Why did Della sell her hair?

The Gift of the Magi is set before Christmas, with Della wishing to buy a gift for her husband. However, she only has $1.87, far too little to buy a worthwhile gift. As a result, she sells her hair for $20, and with the money she is able to buy a chain to attach to his watch. This ties together the two most prized possessions of their household: for Della, it is her hair she values above all other possessions, and for her husband, it is his watch.
This brings us to the twist ending of O. Henry's tale, because just as Della sold her hair to be able to buy a present for Jim, so too did Jim sell his watch in order to gain the funds to buy his wife a gift in turn (in this case, combs for her hair). Yet, one should not forget that O. Henry closes the story in a note of approval and admiration for these two characters:

"And here I have lamely related to you the uneventful chronicle of two foolish children in a flat who most unwisely sacrificed for each other the greatest treasures of their house. But in a last word to the wise of these days let it be said that of all who give gifts these two were the wisest. Of all who give and receive gifts, such as they are wisest. Everywhere they are wisest. They are the magi."

Ultimately, then, this story isn't one about human foolishness or poor decision-making. It's about a husband and wife both subordinating their own interests in favor of the other's. From this perspective, these gifts actually hold tremendous value due to the thought, consideration, and sacrifice that went into them.

Della in "The Gift of the Magi" is renowned for having beautiful hair. She may be poor—she doesn't have much in life—but she does have a lovely set of locks. Christmas is fast approaching, and Della so desperately wants to buy her husband Jim a special gift. But because she doesn't have enough money she has no choice but to sell the only precious item she possesses: her hair. So she cuts off some of her lovely locks and sells them to a fancy hairdresser, who will presumably use her hair to make wigs. With the money she earns from selling her hair, Della buys Jim a chain for his watch.
Unfortunately for Della, she's wasted her time. The gift she bought for Jim is absolutely useless as Jim sold his watch to buy Della a gift. The gift he bought is also useless: some brand new combs for Della's lovely hair.