Thursday, December 22, 2011

The REAL Christmas Grinches: "Rational" Economists!

"We rational economists demand you give cold hard cash if you must give a gift!"

While over the past decade the Right's Culture Warriors have depicted Secularists and Atheists as "grinches" trying to "steal Christmas" - by attacking everything from the placement of creches to the gift- obsession of the holiday period itself, the truth is more complex. Most of us, in fact, enjoy the emotional uplift at this time of year, which seems to bring out more of a spirit of generosity for whatever reason. Just look at the numbers of people paying off the layaway balances of total strangers! We also enjoy the music peculiar to this time of the season, and my favorite seasonal music is anything by the Kings College Choir of Cambridge. No, it's not the usual fare and much of it is over laden with religioisity, but I for one pay more attention to the musical composition and tones - not the words. Nor am I unusual.

But interestingly, the real grinches appear now to be economists and namely a specific breed called "Rational Economists" who suddenly appear to be going ape shit over the whole giving Zeitgeist in whatever form it takes - whether paying for others' layaway balances, or simply giving gifts to friends and relatives. According to a W/E WSJ piece ("Is It Irrational to Give Holiday Gifts?') these guys are pitching a fit right now. According to the piece:

"One much-cited study estimates that as much as a third of the money spent on Christmas is wasted, because recipients assign a lower value than the retail price to the gifts they receive. Rational economists thus make a simple suggestion: give cash or nothing!"

Cash? Cold, hard, unadorned, unwrapped (for mystery) CASH? Who are these unfeeling bastards making such a proposal? Need you ask? (Hint: Think of Vilfredo Pareto. Ring any bells? Think of a statistical distribution. Think of the parable of the sheep and wolf collective and how it is to be rendered maximally happy.)

Of course, "rationalist economics" is predicated on the Pareto Distribution and Pareto "optimality" or "efficiency". Thus, if one's spending - consumption doesn't make the cut for these, one is "Pareto inefficient" and hence, irrational!

Recall the earlier blog on this:

Wherein I noted the concept of the "reservation price" for a given object or service. Ultimately, along with the Pareto distribution, this factors into what is called the Pareto efficiency. This is just the maximum price a person is will to pay. So, if I have a 1954 Henry Aaron TOPPS baseball card (now with a very high book price) and I offer it to you for sale, and ask what the top price is that you'd pay, if you respond "one hundred dollars" then that is your reservation price.

In the context of Xmas gifting, it would be the maximum price I am willing to pay for a gift to a friend or relative. Say then that I pick out a book, maybe the latest one ('The Grand Design') by Stephen Hawking and Leonard Mlodinow on the multiverse, retailing currently at $15.95. I send this book to my friend or brother, but he doesn't read it. According to the rational, errr.....Pareto-based economists, then the money I spent is totally wasted...and the primary reason is that their valuation price was far below my reservation (gift) price. Thus, in this sense, I am irrational.

If on the other hand, I buy a porcelain display doll for my sister, say for $6.95, and she uses it or at least props it up for display someplace, then her valuation price meets my reservation price and I have acted with proper economic behavior or Pareto optimal and rational.

If meanwhile, my wife's Aunt Bessie spends $50 on a sweater for her that she ends up wearing just once, then her valuation price is ridiculously below her aunt's reservation gift price which means, according to Pareto economists, Bessie's hard-earned money has simply evaporated, especially if wifey doesn't even like the present! But is the money truly wasted? What about the surprise of seeing an unopened gift that then has materialized into something which embodies the thought (and feelings) of the gifter?

According to rational economists, it's neither here nor there. Bessie could as well have taken the fifty with U.S. Grant on it and burned it up with a match. In examples such as this, or my giving a book that never gets read or dvds that never get played, rational economists go bonkers over what they see as orgies of wealth destruction, as opposed to occasions of joy.

There is one exception they do make, which is the "practical" gift that is deliberately sought and known about before hand. A classic case is that I need new socks because mine are in holes. My wife knows this and buys them for me, and I know already what's coming. I have no problems with this and to rational economics there is no waste. The money was used by the gifter for something repeatedly used by the giftee, never mind there's no surprise component!

Another option with which rational economists are ok is the gift card, but the main proviso here is that its reservation cost to the gifter not be more than the valuation acknowledged by the giftee. (Also that the giftee not let it expire!)

At the other end of the spectrum are the behavioral economists, who basically tell the rational types to ease up. They are more sympathetic to "irrational" holiday giving because well....behavioral economics draws on psychology as opposed to funny looking statistical distributions purported to represent the optimum ways for people to part with their wealth. Thus it is that these behavioralists better understand why people prefer not to give up the mystery and fun of "blind" gift giving. Sure two bucks out of three may be wasted, but what the hey? Are you going to just reduce the holiday to cold, hard cash exchanges?

By the arguments of the behaviorists, it's not that blind gifts are irrational but that the Pareto-obsessed rationalists haven't factored in their genuine social utility. Still, the behaviorists suggest one can still optimize gift giving by "getting inside the giftee's mind". Behavioral psychology shows we are all partial prisoners of our own preferences and thus have great difficulty seeing another's perspective or preferences. But if we can supersede those limitations, we can not only hit the social utility mark but the maximizing of economic cost mark too.

Perhaps. But I'm willing to bet most of us stick with gift cards!

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