A light-hearted application of utility theory to Christmas

Published by Kim Durniat on

Introduction

Do you leave your Christmas shopping until the last minute when everything is sold out, and wind up greeting your family on Christmas day with a bouquet of petrol station flowers, an itchy brown Christmas jumper and some coffee-flavoured (eugh!) chocolates?

Chances are you are failing to maximise the utility to yourself, and those you love, this Christmas. But don’t worry; my handy guide is here to help you prosper!

So what is utility?

Utility is a concept from economic theory which simply equates to the value each person places on certain goods. Everybody will have different “utility curves” which describes their attraction to goods of certain type and affect how much they are willing to pay for something. For example, I frequently pay £10 for a good quality steak as the steak itself gives me a warm, juicy dose of utility that I think is worth £10. My vegan friend, however, gains zero utility from a steak and therefore spends her money on carrots or something equally rubbish.

Whenever you buy something you are giving up all the other things that the money could have bought you instead; effectively making a deal with yourself that there is nothing else you would rather have bought with that money at that time. Traditionally, economists think that people are very good at maximising their own utility. But it’s a lot harder to maximise someone else’s.

This creates obvious problems at times of year when everyone is giving lots of gifts: I may very well buy my brother an ugly Christmas jumper for £20 that he would only have spent £2 on. I could have just given him £2 and he would be just as happy, and I would have enough change to buy 1.8 more steaks. Yum.

How to maximise your utility this Christmas

As I said above, traditional economists think that everyone is very good at maximising their own utility. That being said, the obvious solution is that all your gifts should be cash, allowing people to make their own choices in the January sales.

For those of a less actuarial mind-set who find it difficult to put a cash value on the level of affection they feel for each of their family members (not to mention adjusting it each year for inflation), gift cards are a far more socially acceptable alternative; offering all the utility-maximising potential of cash with none of the awkwardness!

However, what this traditional theory fails to recognise is that the pleasure inherent within the giving and receiving. This is worth something too; usually more than the value of the gift itself. And really it’s those warm fuzzy feelings of generosity and love, seeing the presents gathered under the tree, and watching the delight on grandma’s face as she opens her grandchild’s objectively worthless but personally valuable drawing pasted onto a tea-towel. That is where the true value in Christmas giving can be found. My advice to maximise your utility this year is therefore to be as generous and caring as you can to those you are spending the holidays with.