Many people spend more during the holiday season than they can afford. Guilt or shame drives them to put too many big-ticket items under the tree. But the satisfaction is both short-lived and shortsighted. Understanding the economics of gift giving may help you decide when and what to buy for Christmas.

You might take comfort in Wharton School professor Joel Waldfogel’s book, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. In his economic analysis, people are the most efficient when spending their own money, producing at least a dollar in satisfaction for every dollar they spend. But spending money on those we don’t know well results in what Waldfogel calls a “deadweight loss” of about 20%.

A deadweight loss is an economic term signifying a loss by one party (in this case the giver) that is not offset by a corresponding gain by another party (in this case the receiver).

With Christmas spending in the United States at $100 billion, this loss results in “an orgy of wealth destruction” to the tune of about $20 billion.

Waldfogel’s study found that givers with infrequent contact were those most likely to give less appreciated gifts. This group includes aunts, uncles and grandparents who live in another town. He compares these gift givers to the loss experienced when some government bureaucrat guesses at what we really need and makes choices for us. According to economists, people are better off when they make their own choices. For this obvious reason, Waldfogel suggests giving money or gift cards instead.

His original 1993 paper, “The Deadweight Loss of Christmas”, was perceived as an attack on the holiday. So Waldfogel clarified that his critique is a study of the economic inefficiencies caused by the commercialization of Christmas and gift giving to strangers.

To the criticism that he had taken the joy out of Christmas, he responds that after watching desperate last-minute shoppers, he thinks the joy was taken out of Christmas long before his critique.

Of course railing against the commercialism and waste of Christmas is a cliché. Finding creative ways of showing your love and caring for others is more complex and nuanced. Here are some categories of gift giving and receiving you may find helpful.

First, learn to distinguish between a gift and a present. It’s a gift when you give something the other person wants to have. It’s a present when you give something you want the other person to have. When we offer a dictator military support, it is a gift. When we give him a copy of the Constitution, it is a present. At Christmas, sometimes we are trying to give gifts; other times we are trying to give presents.

Some gift giving is a social expectation and a test of the relationship. For example, for couples who are dating seriously, the message is much more important than the medium. Give a book the other person despises, and you have revealed how little you pay attention to your loved one’s opinions. But a pair of gloves, with a heartfelt note saying, “These will keep your hands warm when I’m not there to hold them” would show your affectionate side. Or perhaps the receiver doesn’t like romantic mush, and you are expected to know better.

Parents can help extended family members select gifts for their children by providing specific wish lists to ensure that what they buy will truly be appreciated. If you aren’t confident, include a gift receipt. You are guarding against deadweight loss when the recipient can exchange the gift or return it for cash.

Families can help make exchanging a gift more socially acceptable. It doesn’t mean that the recipient did not appreciate the gesture or does not love the giver. Sometimes with after-Christmas sales, if you have the receipt you can get the original value back, purchase a different make or model at a discount and still pocket a sizable amount of cash.

And in families where children don’t have any spending money, cash may be the best possible gift. Handling cash with all the complexity of choice is an experience that offers irreplaceable life lessons.

Presents are handled differently. A present is when you buy Grandpa an iPod because you know he would never buy it for himself. Or when you give Grandma a computer with a built-in video camera so she can enjoy more contact with her grandchildren. It is a present if you want the recipients to have it more than they realize they want it.

Thoughtful presents may kindle new interests or prove inspiring. For example, they can encourage children to develop their talents or expand their horizons. My favorite Christmas gift idea comes from “The Homecoming “, the first movie about the Waltons, in which the father buys John Boy paper and pencils. His gift, which affirms his son’s choice of writing as a career, is the emotional climax of the story.

Try asking people, “What Christmas present changed the course of your life the most?” to see how much influence you can have. A pair of binoculars sparks a love of ornithology. A telescope fuels a fascination with astrophysics. A microscope leads to a biology career. An electronic toy prompts your daughter to join a robotics competition.

Not all presents need to be academic. A graphics tablet can lead to a design career. A guitar can inspire your son to form a new band. Or a video camera can lead to a later career choice in film making.

Discovering talent, calling and vocation is never foolproof. Every success will be accompanied by many more failures, but that’s what it takes to help children find their passion. Sometimes the risk of giving a present that may or may not be wanted is worth the possible deadweight loss. It is like research and development in the pharmaceutical industry. Most experiments are dead ends, but the whole process is worth the one success. Think of presents as R&D for the course of someone’s life.

Presents that expand a child’s horizons are a satisfying way to fight the commercialism. Another way is to work toward redefining our expectations for Christmas. That’s what www.redefine-christmas.org is all about. Their website explains, “It’s not about reinventing the holiday. It’s about changing the way we look at gift giving and receiving.”

At the site you can arrange for gifts to nonprofit organizations in lieu of personal gifts and send gifts in someone else’s name to his or her favorite charity. Consider their wise words: “There is no question we are in the midst of difficult financial times. And if it has you feeling unsure or uncomfortable this holiday season, imagine how purely difficult it’s becoming for people who already, or are about to, depend on the generosity of others for the things that only a donation can provide.”

Finally, some parents who are still unemployed will disappoint their children if they are hoping for expensive gifts this year. I’ve known a few families who had to tell their children that celebrating a traditional American credit card Christmas would jeopardize the family’s financial security. Many parents are experiencing the first economic setback in their adult lives. Being financially cautious doesn’t mean you love your children any less. And if you can be positive and reassuring, you needn’t try to shelter you children from household economics.

The greatest joy of the holiday season is not bought in a store and does not increase your credit card debt. There is a better way to celebrate that builds long-lasting family ties.

Recognize that serenity during the holidays comes from taking time to celebrate values that don’t show up in your net worth statement. Start by asking your family to share their fondest holiday memories. Make a list of all the things you have gotten right in past years and make them annual family traditions. Add a few new ideas each Christmas. The best holiday traditions don’t cost a lot of money, and they aren’t wrapped and put under the Christmas tree.

Photo by Jonathan Borba on Unsplash