Thursday, November 17, 2005

Dead Weight Loss of Xmas

I realized over my Birthday what a loss Birthdays and these gift giving holidays are. We all follow this tradition of choosing something to give our loved ones, which they have about a 50% chance of liking, and then receiving gifts that we have a 50% chance of enjoying ourselves, and then calling the whole thing a success. I think it's interesting how rational human beings can follow the same routine year after year and realize this Dead Weight loss year after year.

Just for the record, I'm not talking about anything any reader may have given to me on my Birthday. Ok ok, I'll speak hypothetically about Christmases, and analyze what goes on. Basically, person A finds a gift for person B and vice versa. A doesn't want to give cash, because that's assumed to be tacky, and wants to give something that B doesn't expect. B is thinking the same. Assuming these 2 people know each other fairly well, A will buy a present that B has a 75% chance of enjoying. However, if B had just received the cash, it's very likely he or she would've bought a different model/color/edition/version etc. etc. I will then (optimistically) say there's a 33% chance that the present is EXACTLY what B desired. Counting in the chance that some other person (C or D etc.) gives the same or similar present, I will bring it down to 25%, which I still find rather optimistic.

So Person A is spending 100% of the price for an object that person B will get 25% of value from, and Person B does the same to A, resulting (let's count percentage as utility) in (25x2)-(100x2)= -150 utiles. For every Christmas, and times the number of people involved.

So both A and B lose out, and where does the extra utility go? The answer, obviously, is to the manufacturers. Well, assuming Person A and B aren't entirely nitwits, they'll know there is an element of risk with each present, so they will try to maximize their chance of providing as high a utility as possible. The manufacturers will help them with this by making products: A) discounted, B) look expensive and thoughtful. Therefore, the best way for the manufacturer to sell products on Christmas is entirely through signalling. Person A will care less about the inherent value of a present, as long as it signals value to Person B, and vice versa.

Person B, on his part, will know this is occurring and expect a present to show more value than usual. In other words, he will assume that Person A spent the least amount for the highest amount of possible utility. So therefore B will assume discounts, rebates, etc. etc. Which means Person A could buy a present for 100 utiles of value, while B will assume it to have been something less (say 80), and A chose that because it was discounted or available in bulk etc. Here we're assuming Person B knows the inherent value which, if it's something Person B wanted in the first place, is safe to say he'll know.

Well, I might be missing something, but it seems to me that in conclusion you're better off giving money, so that everyone knows the value and achieves the full satisfaction, while with presents they'll know the value, assume it cost less, and only achieve 25% satisfaction from it. So from now on, everyone can just give me cash. Thanks.


BBS said...

what about the utility the giver gets from giving? isn't that the whole point, you heartless wench....

Lugano said...

Yeah, but that's my point. How much utility are you going to get knowing the the recipient is only getting 25% satisfaction from your gift? While he/she/it could be receiving 100% if you gave him/her/it cash.

If you just get utility from giving and what the givee gets has no bearing, then just give everyone a CIPA Mug for Christmas and you're done.

And I'm pretty freaked out you found this site.

Security Joe said...

yeah, you wench. what about the utility of B knowing that A thought of him? apparently, "it's the thought that counts," doesn't have a counterpart in Italian. No, but i read something like this before in the economist. there is an article on behavioral economics and charity.

Security Joe said...

btw, i'll be expecting cash this X-mas. but you should be ready for a gift. hehe

Lugano said...

Which economist article is this? I could use it for my behavioral econ essay.

Yes. I get lots of utility everytime I know you think of me.

PhD Wannabe said...

nerd, but if you want to maximize your utility,then don't give gifts at all.. you get 100% utility from cash spending on yourself and your friend is just a corner solution

at any rate, cash is fine with me and my wishlist is also on amazon ;p

and you boubon how come you don't comment on my blog you another heartless wench