MP Dunleavey

Women in Red

Why pricey gifts are a waste

As the holiday bills come due, it may be apparent that you overdid it. Again. But studies indicate that spending less on gifts can make recipients just as happy.

By MP Dunleavey
MSN Money

Just when you thought the holidays were over, suddenly they're coming back to haunt you.

Yes, it's Visa time, and not in a good way, as the January credit card bills land with a thud -- further evidence that many of us went on a spending spree at the end of 2009. Online sales were up 5% from a year earlier, and in-store sales kicked up, too.

If your holiday budget ballooned bigger than planned, don't fret about the charges for the cashmere sweater for Mom and the Wii for the kids. Instead, let those Ghosts of Spending Past inspire you to make smarter, cheaper gift choices next season.

According to researchers at Stanford University, people tend to appreciate cheaper gifts as much as more-expensive ones. And people typically underestimate the cost of the items you bought for them anyway.

In other words: You could have spent a lot less and made everyone just as happy. Could this wisdom prevent a spending hangover next January?

The tradition of overspending

For decades, it has been a holiday tradition to overspend. Americans consistently have reported that it's taken them months to pay off holiday credit card bills.

And though it would be nice to believe all those reports about our "new frugality," the jury is still out.

Yes, Americans on average used less credit toward the end of 2009, according to a Federal Reserve report on consumer credit. Revolving credit -- i.e., mostly credit cards -- had dropped 18.5% by the end of November.

Unfortunately, part of that decrease was due to a record number of charge-offs. Also, many people had defaulted on their credit cards or were delinquent and weren't using them, according to Moody's.

Bottom line: Seasonal extravagance -- whether it's Christmas season, wedding season, graduation season or hunting season -- is a persistent financial risk.

Until now. Knowing that friends, neighbors and loved ones don't peg their appreciation of a gift to its price tag is like having a Get Out of Nordstrom Free card. If it's the gift that counts, not what you spend on it, then spend less.

What the studies found

In two studies that I'll explore here, researchers set out to examine why gift givers often overspend and whether the cost of a gift is driven by the belief (or hope) that a higher-priced gift will inspire more appreciation from the person who receives it.

The studies, by Frank Flynn, an associate professor at the Stanford Graduate School of Business, and Gabrielle Adams, a doctoral student, were summarized in "Money Can't Buy Love" in the March 2009 issue of the Journal of Experimental Social Psychology.

In one study, men who purchased engagement rings believed that the more they spent, the more their fiancées would appreciate the rings.

Note for Valentine's Day, guys: Gals who received the more-expensive rings weren't any more appreciative than those who got cheaper ones.

Continued: What the studies found

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