Skip to main content

Are you ready for Christmas?

Edited 0500 1

Finance is based on the idea that we are rational and risk-averse. When investing we prefer higher returns to lower ones, and if two investments offer the same return we will choose the one which is less risky. When faced with the choice between an investment with low risk and return and another with both higher risk and higher return I know what I would do, but cannot speak for you. In other words I understand my preferences but not yours, which makes it difficult for one person to give investment advice to another. This explains why, if you go to an independent financial advisor they will ask you to complete a questionnaire designed to indicate just how risk averse you are.

Buying Christmas gifts is a bit like offering investment advice, it is difficult if you do not know the preferences of the recipient. In a book with the wonderful title Scroogenomics, Joel Waldfogel2 explains how he has estimated the deadweight welfare loss that is created by our Christmas shopping. A welfare loss is created when I buy a gift for £10, but as far as the recipient is concerned, it is worth less than that. Think about all those weird and wonderful novelty gifts that appear in department stores at this time of year - wind-up racing snails, singing hamsters and reindeer slippers. If you are a rushed or confused shopper these seem like a good idea at the time, but are they really what your loved ones want? The trouble is that anyone receiving that kind of gift will smile when they see it. Research by Yang and Urminsky3 shows that gift givers like to hand over their presents in person because they are hoping for a reward in the form of a smile. You as the recipient may not think it is worth £10, but the more you smile at a singing hamster this year, the more likely you are to get a dancing llama next year and so the welfare loss carries on year after year.

How can rational people overcome this problem? For Waldfogel the answer is gift tokens. If I give you a token valued at £10 you can buy something which you value at £10, it makes you happy and makes life easier for me. I may not see a big smile, but at least I don’t have to listen to your singing hamster …


  1. As reported by
  2. Waldfogel, J. (2009) Scroogenomics Princeton University Press
  3. Yang, A.X. and Urminsky, O. (2018) The smile-seeking hypothesis: How immediate affective reactions motivate and reward gift-giving Psychological Science 29 (8) 1221-1233
Published 10 December 2019
Business News

You might also like

PhD student receives Best Paper Award at recent conference

30 May 2012
The ICMA Centre is very proud to congratulate PhD student Yingying Wu on her receipt of a Best Paper Award at the 19th Global Finance Conference, taking place at DePaul University in Chicago on May 23-25, 2012. The prize was awarded for the paper “Commodity Futures Prices: More Evidence on Forecast Power, Risk Premia and the Theory of Storage” (co-authored with Chris Brooks and Marcel Prokopczuk).
Research news

Can we predict when football managers are no longer effective?

7 August 2019
As the new football season commences, the media is speculating on who will be the first manager to be sacked. Whilst economists have used their models to predict football events, academics from the ICMA Centre have developed a model to see if they could predict when a football manager is no longer being effective.
Business News

Adrian Bell announced as ICMA Centre Head of School

1 August 2012
From 1 August 2012, Professor Adrian Bell will take over as Head of ICMA Centre. Adrian is well known to graduates of the ICMA Centre having been a member of staff since 1994 and has been involved with every group of BSc, MSc and PhD students since.
Press releases