Blogs | December 11, 2017

Should you give a gift card this Christmas?

Economists are divided.

It’s Christmas Eve and you still haven’t got a clue what to buy your brother-in-law.
He doesn’t drink and he’s on a diet. It seems the only options left are a gift card, or cold, hard cash.

But are these acceptable presents to give?

For some economists, the answer is a resounding yes: giving cash or gift cards makes complete sense. Professor Joel Waldfogel, author of Scroogenomics, has described Christmas as a “large and organised institution for value destruction” because presents are valued considerably less by those that receive them than they cost the givers. 

When we buy for ourselves, we know what we like, so every dollar we spend produces at least a dollar in satisfaction, he says. 

What they really want
But when buying for others, we make less-informed choices (because we’re not them) which result in less satisfaction. To put it into numbers, his research has found that we value items we receive as gifts 20% less, per dollar spent, than items we buy ourselves. 

Money, on the other hand, allows the recipient to buy what they’d like, preventing this deadweight loss. Bear in mind, though, that cash should only flow from “those of higher social status to those of lower social status” – parents to children, grandparents to grandchildren, aunts and uncles to nieces and nephews, according to Waldfogel. If not, it’s seen as a bit tacky, he says.

So a gift card, which still allows a person to choose for themselves, would be a better gift for your socially equal brother-in-law.

Bruce Wydick, Professor of Economics and International Studies at the University of San Francisco, argues that gift cards are king at Christmas because – unlike cash – they allow the recipient to indulge themselves without guilt.

While he acknowledges that there are many people who would have no difficulty spending a wad of cash on themselves, there are also many more – like him – who suffer from “hyperopia”, or excessive farsightedness.

These “habitually responsible” people have difficulty throwing caution to the wind and spending money on themselves. And just as many people need to pre-commit to avoiding unhelpful temptations – not having biscuits in the house so they can’t eat them, putting credit cards in ice to prevent spending sprees – this bunch need to “pre-commit to indulgence”, or else spend their lives living for the future. 

Voucher for you
A gift of cash would simply end up in the pool of money used for necessities and savings. With a gift card for Amazon, say, the decision has been made for them: they must spend it on fun stuff for themselves. The gift really is a gift. 

British economist Tim Harford argues, however, that gift cards are a poor choice, managing to be “both sterile and inefficient at the same time”. 
“Quite apart from the seasonal risk of being an unsecured creditor to the latest high-street bankruptcy, these vouchers very frequently end up in a desk drawer and expire unused,” he writes on his blog.

He points to research by Jennifer Pate Offenburg, who tracked the resale value of gift cards on eBay. 

People tend to put off spending their gift cards if they come with an expiry date that’s a long way in the future

She found that the most wasteful cards – the ones that traded at a discount of 20% – were for the more  romantic ones, like Tiffany & Co (the jeweller) or Victoria’s Secret (lingerie). Those for stores like Home Depot, Wal-mart and Starbucks fared better.

According to estimates by CEB Towergroup, $1bn was wasted on unused gift cards in 2015 in the USA alone.

Putting off pleasure
Part of the problem could be due to people procrastinating over enjoyable tasks, research by University of California academics Suzanne Shu and Ayelet Gneezy suggests.

The pair found that people tend to put off spending their gift cards if they come with an expiry date that’s a long way in the future, resulting in them never being redeemed at all.

They tracked a group of students given gift certificates to spend at a café, with some of the cards having a deadline of three weeks and others that needed redeeming within two months.

Those given the two-month cards were much less likely to use them. They fell into the trap of thinking they would have more time to spend them in the future “without realising the future would be equally busy”. The same thing happened when people were given vouchers for cinema tickets.

The pressure of a short deadline, on the other hand, helped people overcome their procrastination and enjoy themselves.

The advice from the researchers? Set your own specific, and immediate, deadline for spending your gift card.

Staying in budget
Meanwhile there is a whole other group of people for whom gift cards aren’t even about giving – they’re a way of staying within spending limits.

In a survey by First Data, 16% were “budget tamers”: typically middle-aged, married men who buy gift cards as a budgeting device. They reload the cards to spend instead of cash, particularly at coffee shops and discount stores, and also buy them when there’s a chance to earn rewards.

Whichever side of the cash-gift card argument you fall on, giving to others this Christmas may make you happier than spending the money on yourself ever could.


eZonomics team
.(JavaScript must be enabled to view this email address)