The Economics of Chrismas and Gift Giving

How often do you receive a gift during the holidays season and then realize that although you understand the gift comes from a good heart from the gifter, that maybe you would have rather received cash?

Maybe you think like an economist, like me, and sometimes start doing a cost-benefit analysis of the gift received.

For example, you receive a pair of shoes that are quite nice. But the economic pleasure of those shoes is maybe $100 at best. Wait, what??? You spent how much money on these???

Then you (hopefully) think to yourself: I’d rather you have given me $150 cash. This way, both I gain a higher economic benefit of greater than $100 (the pleasure the shoes would give me) and you also part away with less money by purchasing the shoes. Win-win! Right?

But of course, you should never voice that opinion. Because 1) it’d be extremely rude to do so, 2) voicing your “economical cost-benefit analysis” opinion will probably break some relationships and no one needs an economist to ruin the fun during the holidays, and 3) because you should NEVER mix social norms with market norms. It’s simple behavioral economics!

So what are social norms and market norms?

Social Norms

Social norms refer to the social transactions that we make in economics and day-to-day life.

These transactions are difficult to quantify, but they do add up. When you hold the door open for a friend, you’ve exchanged social value. Or paying for your date’s meal. That is a social transaction with your partner. The meal you pay for, although can be quantified by money value, is meant to improve your social relationship. Social transactions occur all the time: giving your friend a lift to the party, sharing your food, helping with homework or studying, inviting friends over for Thanksgiving, and finally, giving gifts on their birthday or during the holidays.

What are the motives for these social transactions? Well, of course, every transaction involves a give and receive.

When you hold the door open for your friend, you expect them to reciprocate in the future. IE: exchanging kindness for kindness.

When you pay for your date’s dinner, indicating interest, you expect to propel the relationship forward.

And giving your friends a lift to the party or acting as a designated driver means that other members of the group will take turns acting as the driver.

MARKET NORMS

Market norms refer to our economic brain.

Instead of asking your friend to babysit as a social favor, you offer to pay them at the market rate because you’d rather make a market transaction then social transaction (if you were to make this a social transaction, it infers that you’d have to babysit for free in the future to repay your debt).

Market transactions are driven by money and are more easy to quantify than social transactions. Market transactions are calculated by the going market rate of the “favors” or items.

CHOOSING BETWEEN SOCIAL TRANSACTIONS AND MARKET TRANSACTIONS

When I’ve been invited to a Thanksgiving dinner with a friend’s family, I always feel this awkward little need to fulfill my end of the social exchange. And it needs to be a social exchange, meaning no money. Imagine how awkward it’d be if I mixed market norms: I’d calculate the economic cost of preparing a Thanksgiving dinner, by calculating the cost of the materials, the turkey, the potatoes, the opportunity cost of making the meal, and then coming up with an objective cost of what I ate, and offering to pay my hosts. No. I can’t do that. That’d be preposterous, and would probably exempt me from future invitations. Instead, I offer a social exchange: I perform magic and provide entertainment. That way, I feel as if I’ve properly completed transaction. This is why many people also will bring gifts to the hosts, maybe wine, or a pie, or some mandarin oranges (a Chinese tradition).

Here is another example of the dangers of mixing social norms with market norms. Let’s go back to the dinner date example. It’s still quite typical for the man to offer to pay for the dinner, and usually, this is because the male is interested in his partner, and, let’s be honest, might be hoping for something more than a goodnight kiss. Now, imagine if, after 5, 10 dates, the male gets impatient and wants to take the next step forward in the relationship. So he decides to mix market norms with his social transactions and he offers to pay for sex. I’ve already paid for dinner 10 times, and we haven’t gone to the next stage of the relationship. Let’s say the going market rate for an escort is $500. Why don’t I just offer to pay her $500 for sex?

Obviously, this scenario goes terribly, not only because the man is incredibly dense and objectifying his date when his date doesn’t owe him anything, but also because in the behavioral economics perspective, remember, you should NOT mix social norms with market norms!

There are so many awkward moments you could potentially place yourself by confusing a social transaction with a market transaction.

Your neighbor helps you move a new couch into your home. Do you pay him? Depends. Do you want to have a social relationship with your neighbor, or do you want to have a strictly economical relationship? Obviously, if you offer to pay him, you won’t feel the need by reciprocating the favor and fulfilling your end of the social exchange. On the other hand, you’ve essentially deemed your neighbor a worker, rather than a friend, and expect to feel obligated to pay him for future favors.

WHY THIS MATTERS

So why does this matter?

Well, first off, I find the distinction between these two types of transactions very interesting, which is why I bothered to write about them.

But I suppose for you as a reader, you obviously want some sort of reasoning or purpose from gaining this knowledge. Let me describe it here:

Now that you’ve understood why it’s bad to mix social and market norms, you can also take advantage of this distinction by deciding when you want to make a certain transaction a social transaction or a market transaction.

For example: when lawyers were asked to discount their hourly rates to do charity work, many would decline. Why? Because they were in a market transaction mindset. Why would they lower their market rate? Instead, when lawyers were asked to do pro-bono work, they complied! In these cases, it’s important to understand what perspective you are making the transaction and understand that each transaction motivates people differently. If you have a market mindset, then you are driven by the market rate. Lawyers wouldn’t discount their hourly rate because they know their market rate is higher. They wouldn’t make that market transaction. The shift from a market transaction (discounted hourly rate) to a social transaction (pro-bono charity work) allowed lawyers to look at their work as for social good, rather than an economical money transaction.

Employees who were offered simply $1000 bonuses from their bosses (market transaction) compared to employees who were offered $1000 vacations and other gifts (social transaction) showed less company loyalty. Sure, many people. in hindsight would rationally decide that $1000 cash bonus is probably a better option. However, humans are not rational. And although the income from our jobs is a huge reason we work, if we only attribute work with money (strictly market transactions), and even our boss pushes this mindset by offering us more money for good work rather than other alternative rewards, then we become numb to our career. Work = money. Instead, those employees who were gifted vacations or items or time off for good work felt a better connection with their job and bosses. These gifts represented social transactions, and built a social relationship between the company and employee, increasing employee loyalty and morale, and increasing employee work efficiency.

Gift giving is not economical. The rational brain understands that in most scenarios, cash is better than gifts because if we really wanted that gift, we would have purchased it ourselves.

But humans are not fully rational, and humans being innately social creatures cannot survive fully on market transactions.

Gifts show that you care. Social transactions build social relationships, and that’s important in building your network. Remember to not blur the lines between market and social norms, or it can get awkward. An important key to remember is that once you’ve established market norms, it’s incredibly hard to go back to social norms. Once you’ve paid your friend ONCE to help you move your couch into your home, he’ll definitely expect some sort of payment again to move in that new 65 inch flat-screen TV next month. Be careful about establishing these market and social norms.

Bottom line: Don’t offer to pay for the Thanksgiving meal.

Anyways, I hope everyone had a good Christmas/Holiday season, and hopefully, you all received some good gifts even though most of us would have preferred cash.

 

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