The weather is getting colder, and before long the snow will start to fall, the eggnog will be flowing, and the season of giving will be in full swing. That naturally brings up the question:

What’s the best gift for your loved ones this year?

At TFP, many of you know we can’t resist taking a mathematical approach to these things. Yes, even holiday shopping. But before we dive into the numbers, there are a few key economic concepts we should unwrap first.

Deadweight Loss:

Think of this as a fancy economic term for waste. In an efficient market, supply and demand line up perfectly. When they don’t, value that could have gone to either the buyer or the seller simply disappears, creating deadweight loss. This principle holds true in any market.

 

Take eggnog, for example. If the supply and demand for eggnog fall out of balance during the holidays, waste inevitably appears. Too much eggnog on the shelves pushes prices down, preventing sellers from earning what their product is truly worth. Too little supply sends prices up, but retailers end up selling less overall, leaving missed revenue on the table and potentially spoiled product in the back room. In both cases, that lost value is the deadweight loss that efficient markets avoid. [1]

Utility:

Think of this as the happiness or satisfaction you get from consuming something. Even if you’ve never heard the word before, you use the concept every day without realizing it.

I’ll admit, I have a serious sweet tooth [Editor’s note: SERIOUS SWEET TOOTH]. So, the joy I get from eating a cookie is probably higher than what you might experience. Economists often measure this happiness in dollars. For example, if I choose to buy a cookie for $3, I’m signalling that the utility I expect from that cookie is worth at least $3 to me. If you don’t value cookies as much, you might skip that purchase altogether, meaning the happiness you’d gain isn’t worth the $3 price tag. [2]

As you stroll through the supermarket this holiday season, keep this in mind: every item you choose to place in your cart is a signal of the minimum utility you expect to receive. It’s a quiet little economic transaction of joy.

So, What’s The Best Gift?

Dr. Joel Waldfogel, an economics professor at Yale, set out to answer this very question. He recognized a fundamental challenge in gift-giving: the person choosing the gift isn’t the one consuming it.

In economic theory, individuals are assumed to have perfect information about their own preferences, which makes choosing a “perfect” gift for ourselves fairly straightforward. But when we shop for others, we don’t have that same perfect information. That gap creates inefficiency.

Dr. Waldfogel studied this by comparing how much value gift-givers thought recipients would get versus how much value recipients actually placed on their gifts. In one of his studies, the average gift cost $438, yet the average recipient was only willing to pay $313 for those same items. After crunching the numbers, he found that nearly one-third of the gift’s value was lost… classic deadweight loss.

Even after refining his methods and repeating the experiment, deadweight loss still accounted for about 16% of the value of gifts. Interestingly, price wasn’t the determining factor; expensive or inexpensive, gift inefficiency persisted.

He also discovered a pattern: gifts from aunts, uncles, and grandparents tended to create the most deadweight loss, while gifts from siblings and significant others created the least. (Turns out, the people who know us best, buy more “efficient” gifts!).

So, what’s the best gift if you want to eliminate deadweight loss…??

Cold Hard Cash!! [3]

Of course, none of this captures the warm, fuzzy feelings, memories, and meaning behind a thoughtful, personal gift. And during the holidays, that intangible utility might just be priceless.

At the end of the day, the holidays aren’t just an economic exercise—they’re a time to connect, celebrate, and share moments with the people who matter most. Whether you choose the perfectly efficient “gift” of cash or a heartfelt present wrapped with care, what truly counts is the joy it brings and the memories it creates.

From all of us at TFP, we hope this season brings you happiness, good company, and just the right amount of holiday indulgence. Wishing you a cheerful, prosperous, and warm holiday season!

As a small addition to my commentary, many of you may have noticed that we are using AI during meetings. This is to allow us to be more present during the meeting and allow our workflow to be more efficient. Nothing from our meetings is recorded, and all sensitive information is redacted. We only receive a transcription of our conversation which is deleted after 30 days. Download this document: Introducing our Digital Assistant  for more information. If you have any questions, please let us know.

 

[1] Deadweight Loss

[2] Utility

[3] Dr. Waldfogel