Thursday, December 28, 2006

Why Do We Give Gifts?

Economists find the widespread practice of giving gifts puzzling for a number of reasons. The most obvious one is that we generally expect individuals to know more about their own preferences than other people do. So it would seem that a gift in money, which I can use to buy whatever I most value, would almost always make more sense than a gift purchased for me. While there are exceptions, cases where the giver happens to have special knowledge that the recipient does not, it is hard to see how they can explain what we actually observe. And besides, the knowledgeable gift giver could always send me a check accompanied by a note recommending the book he would have bought for me, leaving it up to me to decide whether to acccept the recommendation.

At first glance, the idea that giving a gift shows you were willing to go to the trouble to find one seems even less persuasive--why not simply send a check equal to the value of the gift you would have bought plus the value of the time you would have spent finding it? But there are two variants on this argument that might work.

The first, which I came up with long ago, is based on Becker's analysis of the economics of altruism. If I am an altruist with regard to you it is in my interest to be well informed about your preferences in order that I can recognize situations where I have an opportunity to confer a large benefit on you at a small cost to me. It is also, via Becker's Rotten Kid Theorem, in my interest for you to know that I am an altruist with regard to you, since that makes it in your interest to act altruistically towards me--loosely speaking, because the richer I am the more I will be able to help you. For details see the relevant chapter of my webbed Price Theory text.

If I am well informed about your preferences, it is relatively inexpensive for me to find a gift you will like. Hence giving a gift you will like meets the requirement for a signal of altruism--it is cheaper to send the signal if it is true than if it is false.

This is, I think, a logically possible explanation of gift giving, but I don't find it a very convincing one. I now have a second candidate.

Suppose we accept the plausible idea that I can be modeled as two individuals in one body. The first is a short run pleasure maximizer--the me that almost always wants an ice cream cone or another potato chip. The second is a long term utility maximizer--the me that promises not to have ice cream for desert until he has lost five pounds and tries to force the first me to keep the promise.

Most of us do not face an immediate budget constraint. Spending an extra few dollars on a gift doesn't mean that I can't afford an ice cream cone today, it means I will have a few dollars fewer when I retire. The long run me cares about that, but the short run me doesn't. Spending an extra hour shopping, on the other hand, is a cost that occurs now and so counts for both versions of me.

We now have a second explanation of gift giving. By giving you a gift instead of cash, I demonstrate that the short run me as well as the long run me cares about you.

When proposing an economic theory of behavior, it is worth thinking about whether it has any testable implications. This one does. A critical assumption in the argument is that the gift giver does not face a short term budget constraint--that spending money on a gift doesn't mean going hungry to bed or having to spend an extra couple of hours shoveling snow. It follows that the giving of money instead of purchased goods ought to be more common among people who do face such a budget constraint.

Since I am by nature lazy, hence a theorist, I will leave to someone else the project of actually finding data that could be used to test the explanation I have just offered.


Anonymous said...

Having made a few hand made gifts this year, I suggest that one motive is showing off, whether skills or - for those with gold cards - assets.

By displaying one's capabilities, one is - perhaps - making a claim on status in a small social group. This has obvious short term benefits - guys are often attracted to women who can knit scarves or bake great cakes, and women are often attracted to men who can bring home the bacon... but it potentially has good long term benefits (or, at least, was adaptive in the situations in which the behaviors may have evolved - small tribes). An adult who can not only navigate by the stars, but can make high quality clothes, weapons, etc., is a good candidate for tribe leadership positions...and that would tend to have beneficial effects on both the mating possibilities and the survival probabilities of offspring.

Thus - perhaps - gift giving was selected for as a signaling mechanism for genetic fitness.

I note that this does not address your real question ("why gifts as opposed to money?") head on, but I'll handwave and suggest that money is too abstract to fulfill the gift-giving instinct.

Anonymous said...

I think the point of gift giving is to show that someone is willing to spend time and effort specifically on you. While giving money would effectively have the same result (i.e. I worked for this 1 hour to pay for your money gift), the link is not there in your mind while you're working, so it doesn't count. The point is you're expending effort with the receiver in mind.

