Sunday, January 06, 2008

New Thoughts on the Gift Giving Puzzle

[Warning: Economic jargon ahead. Without it the post would be even longer]

Economists, especially those familiar with Gary Becker's analysis of altruism, find the practice of giving gifts puzzling for two different reasons.

If, as a Becker altruist, I take your utility as one of the things I value, the obvious way to increase it is by giving you money and letting you spend it. While there are exceptions, in most other contexts we assume that each individual knows what is in his interest better than others do. Gifts, however, are usually things, not cash.

Becker altruism implies, roughly speaking, that from the altruist's point of view there is an optimum division of the combined income of altruist and beneficiary between the two, a division that maximizes the altruist's utility. If the beneficiary already has more than his share, the result is a corner solution--no transfer. If he has less, the altruist transfers money to him until that division is reached--that being the point at which an additional dollar of transfer costs the altruist as much in lost utility from his own reduced consumption as it gains him in increased utility from the beneficiary's consumption.

One implication of this is that, when transfers occur, they should be large. How likely, after all, is it that my beneficiary's share of our combined income, adding up to many tens of thousands of dollars, will be precisely five dollars less than the optimum? Yet gifts are usually small.

I think I have a possible solution to these puzzles, but explaining it requires a digression.

Economists find it useful to think of utility as a single thing, combining all sorts of values. But as individual actors, it doesn't feel that way. When I decide whether or not to have an ice cream cone, my behavior can be modeled as an attempt to maximize the present value of my utility stream, trading off pleasure today against the negative consequences of present calories for future welfare. But what it feels like is more a conflict between two me's, a short term pleasure maximizer and a long term utility maximizer, with the latter using various stratagems in attempting to control the former.

Suppose what the altruist values is not the welfare of the beneficiary as economists define it--the present value of his utility stream--but his happiness, his current happiness, making the gift giver the ally of the short term me. Give me money and the long term me might insist on putting it away for our old age. Give me a box of candy and there is nothing to do with it but eat it.

This also explains the small size of gifts. I can use an almost unlimited amount of money to provide for my old age or to insure against medical risks. But there is a fairly low limit to how much candy I can eat--more generally, to how much happiness you can provide for me today by giving me stuff. And if your utility function exhibits declining marginal utility for my happiness, that effect can be expected to show up much faster than if it exhibits declining marginal utility for my utility.

The final question is why humans might have this sort of modified Becker altruism. Becker has offered an interesting evolutionary explanation for altruism. The environment we evolved in did not contain savings accounts, annuities, insurance policies. Given the constraints of that environment, short term benefits may have been all it was practical to produce or observe. Hence we may have ended up as altruists targetting the current value of happiness rather than the present value of utility.

[Curious readers can find a summary of Becker's analysis of utility in the chapter of my Price Theory devoted to love and marriage. Look for the subhead "The Economics of Altruism."]


Anonymous said...

What if, instead of only the utility of the donor, the purpose of the gift is to strengthen the social bond between the donor and recipient? In that case, you'd want to give a gift that would maximize gratitude or good feelings. That is, you want a gift that will make the recipient think good thoughts of you a lot.

If you give money, that won't happen. Money is fungible, and one dollar looks the same as the next. The recipient will feel brief gratitude, then spend or save the money and forget about you.

But if you give a personal gift, like a box of candy, the recipient will think of you every time he eats a piece. If you had given him money, and he bought his own candy, that connection wouldn't be there.

This theory has a couple of advantages over the other. First, suppose you give a gift of candy, only to find several other people gave the same gift. Even if you assume no reduction in utility for the second, third, etc., box, you wish you hadn't given the gift. Why? Because even though it makes the recipient happy in the short term, it doesn't create as much of a one-to-one social bond.

Second, such gifts are more valuable to the recipient also -- "it's the thought that counts," and all that. I have gifts of things I would never have bought for myself, and (to be honest) don't particularly like for their own sake, but value highly because of who gave them. Because of the social bond effect, the act of giving a "thing" actually adds value to it.

Third, it seems that people give things to those who are closest to them, and money to those who aren't so close. This may be because we don't know what distant relations would like -- but perhaps it's also because we really don't care that much if our second cousin twice removed thinks fondly of us on a daily basis.

Fourth, this theory can also explain the small size of gifts. The donor/recipient connection probably works just as well for cheap gifts as expensive ones -- and even if not, certainly a gift ten times as expensive will not create ten times the goodwill, so lower-priced gifts are more efficient that way.

dWj said...

When I see small events where I'd expect large ones, I immediately think "prospect theory". Giving an amount of money on par with my lifetime expected earnings seems like a big transfer compared to things I deal with on a regular basis.

One of the things I like about the short-term / long-term distinction is that a decision not to give a gift may well be a decision not to give a gift right now. I may well intend to continue to make a series of small transfers where I prefer to retain the option of rescinding much of the gift (the stream of gifts) at some point in the future. (I doubt, though, that the cumulative size of gifts people make over long periods of time are enough for this to be a full explanation for the size of gifts.) This also feels right in terms of paternalistic gifts; I wouldn't give a large amount of cash to someone whose judgment about their own wishes seems poorer to me than my own does. Often this means I am trying to direct their short-term consumption out of my own beliefs about what will increase their long-term utility.

110phil's observation sounds like the way I think about what I'm doing when I get a gift for someone; it's either something that the person wouldn't be able to get for themselves (weakening arguments that the other person's judgment of their wishes is better than mine), or I'm trying to get something that will make them think of me.

Beastin said...

In my family this has sometimes been referred to as the money hole. You don't give people money because it just winds up in a pile with all of the other money and gets used for something sensible (and therefore not fun).

