Saturday, December 17, 2011

$50 or Build-a-Bear? That Is the Question



Dan Ariely (of Predictably Irrational fame) writes about the irrationality of gift giving. At least, that's what the standard economist would say. Of course, Ariely, being a behavioralist doesn't think this way. He gives a number of examples of why, if you combine psychological reasons with economic ones, gift giving can make sense on a lot of levels. The one I am most interested in is a more general point: gifts vs. just giving cash.

My argument is that giving a gift creates more utility than giving the equal measure of dollars. Let's see why.

First, the simple cash gift... If you give someone $50, you are $50 poorer, and the recipient is $50 wealthier. For a short while after, your friend is happy for the money, and maybe you're glowing after doing something nice. But pretty quickly, this fades. There's no guarantee that your money gets spent quickly, and, more likely than not, your buddy probably just deposits into his bank account. Also, obviously, the good vibes form giving a gift don't last indefinitely, and you'll eventually realize you're $50 poorer.

Alright, now let's say you give a gift of equal value, and for simplicity's sake, let's say you take a pretty good guess at what your friend wanted. The first part of the situation is identical. You are $50 poorer, and your friend's wealth has increased by $50 (since he could always sell the gift for the money). Let's really simplify things down, but not lose generality here.

Your friend wanted a Build-a-Bear for $50. However, that toy doesn't fit in his budget right now. If he were to receive $50 exogenously of his own income (i.e.- as a gift from you), he would run off and buy the bear. So, if you gave him the gift, you're pretty much eliminating a lot of steps here. You're saving your friend's time. Which, you might argue, is an added bonus to the bear. Also, the bear will remain in your friend's mind longer (since he has to see it), and therefore the psychological boost probably lasts longer. (I'm no psychologist. Just a guess)...

Point being: the equivalently valued gift, in my view, is worth more to your friend. Even though it costs you more to think of a gift and go get it, you also get the bonus of a longer "emotional high." Everybody wins.

Second point being: Everybody loves Build-a-Bear

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