The Best Gift Voucher

 In Around the Home, Budgeting

Christmas is coming and you probably know someone who is really hard to buy a present for. You might be tempted to buy them a gift voucher. Can we suggest you think again? Unfortunately, gift vouchers are generally a really bad idea. We know, we know – we sound like the Grinch. But let us explain.

What’s a Nobel Prize got to do with Gift Cards?

A Nobel Prize is awarded each year for economics. In 2017 award went to an American economist named Richard Thaler. Thaler is a ‘behavioural economist’ – which means that he studies the way people think about their money. If you ever get the chance, read some of his stuff or listen to a podcast. He is a very funny man.

Thaler is best known for identifying a phenomenon known as ‘mental accounting.’ Mental accounting is where people link a specific dollar with a specific purpose. In doing so, they forget that money is fungible. Fungible is a fancy word that essentially tells us that ‘any dollar will do’ – you do not need to use a specific dollar to pay a specific expense.

Unfortunately, people frequently dedicate ‘specific’ money to a specific purpose. Thaler demonstrated this by asking people two questions. In the first question, Thaler presented the following situation:

“You have paid $10 for a paper ticket to the movies. As you arrive at the cinema, you realise that you have lost your ticket. The ticket was not registered. If you wish to see the movie, you will need to purchase another ticket and pay another $10. Would you do this?”

Less than half of the people presented with this situation said that they would buy another ticket. Having lost their ticket, more than half of the people would skip the movie. Thaler then developed a second question which went along the following lines:

“You are going to the cinema and you will buy your ticket when you arrive. When you arrive you discover that you have lost a $10 note. A ticket to the movies will cost $10. Will you still purchase a ticket and watch the movie?”

In the second case, almost 90% of people said that they would still buy a ticket and watch the movie. Only 12% of people skipped the movie.

Thaler points out that there is actually no difference between losing a $10 note that will let you buy a ticket to get into a cinema and losing a $10 ticket that will also get you into the cinema. In each case, you have lost $10 and it will cost you another $10 to watch the movie. But people treat a $10 ticket and a $10 note differently – even when they are both intended to be used for the same purpose.

From an economist’s perspective Gift Cards are irrational

Looked at with a pure economist’s eyes gift vouchers are irrational. They perform the same function as cash, but they are much more restrictive. For example, if you spend $50 to buy somebody a gift voucher, often that voucher will expire within a particular period. What’s more, the voucher can only be used in a particular store. It is much more restricted than the cash that you used.

Basically, a gift voucher represents a loan to the retailer. The purchaser gives the retailer money, but the retailer hasn’t given the purchaser anything yet. It is up to the recipient to decide whether the ‘loan’ is repaid by using the voucher. Not surprisingly, many retailers try to avoid repaying these loans by making it difficult to use their vouchers. For example, few retailers will give change when somebody uses a voucher. A retailer might issue a $50 gift voucher , but if a person spends $48, the retailer does not give them $2 change. Instead, the retailer says that the customer can only use that $2 towards the purchase of something of equal or greater value. The total spend will now be more than $50. Basically, the retailer says that they will only repay the loan if the recipient spends more than they borrowed. Try that one on with your bank!

On top of the restrictions of use a gift voucher is also at risk of becoming worthless if the retailer gets into financial difficulties before you’ve had a chance to spend it. In this environment where bricks and mortar retailing is becoming harder and harder do you really want to risk your loved one ending up with a worthless piece of plastic that you’ve forked out cold hard cash for?

But gift cards serve an important purpose

I’ve bought more than my fair share of gift cards in my time, and I admit I still do it from time to time. Sometimes sticking $50 in a greeting card just doesn’t feel that special. You want to make the person feel special, that you’ve thought about what they might like. You might want to give them flexibility so they can choose exactly what they want but you want to provide parameters on it. Those parameters aren’t usually put there because you want to control people, it’s comes from a more loving place. You are saying here is some money and I don’t want you to spend it on mundane things, I want you to really enjoy yourself and buy something special.

Gift vouchers can be a quick and easy way out of a last minute gift emergency, but more often than not they are an expression of love and care. Expressing a desire for the recipient to purchase something they will most enjoy.

So what’s the alternative?

Lately we have taken a slightly different approach. Rather than getting a gift voucher, we are getting the kids to make their own gift vouchers. They create a hand-drawn image of they types of things they are suggesting are purchased. My sister in law recently received a ‘hand made gift voucher’ from my kids. It was to be used towards new plants for her garden. The girls drew some lovely pictures of trees and flowers and my son wrote very careful instructions that it was to be used towards trees and flowers, that there was no expiry and the voucher was completely transferrable. (Of course the $50 was attached to the back of the voucher).  We trust Aunty Clare to use it wisely and this voucher is accepted no matter which garden shop she finds her perfect tree in.

My dad has taken a similar approach to gift giving in recent years. Rather than buy the kids toys at Christmas time he provides the family with an envelope with cash in it and strict instructions written on the outside. It’s cash that must be used towards a family outing(s). It must involve and be fun for the entire family and he must receive a photo of the event. Last year we spent our gift on a trip to the Morning Peninsula Hot Springs, which was enjoyed by all.  While at it’s essence it is just money in an envelope, but if given in the right spirit it is much more than that. We enjoy deciding as a family what we will spend the money on, one big outing or a couple of smaller budget outings. We aren’t tempted to use it to cover an emergency school excursion or pay for the milk and bread, because that’s not part of the rules.

This Christmas why not get a bit playful, take the time you would head out to the shops to buy the gift card or online printing out the voucher to get out your coloured pens and pencils and your sense of humour to create the most perfect, magical and memorable gift card for your loved ones this Christmas.

 

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