Is cash the only efficient gift?  Pure economic theory points to two contradictory answers:

1. Yes, because of the receiver’s demonstrated preference.  Suppose gift X costs $100.  If you gave the receiver $100, would he still have spent the money on X?  Almost certainly not, so he must prefer whatever he bought with the $100 to X.

2. No, because of the giver’s demonstrated preference.  Suppose gift X costs $100.  The giver could have given $100 instead of X, but gave X instead.  So he must prefer giving X to its cash equivalent.

When polled, economists on the IGM panel heavily favor some version of #2.  Many even ridicule #1 as psychologically obtuse.  Angus Deaton quips, “This is the sort of narrow view that rightly gives economics bad name.”  But neither side on the IGM even mentions a massive body of psychological research on Social Desirability Bias (SDB) that weighs heavily in #1’s favor.  Quick version: When lies sound better than the truth, human beings often lie. 

Consider “I enjoy finding the perfect gift for all my friends and family” and “It’s the thought that counts.”  Such statements sound great, but the power of SDB suggests that such protestations are often balderdash.  Shopping for the perfect present for an uncle who drives you crazy does not fill your heart with a warm glow.  Neither does getting CDs from your grandma who’s never even heard of iTunes, much less your favorite bands.

Once you grasp SDB, economists’ case for cash presents starts to sound a lot more plausible.  Yes, non-pecuniary preferences argue against cash; but SDB suggests that a lot of professed non-pecuniary “preferences” are, in fact, lies.  Why don’t these liars jointly agree to stop exchanging (non-cash) presents?  SDB once again!  The first person who proposes an End This Miserable Charade Treaty sounds like a jerk.

Does this mean that the pro-cash economists are right?  Not quite.  The pro-cash economists are correct to see – and courageous to point out – a lot of gifty inefficiency.  But SDB is only a tendency, not a universal law.  Some people some of the time really do feel the spirit of Christmas.  When they do, traditional gift-giving is efficiency-enhancing.

When is this most likely?  Two obvious factors:

1. How much affection the donor and recipient truly feel for each other.  Your kids, your spouse, and your go-to friends are probably very dear to you.  Your second cousins, your brother-in-law, and the co-workers you never see outside the office probably aren’t so dear. 

Corollary: Giving presents to kids tends to be more efficient because kids (a) inspire more affection than adults, and (b) exhibit less SDB than adults.  If giving a child a toy makes you feel good, and the kid smiles when he gets it, you probably gifted efficiently.

2. The kind of person you happen to be.  If your Five Factor personality test says you’re high in Agreeableness and low in Neuroticism, you probably savor both giving and receiving gifts far more than people low in Agreeableness and high in Neuroticism.  Christmas is fun for the former, pain for the latter.

In adage form: Exchange gifts with your close family and friends, especially kids – and leave your favorite Grinches in peace.

P.S. None of this applies if you’re giving the gift of economic literacy to your entire family at holiday dinner.  Giving and receiving economic enlightenment is always a joy for all people at all times.  🙂