Gifts that people buy for other people are usually poorly matched to the recipients’ preferences. What the recipients would willingly pay for gifts is usually less than what the givers paid. The measure of the inefficiency of allocating value by gift-giving is the difference between the yield of satisfaction per dollar spent on gifts and the yield per dollar spent on recipients’ own purchases.

By calculating the difference between the consumption of holiday goods (e.g., jewelry, but not gasoline) in December as opposed to November and January, you get a rough estimate of Christmas spending. Waldfogel’s conservative estimate is that in 2007, Americans spent $66 billion on gifts and produced $12 billion less satisfaction than would have been produced if the recipients had spent the $66 billion on themselves…

Were it not for sentimentality about sentiments, which are highly overrated, we would behave rationally, giving cash, thereby avoiding value subtraction. We almost do that with wedding registries. And cash for Christmas, or semi-cash in the form of gift cards, no longer seems so tacky. Between 1998 and 2005, gift card sales grew 27 percent a year. They now are about one-third of Christmas spending and rank near the top of lists of preferred gifts. Grandmothers, especially, should give cash to grandchildren. Instead they think, “What did I get when I was young?” and then they give a kaleidoscope to Jimmy, who wanted Grand Theft Auto IV and now wants to trade grandma for Grand Theft Auto IV.