The Behavioral Economics of Gift Cards over Cash

The Christmas deadline is quickly expiring, and even by your own poor standards, you have displayed an impressive level of procrastination in Christmas shopping for your loved ones. Panic has set in. You have no idea what to get for these people on your list, and they won't tell you, seemingly relishing in this test of your creativity, thoughtfulness, and understanding of their likes and dislikes. It has come down to this: giving cash or buying one of those gift cards at the local supermarket located on the big rack next to the Trident gum display.

In the choice of gift cards versus cash, most traditional economists would come down on the side of cash--wrapping up a Ben Franklin or a Thomas Jefferson (depending on how generous one is) inside a nice Christmas greeting, and letting the animal spirits of free choice have their way with it.

However, I would like to offer a behavioral economics argument for gift cards, from a receiver's perspective. I always wondered why I liked getting gift cards for places like Amazon more than cash, and after pondering this feeling for some time, I now understand why.

The argument goes like this: Suppose there are three things that I care about 1) allocating my resources responsibly toward things like food and clothing for my children and saving for their college education; 2) blowing money on frivolous and relatively unnecessary items for myself; and 3) feeling guilty about a decision to spend money on (2) rather than (1).

Now consider I get a gift of $100. If I were to spend all of a $100 cash gift on myself to buy a drone helicopter, the frivolous spending would be fun. But by spending the entire wad of cash on myself, I would feel guilty about my self-indulgence (see #3 above). The truth is if I were to receive $100 in cash, what I would probably do would be to allocate most of it to responsible things like feeding and clothing my children and saving for their college education, and I would blow $20 of the gift on four large mocha lattes for me and only me, and I would feel no guilt because what I blew on myself was greatly outweighed by my responsible allocation.

But herein lies the wondrous properties of receiving the gift card. Receiving a gift card allows me to have my behavioral economics cake and eat it too. The gift card constrains me to buy stuff on Amazon for myself, which in many ways is my first choice, but someone else has made this decision for me so I don't have to feel guilty about my action in doing so. In other words, at least for me, and I believe many people like me, receiving the gift card, and the guilt-free spending associated with it, outweighs the greater "freedom" I have with a cash gift. Moreover, through the miracle of the gift card, not only do I not feel guilty, but the guilt does not transfer to the giver. The guilt magically vanishes. Why should the giver of the gift card feel guilty about allowing me the pleasure of doing a little bit of frivolous spending? Maybe that's what she intended in the first place.

The late 2005 Nobel Laureate Thomas Schelling who passed away at age 95 last week, wrote in a famous essay about "the intimate contest for self-command." So many human decisions involve a conflict between the disciplined self that wants to act responsibly and the pleasure-seeking self that wants to eat chocolates and watch movies in bed. For some, this leads to a lifetime of decisions that maximize a person's own short-term self-interest, with the resulting negative consequences in the future.

However, there are many of us, as psychologist Ron Kivetz describes, who suffer from hyperopia, or "excessive farsightedness and future-based preferences." In layman's terms, these are people who are so habitually responsible that they never bother to have any fun or spend any money on themselves. These kinds of people, Kivitz argues, actually need to pre-commit, or be pre-committed, to acts of self-indulgence or they will spend the rest of their lives living for the future.

And I think this is why I like receiving a gift card more than cash. So in honor of the late Nobel Laureate Thomas Schelling, and for the benefit of all of your hyperopic loved ones on your shopping list, consider replacing the cash with a gift card...if you can't think of something else more frivolous for them.

Follow Bruce Wydick on Twitter @Bruce Wydick.