buy them only if they cost less than $3.12.


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© 2006 The Washington Post Company

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