When Dan Ariely recently took his kids to a birthday party, he didn't expect a lesson in how to celebrate the holidays, let alone a tutorial in economics. But as clowns and inflatables entertained the children and the parents feasted on wine and sushi, he found himself pining for old fashioned birthday cake and soda. For Ariely, a behavioral economist and author of Predictably Irrational, it was a near-perfect example of what's known in his trade as a social coordination problem, and a big demonstration of why many people grow to dislike what should be festive occasions. Put simply, our parties and gifts need to be on par with our peers' or we become unhappy.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%According to Ariely, who works at Duke University, "Over time there's a race to the top. In a world where other kids are getting a clown you cannot, not give them a clown. [But] if we all started doing simple parties all the kids would be just as happy."
The holiday season is especially ripe for this kind of behavior -- and subsequent unhappiness -- than the holiday season. Imagine last year your Aunt Betty splurged on everyone and gave lavish presents. This year, her gifts establish the base level of gift-giving. In economics, this is known as a positional good: we don't care how big an event is, we just want it to be among the biggest and we become unhappy if we fall behind. Over time, this can lead to party and gift inflation.
It's like going to the theater, Ariely says. If all the people in the first row stand up, then everyone in the second row will rise in order to see, followed by the third and fourth and so on until the whole audience is on its feet. The result? "Everyone is seeing just the same, but everyone is just more uncomfortable," Ariely explains.
There is a way out. We can be just as happy if we sit down, as long as everyone else sits down, too.
That happened at the party. One of the parents suggested returning to more low-key birthdays, inviting a handful of friends and serving cake. Ariely proposes a similar fix for gift giving. According to Ariely, we often equate the amount we spend with the amount of pleasure we think the other recipient will get from the gift. That approach may seem rational, but may not be realistic. "They're not getting as much benefit as we think they are," Ariely says. He suggests three ways to improve your gift giving:
* Change your mindset: Focus on something less expensive that the person really wants, rather than try to hit a price target equivalent to what you think they will spend on you.
* Share your tastes, not just your money: "Here's a book that you never thought of, but trust me, in the long term you will thank me," Ariely says.
* Little Luxuries: Consider a small, special item that the person would never buy for him or herself.
According to Ariely, the key may lie in simply being more thoughtful and logical in gift-giving: "If you start thinking more systematically about gifts, you get more value out of the money you spend," he says.
Sounds like a gift to everyone.
Take the first steps to building your portfolio.View Course »