So, I think your short-term long-term distinction isn't the real issue. I'd expect that gift givers who do face budgetary restraints give purchased gifts more or less as frequently as richer people. Many people live paycheck to paycheck, so money spent on someone else is money not spent on them now, yet I don't imagine they frequently give money gifts.

Mark said...

My explanation is that gift-giving occasions are opportunities to affirm one's personal bonds. To most people, there is no exchange rate in this respect between time/attentiveness and money. Time and attentiveness affirm personal bonds. Money cannot.

Gary McGath said...

To a large extent, especially within families, gift-giving is an expected ritual, so we can't really expect rational explanations that make sense in all cases. But there are reasons, or people wouldn't have started giving gifts originally.

The value of a gift, ideally, is that it shows the giver knows something about the recipient's preferences and wants to satisfy them. Things like a fancy edition of the recipient's favorite book or clothing which matches the recipient's taste accomplish this. Gifts which only the giver can provide, such as hand-made items for which the giver has a special skill, reinforce this point. It's a safe bet that almost any recipient likes money, so giving money doesn't accomplish this aim.

The value of this to the giver comes in the form of a greater sense of psychological visibility, and perhaps concrete expressions of appreciation in return.

Anonymous said...

Another factor worth taking in to account, is what we can call "affection-value added" - meaning that a certain item might not have a great value in itself, but the intention and affection behind adds a great amount of value.

I find it reasonable to assume that people in general seeks recognition from other human beings, and spending time and effort on buying a gift is a pretty efficient way of giving/recieving recognition.

Buying chocolate or flowers for a girl is all about that - usually the girl would herself be able to buy all the chocolate and all the flowers she would want, hence the flowers and chocolate is merely signs of affection and on a more subtle level, recognition.

Anonymous said...

I am willing to accept a dual-selves model, but I do not find it persuasive in this case. I understand the trade-off as follows: spend an hour searching and buy a low-cost gift or save the hour and buy a high-cost gift. The low-cost option makes sense only if: 1) I am better at searching for gifts than I am at my day job; or 2) I am unable to readily convert my extra hour into income. With my life-partner, 1) may hold, but that does not explain ubiquitous gift-giving. In the very short term, 2) may hold. Then, however, the relevant “second-self” is not myself at retirement, but myself (say) three months from now when I will have an opportunity to work for an extra hour. Complications arise if I enjoy searching for a gift and also when I consider my after-tax income rather than my wage.

So here is my prediction: eliminate the income tax and we will see far more high-cost/low-search gifts (and cash) exchanged.

Anonymous said...

I find Eric Posner’s explanation the most persuasive: we give gifts to signal that we have a low discount rate and, hence, are good long-term partners. By accepting a small sacrifice now in return for a stream of benefits over the life of our relationship, I signal that I will not sacrifice our relationship for short-term gain. Exchanging checks, however, will not do; neither party sacrifices so the signaling value is lost.

This model predicts much more gift giving early in relationships, which is borne out by experience. The ideal “gift” would be to burn a sum of money, but identifying the “recipient” may be difficult. A close substitute is to consume (not give) an expensive bottle of wine.

Anonymous said...

Intriguing theory, though I do believe it is amazingly overcomplicated and excessively, unnecessarily verbose. Viewing the idea of gift-giving thru the discipline of economics is awesome. I tend to believe there is soo much more that can be discovered in the ways of our world by viewing them thru a multi-disciplinary approach. Gift-giving, to me, when speaking or writing of desire, has a much larger rooting in a person's heart rather than their wallet. Of course, in my own gift-giving tradition, i access my personal financial ability....economics plays into that role. The desire to give, the force of persuasion is almost never affected in any other way by my finances. It is a personal, heart-felt inclination, that is affected by other variables, one being economics. I do not believe that my theory is the end-all-be-all... I do believe that there are those who, being in different financial states, are capable of being influenced to give by those forces.

Mike Huben said...

Gifts serve numerous, varied functions in societies. It would be a good idea to understand precisely the kind of gift giving you wish to explain. Perhaps the anthropological literature can help you discriminate between the varieties of gift practices.

