Does Consumer Irrationality Trump Consumer Sovereignty? Evidence from Gifts and Own Purchases

Abstract:     
Scholars working on the border of economics and psychology have assembled an impressive body of evidence that consumer behavior is not fully rational. As a result some observers (see Kahneman, 1994) question whether consumer choice warrants deference. We address this question by asking whether consumers or others are better situated to make consumption choices. Based on a new survey of both holiday gifts and items consumers purchase for themselves, we present direct evidence that consumers' own purchases generate between 10 and 18 percent more value, per dollar spent, than items received as gifts. Our estimates therefore support economists' faith in consumer sovereignty, place some limit on the reach of the behavioralist critique of economics, and, in addition, confirm the substantial deadweight loss of Christmas.

Keywords: consumer choice, rationality, deadweight loss of Christmas

JEL Classifications: D12

Working Paper Series