Should you happen upon this blog this December, you may be wondering: how would a rational economist make the best of the festive season? What can I learn from this, and how can I make my life better? Fear not. Here is your handy cut out’n’keep (or cut’n’paste) guide to a utility maximising Christmas.
Step One: Think about what you like
Before you even begin to try to maximise your utility, you need to know what it is exactly that gives you utility, or, for want of a better word, satisfaction. Some factors you may want to consider are:
- What goods or services would you like to receive as presents this year? Are you likely to receive these as presents? Is there anything you would prefer to spend your money on instead of presents for other people? Would you prehaps prefer to save the money? You may wish to consider this article, “The Deadweight Loss of Christmas“, by Joel Waldfogel, which explains that giving and receiving presents can leave everybody worse off (essentially because other people give you stupid things that you don’t want – and let’s be honest, probably vice-versa. For example, some people think wind-up snails make good Christmas presents. Other people… don’t.).
- Are you disgusted with yourself after showing yourself up to be a greedy self-absorbed Scrooge after considering the first question? If so, you may want to include self-image and good social relationships with other people as factors in your “utility function” (essentially, the list of things that give you utility).
- How much do you like eating, and what do you like to eat?
- How much do you enjoy regretting how much you have eaten and suffering indigestion for most of Boxing Day?
- How much do you value leisure time versus traipsing about organising Christmas? Or perhaps, you count traipsing around as a leisure activity?
Once you have a list of factors in your utility function, consider the relative weights to place on each of them. This will become important for Step 3. You may find it useful to form an equation, for example, suppose I was a simple person who only cared about mince pies and presents. Then, my utility might be:
utility = 3(mince pies) + 2(presents received) x 1(present given)
Step 2: What are your constraints?
There are two main aspects to working out what your “budget constraint” is. Firstly, how much money have you got? How much time have you got? Secondly, how much do all the things in Step 1 cost?
Again, you may find it useful to form an equation, for example, suppose I lived in a simple world where the only things I could spend my money on were mince pies and presents. Then my budget constraint may be:
income = (price of mince pies x number of mince pies) + (price of presents given x number of presents given)
Step 3: Maximise!
The moment you’ve been waiting for. Well, you’ll have to wait a bit longer, while you calculate the correct combination of factors in Step 1 that maximise your utility within your budget constraint in Step 2.
Use your equations, or resort to Excel if necessary.
Alternatively, consider following some rules of thumb:
Undertaking the above exercise is likely to significantly eat into your leisure time. It’s probably not worth it.
Unless you enjoy social stigma, or only have economists as friends and relatives (lucky you!), it may not be a good idea to use Waldfogel (1993) as an excuse not to buy anyone any Christmas presents. Likewise, wrapping up copies of “The Deadweight Loss of Christmas” to give to people probably won’t go down that well. You’ll either look stingy or a smarty-pants, or both. Remember: one enlightened economist cannot change the world. Even if you do have Joel Waldfogel backing you up.
Have a good Christmas!
Signing off until the New Year,
Five Minute Economist