One thing I notice, though, is that you keep bringing up money. Most gift practices occur in non-monetarized or weakly monetarized cultures as well. I suspect that a fair amount of gift giving originates in cultures where self-provisioning (or family-based provisioning) is dominant instead of earning and purchase. In that case, specialization within the family, clan, etc. would be well served through gift economies.

Lester Hunt said...

Commenting on the argument that the British monarchy is merely symbolic and therefore serves no function, Ortega y Gasset said that this is a non-sequitur: its function is to be a symbol.

Similarly, gift-giving begins to make sense when we realize that the utility of my giving you a necktie for Christmas is not equivalent to the out-of-context utility of the necktie. It is equivalent to the utility of the necktie as a symbol -- a symbol of the value you have for me.

Having said this, I admit that this does not (yet?) answer David's interesting question, "So why don't we just give money." The answer to that probably is to be found in distinctions between different ways to value someone, and in distinctions between the ways in which different gifts symbolize these ways of valuing. I give a (symbolism-poor) gift certificate to my niece. I give the (obviously-symbolic) flask of perfume to my wife.

Like I say, though, this does not yet answer the question.

Mike Huben said...

Conversely, if you want to understand gift giving as a purely economic phenomenon, you might want to look at the gifts that for-profit corporations give each other. If any.

Anonymous said...

People with immediate budget constraints also tend to have lower time costs, though, which would probably make make them more likely to give gifts instead of cash. It might be tough to separate that effect from the one you proposed.

Anonymous said...

For the past two Christmas I gave to my parents only money. I think they were very happy. Try to give money the next time and you will see how brilliant eyes can be.
I think most people give gifts instead of money because they are not economists, but I also accept the idea that a gift is prefered if it costs less to the giver than to the receiver (comparative advantages).
I would not feel unimportant if someone gave me money instead of gifts, would you?

Anonymous said...

It might be worthwhile to distinguish gifts to adults versus gifts to children. My recollection and suspicion is that children have a stronger preference for cash than adults. Does that change because to children cash is a scarce asset, or is that preference socialized out of us?

Anonymous said...

Consider the possibility that many people specialize in production rather than shopping. Personally, I don't even know what's in the stores: whether an author I like has produced a new book, a sweater that would enhance my appearance is available, etc. My wife and certain other members of my family are shoppers. They devote much more time to shopping than I do, and can within limits spend the money I earn much more effectively than I can in order to please me. Presents turn up at Christmas and on my birthday that I didn't even know existed, and left to myself, I would never have bought them. At least some of the time gifts are utility enhancing because they represent the fruits of the division of labor.

Anonymous said...

I tend to agree with the two-guys-principle, and I think it does explain the paradox but not for the reason that is mentioned. Gifts, as opposed to money + recommendation, are a way to please the short term guy. If I were to give a check and a recommendation instead, the long term guy would take over for the gift recipient and cash it to the bank. We please the short term guy because we save him from being censored by the long term guy. One possible selfish reason to do it is that we may in return expect favors from the less value conscious short-term guy.

Anonymous said...

I like the dual-selves model in general, and Arthur B.'s take on it (letting the receiving short-term self enjoy the gift) is interetingly novel.

But it seems foolish to not note that gift-giving far precedes money. Modern humans are 50,000-100,000 year old, and you have elements of gift-giving in chimps sharing meat with other males or with sexually receptive females. So when thinking about the roots of gift-giving, I'd start with parents to kids, and successful hunters to everyone else, and why those exist and how we react to them emotionally.

Anonymous said...


The chimp's and hunter's society don't have money, so the gift paradox doesn't really exist there...
I would guess it can be explained by biological altruistic inclination that evolves to balance individual incentives and risk mutualisation.

Leonard said...

I too like arthur b.'s suggestion that the gift is an attempt to please the short-term you. The reason is clear: while the long term you can be pleased, including w/ money, because he is calculating his long-term advantage, he is not impressed w/ any of it. Helping him won't help you beyond maybe getting reciprocation.

One possibly testable prediction here is that people will vary in how much they like gift-giving, and gift-receiving, based on the proportion of control their long-term self has vs the short-term self. People who are, generally, well-controlled in long-term terms should dislike receiving gifting more than more impulsive people.

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