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Why We Overspend on Gifts

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Why We Overspend on Gifts

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Modeling Gift Choice: The Effect of Uncertainty on Price Sensitivity
van der LANS, Ralf | WANG, Sherry Shi 
Journal of Marketing Research 55 (4), p. 524-540 

Gift-giving is a big business – in the US annual spending on gift-giving reached $159 billion in 2017. But such expenditure may also be symptomatic of overspending. In the UK in 2015, one in 10 people reported experiencing financial difficulties because they spent too much over the Christmas season. Moreover, recipients are often not as impressed as the givers might hope. One estimate shows they assigned between 10 per cent and 33 per cent lower monetary value to gifts than the givers had paid, a phenomenon known as deadweight loss of gift giving.

There is therefore a need to better understand why givers overspend in order to please receivers. Sherry Shi Wang and Ralf van der Lans offer an explanation through a model that captures two factors affecting gift-making decisions: the giver’s inaccurate prediction of the receiver’s preferences, and the price. The authors argue that uncertainties about those preferences can lead givers to have lower price sensitivities and spend more than they might otherwise.

“If uncertainty increases, it becomes more difficult to predict the receiver’s preferences and the giver may therefore decide to put more weight on the signaling value of price,” they said. In other words, price is used to represent the value of the relationship.

To explore these ideas, the authors designed a model and tested it out in two newly designed conjoint experiments for gift giving. In the first, 99 pairs of friends were asked to each choose from a selection of headphones for themselves, then to choose headphones as a gift for their friend. In the latter case, some participants received no information about their friend’s preference, some were given one piece of information (i.e., one of the choices that the receiver previously made), and some were given full details. This was to manipulate the uncertainty of their decision.

The givers were found to be less price sensitive when buying a gift than buying for themselves, and this was especially the case when they did not have full information about the receiver’s preference. This finding is unique and has not been shown in previous research.

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