Economists assume that humans act based on their self-interest. We do something in exchange for a personal benefit.

For instance, I buy skincare products to improve my skin tone, while the company sells these products for profit. The buyer and the seller are both happy in this standard economic transaction.

But given the following definition, how can economics explain why we give gifts?

Gift: Something given voluntarily without payment in return.1

Three Wise Men. Source: livetradingnews The Magi by Henry Siddons Mowbray, 19152

Gifts have always been an integral part of our culture. The remarkable ones have been subject of interest in history and literature, such as the Statue of Liberty from France and the gifts of the three magi.

In our everyday lives, we give and receive gifts on special occasions like Christmas, birthdays and anniversaries. Christmas gift shopping has always been one of my favorite activities during the Yuletide season, albeit breaking the bank.

Companies also give material gifts to employees based on years of service. My officemate received an expensive watch on his fifth year in the company.

Given these instances, do we give gifts out of sheer altruism, or is there something more than meets the eye?

With the help of concepts from Dan Ariely's Predictably Irrational, let's find out!

1. Gifts are free!

As obvious as it already is, humans love getting things for free.

Have you ever wondered why we stuff ourselves more in a buffet, but not so much in fine dining?

Don't you feel a bit giddy whenever your brand of chocolate drink comes with a free (but low-grade) tumbler?

Have you ever found yourself throwing away some free pens and stationery you hoarded from a conference?

Zero is an emotional hot button—a source of irrational excitement.3

We all get excited by free stuff, simply because we save ourselves from depleting our personal resources. We don't have to do or give something in return. that really so?

Starbucks Starbucks' Philippines "Buy one, Get one Free" Promo2

Our minds become irrational with free items. Our evolutionary instinct to hoard resources activates whenever an expensive frap is in a buy-1-take-1 promo.

Most stores promote buyers to spend a minimum amount in order to get "freebies", such as the following ad:

Savory Savory Restaurant gives away free food, but in exchange of spending more.4

Free can lead us into trouble: things that we would never consider purchasing become incredibly appealing as soon as they are free.3

Most transactions have an upside and a downside, but when something is free, we forget the downside.3

Humans are intrinsically afraid of loss. The real allure of Free! is tied to this fear. There is no visible possibility of loss when we choose a free item.3

Going back, we love receiving gifts (or free items) because it's our chance to gain something without incurring personal loss. In the context of shopping, this may not be the case.

We love giving gifts because it's a more subtle way of persuasion. Free items ease our way in to make someone do what we want.

Marketers use our instinctive love for free items to make us spend more. In all cases, they give away free items to draw a crowd and sell more products and services

In our personal lives, our family, friends and workmates give us gifts to send a message across.

It's proper to be grateful. But given what we've learned here, we should also be aware of the intention behind every gift we receive.

(Based on Chapter 3: The Cost of Zero Cost)

2. We are social beings

The most expensive sex is free sex - Woody Allen

Dinner Party Image Source 6

You're invited to your boss' birthday dinner party.

While everyone is enjoying their meals, you bring out your wallet and hand cash to the celebrant—to account for the invitation. You are a practical and rational person anyway, as assumed in standard economics.

What would your boss think of this gesture? I would say, good luck on your upcoming performance evaluation.

Why is it often weird to give cash as gifts?

The answer is we live in two different worlds at the same time: the market-driven and the social-driven worlds.

Behavioral economics deems that we all have capitalistic and social tendencies.

Market rules are some of the forces that operate on us.

As social animals, we also have social forces to contend with—and when economic and social forces mix, the outcome is sometimes different from what we would expect. 7

Standard economic transactions fall under the market-driven world. We just take something equivalent to what we give. Companies pay wages, employees earn income, debtors pay debts, investors earn interest, etc.

Market norms are associated with the following concepts: money, self-reliance, ambition and individualism. 7

The adage "An eye for an eye, a tooth for a tooth" applies for this world.

On the other hand, humans are social animals. Market norms won't sustain our need for belongingness, but social norms will. We willingly do favors for other people: show directions, reach something on top of a shelf, open doors, look after our belongings, etc.

You would not require something in return for doing these simple things for others.

We develop market relationships with people whom we deal with professionally: landlords, salespeople, managers, employees.

Social relationships, such as mentorship, friendships, romance and marriage, develop from this warm and fuzzy world.

So, if you and your boss are just in a market relationship, why should you still buy her a birthday gift?

Gifts are inefficient in economic standards, not just because of additional financial costs. We spend our limited time and effort in shopping a gift for someone, instead of working more to earn more money.

Despite the added costs, we still give gifts because of our need to belong.

We resort to gift-giving for the following purposes:

  1. To transform a relationship for market to social
  2. To maintain and improve a social relationship

Going back, your boss invites you on her birthday dinner because she likes you as a person, not just as an employee. Reciprocate her fondness by giving her something nice, like a bottle of champagne, or high-end makeup. Never cash.

(Based on Chapter 4: The Cost of Social Norms)

In a nutshell, we love gifts because of the following reasons:

  1. Gifts are free.
  2. We are social beings.

We love receiving gifts because we don't need to pay for it; but in most cases, there is something that more than meets the eye.

As wise consumers however, we must evaluate the intention behind the gifts (or free items) we are about to receive.

Do companies send you gifts in exchange of your loyalty? Most likely! Do malls give away free items to increase your spending? Certainly. Why did your significant other give you a random present? Hmmm... (just kidding)

On another note, gifts are social lubricants.7 Gifts are means to fulfill our need of a community.

This gesture breaks the robotic, transactional nature of a market relationships, therefore improving our social lives.

In effect, gifts make us happier and healthier people.


  1. "Gift". Unabridged. Random House, Inc. 2 May. 2017. .

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  3. "Chapter 3: The Cost of Zero Cost" Predictably Irrational: The Hidden Forces That Shape Our Decisions. New York, NY: HarperCollins, 2009. N. pag. Print.

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  7. "Chapter 4: The Cost of Social Norms" Predictably Irrational: The Hidden Forces That Shape Our Decisions. New York, NY: HarperCollins, 2009. N. pag. Print.