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Junk Science: The Scroogenomics of Prof. Waldfogel

December 27, 2010

I recently happened upon a post on the website lifehacker titled Holiday Misgivings about how gifts given during the holiday were not worth as much to the recipients as they cost. Similar arguments were mis-represented in news sources and blogs, and it might be a good time to address this issue as many people are returning poorly chosen Christmas gifts. Now, we’ve all gotten gifts from people that we disliked (in both senses of the statement), however the claim that “when you give a gift, the recipient automatically values it lower than its actual worth” seemed to me to be one of those cases when a reporter’s oversimplification of economic phenomena leads people to the wrong conclusions.  It also didn’t help that one of the studies they cited was from an online money order company… And in this case, in the interest of the holiday spirits and grandmothers everywhere I decided to do a little research on the economics.

When I did a little background work on the claim I found that its origin sprung from a 1993 paper entitled The Deadweight Loss of Christmas by Professor Joel Waldfogel . While the paper comes from professor  Waldfogel’s early research, he did feel passionate enough to write a book about the subject.

I quote from his interview:

“Where other people see wonderful scenes of hearth-side cheering. I just see an orgy of value-destruction and miss-allocated resources.”

… Can you  believe this guy?

However, when you actually read the short and childishly theoretically simple (as in Econ 101 for dummies) paper he wrote in 1993 you realize that it suffers from three research errors that often occur in economics, making it what I like to call Junk Science.

Analysis

One, he takes an overly simplistic theory and applies it to complex social phenomenon (almost all social-research does this, but in this paper he is particularly egregious). Two, he journeys into a field he is not qualified to comment on as an economist, without prior research (Economists often produce really strange research when they do this, although recently it seems to have become in vogue). Three, he uses a non-representative sample of the population in his survey by sampling only college students, the favorite subject of professors due to their abundance and requisite attendance (he admits this, but doesn’t think its a problem… I do for reasons I’ll state later).

His first failing, of theoretical over-simplification, is clear from the start of his paper where he declares:

“In the standard microeconomics framework of consumer choice, the best a gift-giver can do with, say, $10 is to duplicate the choice that the recipient would have made. While it is possible for a giver to choose a gift which the recipient ultimately values above its price -for example, if the recipient is not perfectly informed –it is more likely that the gift will leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash. In short, gift-giving is a potential source of deadweight loss.”

If you start the paper off, assuming your conclusion, then it  makes sense that within your analytical framework you will validate that conclusion. Really when a paper begins like this you can almost stop reading.  What he is stating is that given a certain gift, a recipient would never pay more than the market price for that item. This is obvious however, because no rational person should pay any more for an item than they know they could buy it for. In his questionnaire he is comparing the cost of the item given with the maximum amount a person would pay for it. This theoretical simplification masks the true aspect of a gift, which is that it is not simply a consumable item, but a symbolic item which has value also as a representation of the relationship between the giver and the receiver.

This theoretical simplification emerges from the fact that Prof. Waldfogel is not a sociologist. As an economist he is used to seeing things in terms of prices. However, if he really wanted to write something meaningful about gifts he should have read some Emile Durkheim and Marcel Mauss. Even a cursory reading of these well-known sociologists would have helped his approach to gift-giving. Gifts are not simply objects, a gift of an object takes on a new meaning, beyond simply being an object it becomes a metaphor for the relationship between the giver and receiver. In this light, a sweater given to me by my grandmother may have more value (even potentially unprice-able value) than the same sweater purchased in a store. They are not comparable. As a result to compare the price of an item purchased to the price someone would pay for it, tells you nothing about the value of the gift. Remember, some gifts are priceless. The value of a wedding ring to a bride is probably higher than the fair market value of the ring, however if you asked her to value any random ring she shouldn’t be willing to pay more than the market rate.

Third, and lastly, even though Professor Waldfogel states of college students:

“While these recipients may be unrepresentative of the U.S. population, their gifts are not necessarily unrepresentative.”

the use of college students is important in at least one respect. I do not know how many parents I have heard complaining that college students do not know the value of money, but it is a lot. When you take into consideration the fact that many college students do not work full-time (especially at Yale) and are not used purchasing every good that they own for themselves; you realize that of course, on average, college students will under-value items. This aspect of sample selection is extremely important as it is the entirety of Joel Waldfogel’s argument. As a result, the empirical results are as useless as his theoretical approach. If you ran this survey on a group of people living in a famine and asked them how much they’d pay for bread, chances are the results you’d get would be higher than the market value (this actually occurs as price-arbitragers during hurricane Katrina demonstrated).  Thus by asking relatively privileged Yale college students to value items, Prof. Waldfogel destroys any hope of credibility for his paper.

In short, gifts are important not only because of how much they cost, but also because of what they mean and represent. Interestingly enough, The Guardian and The Economist cover this paper and do a surprisingly good job of reminding us of this point.

Here is a copy of the money order company sponsored chart from lifehacker.com if you’re curious about spurious research and claims:

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