Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Saturday, November 21, 2009

Scroogenomics

Posted by Simon Halliday | Saturday, November 21, 2009 | Category: |

In his recent column for the FT, Tim Harford discusses the idea of Scroogenomics. The idea, conceived by economist Joel Waldfogel, proposes that Christmas be abolished. No, Waldfogel is not the Grinch made flesh, but rather an economist who has rather narrow views on gifts and gift valuation. Waldfogel argues that each year at Christmas the worldwide deadweight loss is approximately $25bn. The reason? If someone gives you a gift with a price of $50, you may value it at $35-40. Extrapolate this outwards and you can arrive at suitably large numbers. Waldfogel's proposal for Christmas is that people give cash rather than physical gifts. Giving gift certificates (vouchers) also isn't efficient because people often don't use them and they expire, not serving their purpose. Thus give money.

Harford challenges Waldfogel's idea of deadweight loss by calling on 'Warm Glow' effects, i.e. how we feel about giving gifts and how we could attach a monetary value to the warm glow that would diminish the deadweight loss. I agree with Harford, but two other criticisms come to mind. First, the much researched notion of framing. The problem is that when people frame things as financial interactions rather than as gift-giving they often behave less cooperatively and less prosocially. Imagine at Christmas not giving any non-monetary gifts whatsoever, but only exchanging envelopes of cash - it may come to feel like an exchange of cash for services rendered, even if the service was just a big 'thank you' afterwards (note, there might be an optimum at some combination of gifts and cash-in-hand). Secondly, people are known to experience the endowment effect for goods, that is to value goods more than their listed price when given the option to exchange that gift with someone else. Highlighting the endowment effect somehow could overpower the straight monetary losses by affecting how people value the gain. I'm not suggesting here that we try to set up post-christmas trades between siblings, but playful commentary on the 'subjective worth' rather than the 'monetary worth' of things could be justified, and potentially more in the spirit of Christmas, regards of your religious or secular affiliation.

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