Xmas overspending doesn’t breed higher returns

(This comment has also been published as a Reuters Breakingviews comment on 24 December 2012.)

If Christmas gifts were an investment, they would fall under the law of diminishing returns. Overspending is unproductive and small presents may be more efficient, behavioural economists suggest. A case where stinginess makes sense. At least economically.

Finding the perfect Christmas gift can be tricky. Good ideas for presents are often scarcer than financial resources. Hence the temptation to offset poor creativity with sheer spending power. Who cares if the present is dull, if it was expensive? In fact, such a strategy can backfire if the purpose is to seek the receiver’s sympathy. Small presents may be more persuasive than big ones, according to the findings of economists Ulrike Malmendier and Klaus M. Schmidt.

The title of their paper – “You Owe Me” – summarises its result, and the experiments they conducted confirm a well-known human preference for “patterns of reciprocal behaviour”. Receivers of a present instantly develop a certain sympathy for the giver. Interestingly, the takers are not fully aware of this, downplaying the gift’s influence on their own behaviour.

Christmas gifts can thus be envisaged as another economic transaction. The warm feeling that comes from giving could hide a mundane investment in social relationships. Be it your wife, or your business partner, a gift entails a hidden obligation to treat you nicely – creating a special bond between the giver and the recipient.

Things get more complicated when size is involved. It matters in an unexpected way. Generous presents seem to buy less favour from the recipients than small ones, according to the study. The art of giving seems to fall under the law of diminishing returns.

The authors presume that big gifts, being too blatant, tend to raise the receiver’s suspicion. They generate suspicion that the benefactor has a hidden agenda, and trigger an impulse to contain reciprocal behaviour. On the other hand, not giving at all isn’t just neutral on potential recipients: it generates negative behaviour in return. Too much is bad, but nothing is worse.

(This comment has also been published as a Reuters Breakingviews comment on 24 December 2012.)

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