Home / Mint-lounge / Features /  The economics of gifting

One of the finest insights into the culture of giving gifts during the festive season is to be found in an episode of The Big Bang Theory, the popular television show that puts together four brilliant, but socially awkward, scientists with one failed actress whose human touch more than makes up for her lack of intellectual capital.

Penny makes the mistake of giving a Christmas gift to Sheldon Cooper. He does not react the way she expects him to. “Oh, Penny. I know you think you’re being generous, but the foundation of gift giving is reciprocity. You haven’t given me a gift. You’ve given me an obligation. The essence of the custom is that I now have to go out and purchase a gift of commensurate value and representing the same perceived level of friendship as that represented by the gift you’ve given me. It’s no wonder suicide rates skyrocket this time of the year," he explains to the poor girl.

Sheldon is a physicist rather than a game theorist. Game theorists study human interactions, how we compete and collaborate. However, his rather blunt assessment of the culture of giving gifts fits in well with the view among several game theorists that human beings are conditional altruists: we do good when good is done to us while we do bad when bad is done to us. We give people gifts because we think they will be giving us gifts as well. We reciprocate.

Our reciprocal behaviour could lead to two radically different outcomes in any small social group: either everybody gives gifts or nobody gives gifts. It is what game theorists would describe as two Nash equilibriums, named after the brilliant John Nash whose struggle with his inner demons was so wonderfully captured in A Beautiful Mind. Giving gifts will either be ubiquitous or totally absent in a circle of friends or family or office.

There is another problem that Cooper mentioned during his inspired outburst. How do you know what the other person would want: “A gift of commensurate value and representing the same perceived level of friendship?"

We generally know more about our preferences than those of others. There is information asymmetry. One standard way to overcome this fundamental predicament in social life is through subtle communication, or what economists describe as signalling. You drop hints about what you would really like as a gift.

Children have few inhibitions. You ask them what they want for a birthday and there are high chances you will get a straight answer. There is no problem of information asymmetry. The situation is more complicated when you are dealing with adults who will not tell you what they really want for a gift. It is up to you to figure that out. Information asymmetry is found in most houses before a moment of gift giving.

Tangentially, signalling is also the reason why we take more care to dress well on a first date or business meeting while we get progressively sloppy after that. The first interaction is under extreme information asymmetry; so signalling has to be strong. The person we are meeting has little information about us so there is a strong desire to impress.

There is one easy way out of the gift-giving dilemma: hand out cash. Then the other person can quite easily go to the nearest mall to buy what he or she most needs. You will not end up gifting a Kumar Gandharva collection to your head-banging colleague. But giving cash is likely to be construed as poor strategy as well. The very act of buying a gift is a signal that you have taken the time and effort to buy a suitable present. Giving cash is rational but also hopelessly inefficient as a signal of affection. Ask me, I have tried.

The economics of giving gifts may seem very cold to some readers. A famous short story gives us a more humane view of the problem—though information asymmetry and signalling are embedded in it as well. This is The Gift of the Magi, the wonderful tale of love and disappointment by O’Henry. It is about a young but impoverished couple that wants to secretly buy a Christmas gift for the other. James sells his watch so that he can buy Della expensive combs to take care of her long hair. Della sells her beautiful hair to buy a platinum chain for the watch that James so dearly loves.

It is a communication failure once again. James and Della failed to share important information with each other. The result is a great short story but a poor gifting strategy.

The word information which has been used so often in this column is passionless. A couple of years ago, I read a fascinating paper by economist Deirdre N. McCloskey, who has moved beyond standard textbook economics to study fascinating stuff such as feminist economics, the role of ethics in an economy and the rhetoric of economics. She argues for a focus on language rather than information.

“A worrying feature of economics as presently constituted is that it ignores language working in the economy... A large part of economic talk is not merely informational or commanding, but persuasive," writes McCloskey. The economy is not just an information exchange; it is a conversation. A visit to the local fish market will tell you enough about how the transactions are preceded by conversation rather than just the exchange of information about prices.

Other social interactions such as gifting are also enriched by factors such as language, social norms and personal affection. It is perhaps closer to the world of Penny rather than the world of Sheldon. Reciprocity is definitely not to be messed around with, but also ask yourself why some of us give money to charities when the beneficiaries of our gift will not (or cannot) reciprocate?

Niranjan Rajadhyaksha is executive editor, Mint.

Also Read | Niranjan’s previous Lounge columns

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