I am very much in agreement with 110phil that gift giving generally seems more like an attempt at establishing a social bond between individuals than an attempt to significantly modify anyone's resource pool. It's a way of indicating that you'll play cooperatively and testing whether they will.

Incidentally, in my view, this also explains the popularity of the gift card. It's a way of forcing people to spend money on something that they like (assuming the store is properly chosen) while allowing them to actually chose their gift (but still tying it to you).

Adam said...

I haven't read all the literature on the economics of altruism, but I must say that I think that 110phil has it about right, and that theories like Becker's and this variation on it are far too sophisticated for their own good. I don't think you can analyze altruism without the idea that it has to do with social status in the vast majority of cases (either social bonding or social signaling). True altruism is almost never selected for in real-world evolutionary environments.

Anonymous said...

Sorry, I've never been persuaded by the economic argument(s) that purport to explain human altruism.

I seriously doubt any gift giver calculates his own, or his beneficiary's, utility maximum before deciding to give a gift, or deciding what to give, or afterwards calculating whether the division between the two is now "optimum."

Valuing another's happiness as a motive doesn't help either - one, because it presumes you know what makes your beneficiary short-term happy and to what degree (maybe the beneficiary has recently been diagnosed with diabetes and she hasn't told you, making the candy gift depressing instead of happiness producing), and two, as in the Becker case, I'm doubtful givers make any realistic measure of "happiness utility" on either side of the exchange before giving or deciding what to give.

A more simple explanation of gift giving is that it endears the gift giver to the beneficiary, and most likely to everyone else who becomes aware of the gift giving event. This imputes favorably to the benefactor's reputation. Consciously or not, the benefactor is selfish; the small cost of the gift is offset the reward of self-esteem, and possibly increased stature in the community.

Note that on this hypothesis the gift giver gains regardless of whether or not the gift actually increases any kind of utility of the beneficiary. "It's the thought that counts" which produces the payoff.

Anonymous said...

Looking at the matter from the perspective of my own experience as a gift giver, I would say that the motives for giving a gift are not exactly altruistic. That is, they are not directly to maximize the utility of the gift to the recipient. Other things are involved.

* I want, if possible, to witness the recipient opening the gift, and see their pleasure in it—and it's even better if it's not just customary thanks, but a spontaneous look of delight. "I made this other person happy" is a fairly powerful motive.

* I prefer to get this by actually choosing a specific object that fits the other person's tastes—this year, for example, I scored such hits with a book collecting H. L. Mencken's reportage of the Scopes trial, with a CD of music by the Klein Four Group, and with a large green ceramic bowl. In each case, getting a good reaction showed that I had succeeded in trying to know the other person and judge their tastes. The satisfaction of giving a gift card is an inferior pleasure; it shows that I know enough to guess where the person would want to shop, but not that I know enough to guess what specific thing would please them.

* There is also an element of reciprocity in gift giving: I give to some people because they give to me and I want to maintain the relationship, or feel obliged to, the way I feel obliged to tip in a restaurant.

I don't think any of these is quite "altruistic" in the theoretical sense, though the feeling of obligation might be—does tipping count as an altruistic act?

Anonymous said...

Dan Arielly's recent book Predictably Irrational explains this very simply in terms of a phase transition between "social norms", in which people do "favors" for one another, not expecting precise or prompt recompense (or any at all), and "market norms", in which people expect to get exactly what they paid for, now.

See more details here, including application both to David's gift-giving puzzle and to the Society for Creative Anachronism's paid-membership controversy.

David Friedman said...

Hudebnik's comment and reference ties in to a more general point that I made in _Price Theory_ and (I think) _Hidden Order_, and linked to the gift giving puzzle--the hostility in our society to money in social contexts. My reservation is that, at least as he summarizes it, the different attitudes are taken as a given, not as something to be explained.

But I already knew the attitudes existed--my politically incorrect example long ago was the difference between taking a woman to an expensive restaurant in the hopes that she will go to bed with you later in the evening and offering her cash for the same purpose. The former behavior many people will disapprove of--the more strongly the more explicit it is--but the latter is right out in any normal social situation.

One obvious possibility is that there is an evolutionary biological explanation for the different modes, perhaps in-group optimal vs out-group optimal or something similar.

Another, which I've considered for a long time, is that it has something to do with transaction costs. One might think of friendship as a long term contract, whose basic condition is, roughly speaking, that each party will act to maximize the summed welfare of the pair. That eliminates a lot of bargaining costs over A getting B to do something that benefits A more than it costs B. But at the same time it introduces significant information costs, since it requires each party to estimate the value to the other of various outcomes.

Russ Nelson said...

A gift is signalling: "Our interests are aligned, so that if you need help in the future, you can count on me."

As you almost suggested, it's a form of insurance payment in a pre-insurance world.

Anonymous said...

My reservation is that, at least as he summarizes it, the different attitudes are taken as a given, not as something to be explained.

True; Ariely is a behavioral psychologist, and his emphasis (at least in this mass-market book) is on identifying consistent and predictable patterns of behavior rather than explaining (in evolutionary or economic terms) why those patterns are in effect.

I doubt that evolutionary biology has much to say about the "market norms" side of things. AFAIK, formal quid pro quo exchange of goods and services has only been around for a few thousand years; is that long enough to have much evolutionary impact on H. sapiens?

In fact, that could be at the heart of the difference: money and quid pro quo are latecomers to the mind, and the older "in-group altruism" circuits don't handle them very well, so the phase shift occurs when those older circuits shut down. (Shaky metaphors, I know; I'm not a neuroscientist....)