Every year at Christmas time, gift wrapping drives many people crazy – and it’s usually not particularly sustainable either. From the perspective of economic signaling theory, however, it is still an important gesture.
Picture the following scene on Christmas Eve: You have spent money on wrapping paper, ribbons, and glittery stars. You have invested 20 minutes neatly folding corners and strategically placing adhesive tape. And the result? Within mere seconds, your artwork is torn to shreds by the recipients and lands in the recycling bin.
From a purely efficiency-based perspective, this looks like madness. It is a waste of resources. Would it not be more rational to hand over the gift unwrapped or – even more efficient – simply transfer the equivalent amount of cash?
Economically speaking: Yes (see also the 2021 Christmas blog post). But in terms of relationships, this would often be a disaster. To understand why we commit this apparent irrationality year after year, we need to take a look at Signaling Theory (Spence 1973). This is a concept for which economist Michael Spence was awarded the Nobel Prize in 2001 and which we discuss intensively in modern microeconomics.
The problem: “Talk is cheap”
In human relationships, we often face what economists call information asymmetry. You know how much you value your family members or friends. But do they know it with certainty? Of course, you can say, “You are important to me.” But in game theory (and not only there), the principle applies: “Talk is cheap.” Words cost nothing and are easily spoken. Anyone can utter them, regardless of their actual truthfulness.
So, how do you credibly prove that the relationship is important to you? You need a costly signal.
The Solution: Inefficiency as Currency
For a signal to be credible, it must be hard to fake. It must cause the sender some “pain”—or, in economic terms, it must incur opportunity costs.
This is where the wrapping paper comes into play. A cash gift is maximally efficient because the recipients can buy whatever matches their preferences, but it is a “weak signal.” Walking to the ATM or making a PayPal transfer requires hardly any effort. It signals no emotional investment.
However, if you choose a gift (search costs) and then elaborately wrap it (transaction costs), you are sending a strong signal. You are implicitly saying: “My time is a scarce resource, but you are so important to me that I am sacrificing this time just so you can have three seconds of joy while unwrapping.”
Objection: The Sustainability Dilemma
You might be asking yourself: “Isn’t this signaling ecologically irresponsible?” After all, we are producing mountains of waste for a short-lived signal.
This is where the flexibility of economic signaling theory shines through. Remember the condition: The signal must be costly – but these costs do not necessarily have to be monetary or material. The currency is your time.
If you use old newspaper or reusable cloth wraps (following the Japanese Furoshiki tradition) instead of foil and fold them artistically, the cost structure changes. The negative externalities for the environment decrease, but your opportunity costs (the time spent on creative folding) remain high or even increase.
From an economic perspective, a sustainably but elaborately wrapped gift is often an even stronger signal than a quickly bought glossy bag. It proves: I put in thought and effort.
The Economic Conclusion From The Perspective of Signaling Theory
Therefore, the core of the matter is not necessarily the destruction of paper, but the act of unwrapping itself. Whether the wrapper is torn to shreds or a knot is ceremoniously untied: The packaging serves not to protect the goods, but to convey emotion. It is the physical proof of effort rendered, which has fulfilled its purpose the moment the gift is handed over.
So, if you find yourself wrestling with scissors and cursing under your breath this year because the paper is too short again: Take comfort. You are currently practicing applied game theory. You are generating a so-called Separating Equilibrium that distinguishes you from those who do not want to make the effort. And if your gift is not wrapped with professional precision? No worries. As long as it is visible that it cost effort, the signal has been received.
Perhaps this is the most beautiful insight microeconomics has to offer for the festive season: That sometimes, it is precisely the inefficiency that determines the true value of a gesture.
In this spirit: Merry Christmas and a Happy New Year!
Tip (advertisement): If you wish to drastically minimize your search costs for this year’s Christmas gift, I have an efficient suggestion: My book not only offers deeper insights into game theory but also signals high intellectual appreciation to the recipient (a very strong signal!): Bartholomae, F. & Wiens, M. (2024): Game Theory and Applications, A Guide for Students and Researchers, Springer: Wiesbaden.
Literature:
Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355–374.
