Live

Watch CBSN Live

The Irrationality of a Gift Card

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!

More on MoneyWatch:
Do Certified Financial Planners Really Put Clients First?
How to Protect Your Investments from Yourself
Is Now the Right Time to Get Back Into The Stock Market?
A New Exciting Investing Platform - Kapitall
It's Not How Much You Pay in Costs, It's the Total Return That Matters
An Interview with Ric Edelman - Is High Cost Indexing an Oxymoron?

View CBS News In