2010/12/13

The inefficiency of Christmas

It’s that time of year. Again (*sigh*). Though I do not restrict my celebration of Jesus Christ to Christmas time, I find it quite appropriate that my first post should relate to his coming (I am a Christian, after all). In many ways though, Christmas annoys me (those hackneyed carols that start playing in August already, for example). I would, however, like to mention some of the financial asymmetries, if you will, that Christmas causes.

The Christmas rush
It is an anecdotal fact that there is a spurt of buying (perhaps from around November) leading up to Christmas (then followed by a lull). It follows from elementary economic principles that prices should increase at this time. There is social pressure to buy Christmas gifts and few seem to have the foresight to buy well ahead of time. So we are all suckers. This surge in demand is (at least partly) fuelled by the Christmas bonus giving people additional disposable income (although the original causality may well lie in the opposite direction).

This rush from consumers causes a rush from businesses that need to increase their staffing levels around Christmas (and may need to pay higher wages), so unemployment may be somewhat less at Christmas time. But who only wants to be employed once a year? Some businesses (notably some selling only Christmas accessories such as tree decorations for which there appear to be no demand at any other time) are only open before Christmas. They must find floor space, which may be unused (or underutilized) during the rest of the year. Business retailing systems (software, equipment, etc.) must be configured to be able to handle peak demand (not average demand), which probably occurs around Christmas and can be substantially higher than average demand. This makes for a (mostly) underutilized system that costs more than one that only needs to cater for something just higher than average demand (were sales not skewed in this manner).

The January lull
The counter to the Christmas rush is the drop in spending in January (in fact it has often been related to me that pawnshops are filled as people sell items they bought with their Christmas bonuses that they now find they can no longer afford). Naturally, prices should fall. The ‘rational’ (the reason for the quotation marks will be explained later) consumer would not buy at Christmas time, but during January, when prices are low. Incidentally, a friend of mine told me he has thought about trying to move his family’s Christmas a week later to capitalise on this (his comment crystallised the idea for this post – which had been in my head some time – and got me to start writing). I do not think he will succeed. The social pressure is too strong. It is this social pressure that stops the expected economic equilibrium wherein sales in January and December are even (aside from some randomness) from occurring. If people were ‘rational’ (homo economicus) more and more people would buy in January rather than in December, until the demand in both months were the same.

It is interesting to note that the Canadian article I mention below suggests that some shift of sales toward January is taking place (at least in that country), but the drop is still quite high and I personally need more evidence. They think the reason for the shift is the use of gift cards (like cash, but can only be spent at certain places). Gift cards are usually redeemed in January. This is one very interesting possible way of fooling the human psyche, which needs a gift in December, but bringing about an equilibrium outcome by moving actual expenditure to after Christmas.

Useless gifts
In my undergraduate economics class I was presented with the difference between gifts in kind (the ones we wrap) and gifts in cash. From a purely economic standpoint the latter is better (not least because money and effort is not wasted on ultimately useless wrapping paper). Cash can become anything. That is it can be what the person needs or wants (that which maximises his utility). Yet we keep giving presents, even though half the time they end up unused or are rewrapped and end up under another Christmas tree. Presents are thoughtful, considerate. They have intrigue and suspense. They prevent people from buying dishwashing liquid with their cash gift (however, I suspect most people compartmentalise gift money and set it aside for luxuries even though this is not rational either).

The market slow
Market activity slows down in the holiday season around Christmas (at least it does in South Africa). This means the market behaves differently at this time. It becomes less liquid, possibly less efficient. I have spoken to a hedge fund manager who says no one seems to work in the holiday period. I have not examined any studies on the matter, however, and it is not clear how significant the effect is. It is interesting to note that (in America at least) markets tend to rise the most in January. This is known as the January effect. Perhaps there is a connection with the market slow (but I have not seen it yet).

Is it rational?
Are these ‘aberrations’ in our behaviour rational? There are certainly good psychological reasons for why we act this way. I am not a psychologist (though I am very interested in what motivates people) so I will not discuss that any further. But I will say that it seems rationality is not a concept with a well-defined (or well-accepted definition) – this is why I used quotation marks earlier. And in our treatment of rationality we always try to determine what should be (normative) rather than what is (positive). All I can say is that I can imagine another way things could be and try to understand why reality differs.

Why do I care?
Firstly I am curious and these patterns of behaviour are interesting. Secondly, they may affect my work. That is, they make modelling and statistical analysis more complex and treacherous. It is not really possible to compare a set of (say, half-yearly) financial statements of any company that contains December with those that do not. The spike in spending (and the lull later) is an example of a seasonal pattern in a time series. I know there are statistical methods for removing seasonality (I have not used them), but it would make statisticians across the world happier if they did not have to do so. Because, essentially, distributions differ at different times of the year one also needs more observations for reliable inference (making more assumptions could lower the observations needed, but the point is there is added effort).

Furthermore the different behaviour of the market during the holiday season means the same trading rules may not work. Prices may need to be analysed with different reference points. It may not even be possible to get useful work done, which means money is lost. The hedge fund manager, earlier, seemed to think there was little to be gained from trading in the holiday season (though I think he also liked the excuse to take a holiday).

Final thoughts
The same things (to a lesser degree) affect other widely and collectively observed occasions, such as Valentine’s day, Saint Patrick’s day and public holidays. Birthdays are, of course, an exception as they are spread throughout the year (and I can think of no good reason why this spread should not be approximately uniform). Things would certainly be easier, more efficient, and more ‘objectively’ rational were Christmas more like birthdays. However, Christmas cannot practicably be distributed in this manner. Each person cannot (or rather does not want to) have their own Christmas date. Leap years are, of course, another pesky aberration that confuse the amount of time that should be assigned to any year in modelling or statistical exercises.

The ‘problem’ could be fixed if people stopped giving gifts on Christmas (including 'gifts' to themselves). My family stopped years ago. We still enjoy a good (too big) meal and each others’ company. The gifts are superfluous. They are only a symbol, after all, of Christ’s gift and that is not something we should only celebrate once a year. Of course, doing away with religion is another possible ‘solution’ (assuming Christmas is not already too deeply entrenched even in secular society), but talk about throwing the baby out with the bathwater.

Some references


An article on the January effect.

For a discussion on rationality and the difference between positive and normative economics (among many other things). You could also read an economics textbook, but that would be less fun.
    • Taleb, N. N. (2007). Fooled by Randomness (2nd ed.). Penguin.

A Canadian article on shopping patterns.
  • Zhang, Y. (2003). Consumer holiday shopping patterns. Retrieved from http://www.statcan.gc.ca/pub/11-621-m/11-621-m2004019-eng.htm

1 comment:

  1. Cool article! A thought on your last point about removing religion - if one looks at the popularity of Christmas even in mostly non-Christian secular countries such as Japan, it becomes quite clear that Christmas has become much more of a social/economical tradition (mostly based on the American idea of Christmas) than a religious one. That is speaking in general, of course. I am quite convinced that there are also many families who celebrate Christmas for the 'right' reasons.

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