The Strangeness of Gift Card Economics

12/20/2024

Gift cards have been an interesting subject matter to me for some time. That sounds silly, but as often as we encounter them in gift-giving scenarios (check the publish date here...), I often ponder what gift cards might signal about human psychology and economics.

It's not uncommon for some set of people - say, a nuclear family unit - to exchange gifts during the holiday season. We know enough about someone to know the general discipline areas they might like to have more from, but not quite enough to know exactly what. Before gift cards, we are left with a conundrum between a few options:

• Take the risk of buying them something they won't necessarily like that much
• Don't buy them anything and instead try to show them you care in some other manner
• Let them decide what they want, and purchase that for them
• Give them money

Each of these has interesting psychological side effects, let's look at the primary reaction for each one:

Take the risk of buying them something they won't necessarily like that much: if it fails, they will feel too bad to tell you they don't like it. "It's the thought that counts" works overtime here, because the negative experience of having to return the item while looking over your shoulder is something neither side wants, but something that very likely will happen.

Don't buy them anything, and instead show affection another way: Sure, this might work conceptually, but we know that people feel psychological pain from not reciprocating, so this only really can work if both sides agree not to participate in giving a gift. Additionally, there might be other pains from not participating in tradition / culture.

Let them decide what they want, and purchase it for them: Not a bad idea! Except now there's no "thought that counts" involved - you've just become a facilitator. Additionally, there's no surprise involved either. Surprise is highly valued, as broadly evidenced by gift wrapping.

Give them money: Ok, maybe this could work. But it's impersonal. And, if we all did it, wouldn't it feel awkward me handing you a $20 bill, and you handing me a $30 bill? This feels transactional... and when the units are exactly the same, and exchanged essentially at the same time, there's a strong urge to settle the tab - you give me 30, I gave you 20... just give me a ten and we're good to go. But then, what did I give you exactly? The opportunity to give me less?

So now there's a strange phenomenon at work here... In my opinion, this is essentially the best example of mental accounting. Richard Thaler studied this; the basic idea is that we create boundaries on resources that otherwise would be fungible. For example, we hold a "savings fund" with no real boundary, and no explicit financial benefit or restriction. We set that money aside to do something specific with it.

Enter gift cards.

When I give you a $30 gift card, and you give me a $20 gift card, in terms of economic outcomes we've created an arbitrary boundary such that these two cards are no longer fungible.

Now here's where it gets really interesting to me: by reducing the fungibility, we've also reduced the economic utility of the underlying cash-value of the thing. Our money is tied up in an asset that directly represents money, but only usable in a specific way. From an economist's standpoint, this is a nightmare! In effect, you've created the ability to buy currency that only works at one vendor.

And it gets even worse from an economist's viewpoint; these cards not only create a lock-in to a specific vendor, but many also degrade over time. The value of the card goes down if its not used within a certain window of time.

In terms of utility, you have now given someone something worse than cash in every economically measurable way. Traditional economics would teach us this doesn't make sense - if the card is equivalent in value to cash or worse, then why not prefer cash? It's more universally usable in more places.

Gift cards solve the problem of proving thoughtfulness, simultaneously resolving the painful effect of highlighting an inequality through fungibility that cash produces.

An additional possible effect I can think of: licensing. When someone gives you cash, the fungibility of that cash might make you feel guilty for using it for anything not strictly prudent, i.e. paying your credit card off. When you get a gift card, the impossibility of using the card for anything other than the indulgence it was intended for could provide a sense of moral license to the receiver.

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