Just stumbled on the following article entitled So, Scrooge was right after all

Conventional economics teaches that gift giving is irrational. The satisfaction or "utility" a person derives from consumption is determined by their personal preferences. But no one understands your preferences as well as you do.

So when I give up $50 worth of utility to buy a present for you, the chances are high that you'll value it at less than $50. If so, there's been a mutual loss of utility. The transaction has been inefficient and "welfare reducing", thus making it irrational. As an economist would put it, "unless a gift that costs the giver p dollars exactly matches the way in which the recipient would have spent the p dollars, the gift is suboptimal".

The big problem I've always had with economics as I was always taught in school is that the fundamental assumption underlying it is that humans make rational decisions when buying and selling goods and services. This is simply not true. The above example is a good one; it makes more sense for everyone involved in the annual gift exchange that is Christmas if people just gave checks and gift certificates instead of buying gifts that the recipients don't want or don't need. Yet this isn't how Christmas gift giving is done in most cases. Then there's the entire field of advertising with its concept of lifestyle ads which are highly successful and are yet another example that human buying decisions aren't steeped in rationality.

What a crock...


Sunday, December 28, 2003 2:12:53 AM (GMT Standard Time, UTC+00:00)
Happy Holidays! I hope you got the suboptimal gift(s) you wanted this year.
Sunday, January 4, 2004 7:07:22 PM (GMT Standard Time, UTC+00:00)
Of course, the rational woman would rather receive diamonds than the equivalent amount of cash to spend at Cartier. Diamonds are shinier and can be transported across international boundaries easier, and they show how much you care. :-)
Friday, January 9, 2004 3:26:15 PM (GMT Standard Time, UTC+00:00)
Economists assume perfect rationality in order to simplify things, just as physicists assume a perfect vacuum. Things are a lot harder to prove in physics if you take away the perfect vacuum and try to account for the real world, and it's the same in economics with rationality.
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