Whether it is during Sinterklaas or Christmas, December is the month of gifts to many. You usually don't know what you will be getting. And that brings me to the question: what exactly is the value of surprises? Is it better to know more?
Economists tend to refer to the ‘welfare loss’ of giving gifts during this month. This loss arises when gifts don't match the preferences of the person on the receiving end. Should you have given money, he or she would have been able to buy something more to their liking. Which means that person would have been better off. Thirty years ago an economist figured out that up to one third of all the billions of euros spent on Christmas presents is actually wasted money.
It's an information problem as we are unable to look into each other's heads. We succeed slightly better for some people. We know, for example, that gifts to our other halves limit the welfare loss up to 10 percent.
Incomplete information can actually be rewarding when it comes to investing. Just think about it. With a government bond issued by a creditworthy country you have all the information. The certainty of the promised cashflows until the date of maturity is quite large. But the expected return is low. When it comes to shares, the term is in principle indefinite and both dividends and the price movements are uncertain. On average you will be rewarded in the long-term. Exactly by not knowing what you will get, you may earn a risk premium.
More information isn't always better. Investors in an index tracker - but also pension participants - will in many cases not open their ‘package’. The objective for them is to have a well-diversified portfolio. It's not about the exact percentage of shares in Ahold, Apple or Alphabet they have in their basket.
More information is often convenient. But an advantage sometimes brings along its ugly brother. Imagine your doctor having a test able to predict your date of death with great certainty. That is of course super handy if you are accruing pension under own management. You will then know exactly how much money you have to set aside for how long. This means you never pay too much. Yet, I suspect such test will not become very popular. It is, so to say, rather unsociably.
Back to that welfare loss. If everyone would buy his or her own gifts, it's a super-efficient economist solution. But the same applies here: it is not very sociable. Maybe more difficult to express in terms of money, but the surprise itself is worth something too. And the emphasis of the relationship between the giver and the receiver.
Knowing what you will get, just isn't what happens in life. Like John Lennon sang to his son Sean: ‘Life is what happens to you while you’re busy making other plans’.
And as we have now entered the atmosphere of the music top 2000, we can also quote the Stones: ‘You can’t always get what you want. But if you try sometime you'll find you get what you need’.
Charles Kalshoven is macroeconomist and senior strategist at APG