Last-minute Christmas shopping? Economics shows why gift cards are not the 'lazy choice'

As the holiday season approaches, many of us are no doubt sweating over the responsibility of picking out the perfect gift for our friends and loved ones. Of course, if we really get in a jam, we can always turn to that tried and true solution for the person who has everything: the gift card.

Economists have long puzzled over the continuing popularity of gift cards. If you view people as rational, which economics generally does, why should anyone prefer a gift card to cash? These cards function just like cash, but are accepted only by a particular retailer, making them less useful than simple currency. Furthermore, the giver of a gift card has to go to the trouble of buying the card in the first place, when a gift of cash would avoid this opportunity cost. Nevertheless, gift cards persist and in fact are more popular than ever. Why?

The answer can be found in the Austrian school of economics’ theory of subjective value. Whereas mainstream economists have long looked for a measurement of value inherent in goods and services — Adam Smith, for example, believed that value was determined by the amount of labor that goes into production — the Austrians, beginning with Carl Menger in 1871, observed that all value is in the eye of the beholder.

Thus, the answer to the gift card conundrum is not that people are irrational, but simply that they place value on things we might not at first expect. The dollar value of a gift card is certainly important, but it’s not the only important thing. Gift cards have certain, subtle advantages over cash.

One of these is the release from obligation that comes with a limited choice. If a person is given cash as a gift, they might feel obligated to invest it responsibly, to use it to pay bills, to save it for a rainy day, or to give a portion of it to a charitable cause. A gift card removes this obligation, allowing the recipient to buy something fun without guilt.

From the point of view of the giver, gift cards can be used to signal a certain amount of thoughtfulness, although perhaps not as much as an individually selected gift. Cash can be dished out at the last minute if a present is forgotten and requires no more effort than reaching for one’s wallet. A gift card has to be purchased, which takes time and energy, and a store has to be selected that will be pleasing to the recipient. All this shows that the giver cares enough to trouble himself, which is a pleasing thought.

There is also a strong cultural stigma against giving cash as a gift, and a gift card allows the avoidance of embarrassment on both the part of the giver and the receiver. There are any number of other reasons why someone might value a card more than a stack of dollar bills. It all depends on individual taste.

While I’m not suggesting that readers replace their traditional gift-giving rituals with fistfuls of gift cards — a carefully chosen and personal gift is still the best — it is worth considering that gift cards are not as lazy a choice as we might think, and certainly not an irrational one when you don’t have a good idea what to buy.

#mc_embed_signup{background:#fff; clear:left; font:14px}

/* Add your own MailChimp form style overrides in your site stylesheet or in this style block.

We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */