The Irrationality of a Gift Card

Last Updated Dec 13, 2009 10:04 PM EST

As the holiday season approaches, the $100+ billion dollar gift card industry ramps up to take advantage of our irrational gift-giving anxiety. Admittedly, I'd much rather receive a gift card to buy what I truly want, than some horrendous tie I'd never be caught dead wearing. And since I prefer to receive gift cards, I also prefer to give them as gifts, despite the fact that it's completely irrational that I do.

Why a gift card
Let's say I want to get a $50 present for my brother in Atlanta. Maybe I've got an idea of what the perfect gift would be for him, but it's more likely that I don't. I've tried getting him that gadget I loved, only to find out that apparently I was the only person in America who loved it. So, what can I get for him with my $50 that won't end up gathering dust on a shelf? Presenting, drum roll please, the gift card. I can send him a $50 gift card to one of his favorite stores and it's the perfect solution! He's a techie, so I'll get him get a $50 card from Best Buy!

The economics of my actions
Great as I am feeling about my decision, the economic consequences of my actions are far from rational. I took $50 in cold hard cash and converted it into a piece of plastic that is worth far less because:
  • It can only be used at one retailer rather than being ubiquitous.
  • It's far more inconvenient as one must remember to bring it to the store.
  • It's far more likely to be lost or forgotten and therefore never used.
  • It's likely to cause one to spend more money -- after all, how many items cost exactly $50.00?
Gift cards at other businesses often place restrictions on them, such as not being valid for sale items or not being used for tips at restaurants. So though I wanted a present for my brother that would allow him to get what he wanted, I ended up taking a perfectly good $50 bill, spending time and gas money, for a gift with severe restrictions on him getting what he wanted.

Before you pooh-pooh me, consider the Freakonomics article showing someone purchased $50 of buying power at Target, yet paid $55.71 for a Target gift card.

An improved gift card
So called open-ended gift cards make a slightly more rational gift. These are cards issued by Visa, MasterCard, and American Express that sell for a few bucks over face value and can be used anywhere the equivalent credit cards can be used. Thus, for about $55, and a trip to my bank, I can give a gift worth nearly $50. The problem with that is that I'm guessing my brother would rather have had the $55 and I could have avoided the trip to the bank. Yet again I have snatched defeat from the jaws of gift victory by my irrational behavior.

This recent Moneywatch video addresses the benefits of giving a gift card over more irrational gifts such as the tie I would never be caught wearing. Still, isn't there a far more rational gift?

The ultimate gift card
This holiday season, I know the logical solution is to stuff some cold hard cash into an envelope and send it away. Unfortunately, sending said cold hard cash could be perceived as a cold gesture, a breach of gift-giving etiquette, and offensive. Might the cash gift be viewed as me being too lazy to even take the time to go out and get them a gift card?

Problem solved -- I'll just wrap the cash inside a copy of this column and I'm good to go. Bring on the holidays!

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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