The Behavioral Economics of Why Hyperopic People Like Me Prefer Gift Cards over Cash

Consider the following scenario: The Christmas deadline is quickly expiring, and even by your own poor standards, you have displayed an impressive level of procrastination in Christmas shopping for your loved ones.  You have no idea what to get for these people, and they won’t tell you, seemingly relishing in this test of your creativity, thoughtfulness, and understanding of their likes and dislikes.

As desperation and panic begin to eclipse seasonal cheer, you sadly ponder the Christmas-gift ejector seat: “I’ll Just Give Everyone Cash.”  The rationalization begins:  After all, Joel Waldfogel’s famous paper in the American Economic Review shows reciprocal holiday gift giving creates a 10-30% efficiency loss from poor gift matches.  But then again, as you well understand, economists often omit from their models less quantifiable phenomena, like tackiness, that receive significant weight around the family tree on Christmas morning.

Then the giant rack of gift cards at the local supermarket enters your mind, the one located right next to the Trident gum display.  “What about a gift card?” Arguably less tacky than cash, but not quite as flexible:  People are constrained to buy stuff from Wall-Mart, Amazon, or whoever else issues the gift card.  Now suppose holiday shopping procrastination has given way to full-fledged holiday-shopping paralysis and now it is Christmas Eve, only the Safeway store is open, and you are left with a sad choice:  cash or gift cards. Which should you choose?

Mainstream economists like Waldfogel and the Marginal Revolution guys, Tyler Cowen and Alex Tabarrok,  (click here for their hilarious video on this) would advocate cash because the argument can be made that in-kind giving can never produce a superior gift match than cash giving.  However, I would like to offer a behavioral economics argument for gift cards, from a receiver’s perspective.  I always wondered why I liked getting gift cards for places like Amazon more than cash, and after pondering this feeling for some time, I think I now understand why. The argument goes like this:

Suppose there are three things that I care about 1) allocating my resources responsibly toward things like food and clothing for my children and saving for their college education; 2) blowing money on frivolous and relatively unnecessary items for myself; and 3) feeling guilty about a decision to spend money on (2) rather than (1).   Now consider the case in which I get a gift of $100, and let the arguments in my utility function be equal to the three things I care about, separated by commas.

If I were to receive the $100 in cash and were to make an optimal allocation that maximizes my utility from receiving a cash gift, my utility would be U($80, $20, no guilt) because I would allocate $80 of this cash gift to feeding and clothing my children and saving for their college education, and I would blow $20 of the gift on four large mocha lattes for me and only me, and I would feel no guilt because what I blew on myself was greatly outweighed by my responsible allocation.  If I were to spend all of a $100 cash gift on myself, then my utility would be U($0, $100, guilt).  By spending the entire wad of cash on myself, I would feel bad about my self-indulgence, and overall I would feel worse than if I would have chosen my preferred (and more responsible) allocation of the cash.  So at least for me, U($80, $20, no guilt) > U($0, $100, guilt).

But here in lies the wondrous properties of receiving the gift card.  Assuming I can’t, or won’t bother, to sell it on a secondary market for cash, or that the price that I would get for it would be too low, I have to spend it on Amazon.  It allows me to have my behavioral economics cake and eat it too. The gift card constrains me to buy toys on Amazon for myself, but someone else has made this decision for me so I don’t have to feel guilty about my action in doing so.  In other words, at least for me, and I believe many people like me, that although U($80, $20, no guilt) > U($0, $100, guilt), I admit (in a moment of transparency and vulnerability) it is also true that U($0, $100, no guilt) > U($80, $20, no guilt).  Moreover, through the wonders of the gift card, not only do I not feel guilty, but the guilt is not transferred to the giver.  The guilt magically vanishes. Why should the giver of the gift card feel guilty about allowing me the pleasure of doing a little bit frivolous spending?

The late 2005 Nobel Laureate Thomas Schelling who passed away at age 95 this week, wrote in a famous essay about “the intimate contest for self-command.”  So many human decisions involve a conflict between the “disciplined self” that wants to act responsibly and the “pleasure-seeking self” that wants to eat chocolates and watch movies in bed.  For some, this leads to a lifetime of decisions that maximize a person’s own short-term self-interest.  And since the future is always now relative to the past, such people are constantly experiencing the negative consequences of the pleasure-seeking self’s past decisions.

However, there are many of us, as psychologist Ron Kivetz describes, who suffer from hyperopia, or “excessive farsightedness and future-based preferences.”  In layman’s terms, people who are so habitually responsible that they never bother to have any fun or spend any money on themselves.  These kinds of people, Kivitz argues, actually need to pre-commit to acts of self-indulgence or they will spend the rest of their lives living for the future.

And I think this is why I like receiving a gift card more than cash.  So in honor of the late great economist Thomas Schelling, and for the benefit of all of your hyperopic loved ones on your shopping list, think about replacing the cash with the gift card…if you can’t think of something else more frivolous to buy for them.

Follow AcrossTwoWorlds on Twitter @BruceWydick.

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