I remember taking a microeconomics class in college. It covered standard introductory material about utility theory. Preferences, utility functions, and constrained optimization.

At one point the professor made an observation about gift-giving: that cash is the gift of maximal utility for the receiver. The reason is simple. Cash imposes no constraint on the receiver, so the receiver is free to exchange the cash for whatever maximizes their own utility.

I was very receptive to this idea. It made sense to me, since I usually enjoyed receiving cash as a birthday or Christmas present (or gift cards, which are a slightly constrained version of cash). The insight also gave me some solace as a gift giver: I could justify the lazy choice of cash or gift certificates from very sophisticated economic principles.

However, my feelings on cash gifts have changed over the years. I doubt I’ve arrived at any novel insights—I’m guessing there’s a pile of academic literature on the subject, but I don’t know any of it. Here are some of my thoughts anyways:

  • Nobody truly knows their own utility function. Even if we assume (a) my utility function exists and (b) it remains constant over my lifetime, the reality is that I will never fully explore it. Since I’m still young, there are many goods I haven’t experienced yet. And since life is finite, there are many goods I will never experience. Many (most?) dimensions of my utility function will remain unknown to me.
  • If someone gives me cash, it enables me to take a utility-increasing step within my known preferences. This serves as a useful baseline for gift-giving: can you do better than giving simple cash?
  • The interesting thing—the point my professor made—is that you can not do better than cash if you confine yourself to the receiver’s known preferences. This implies that the only way to beat a cash gift is to provide a good that the receiver is not familiar with.
  • This seems like a tall order. How do I
    1. identify the unknown unknowns in another person’s life; and
    2. choose one that they would appreciate?
  • A gift that succeeds at these tasks could be called a thoughtful gift. I have known people who are skilled at giving gifts. I think it is a real skill, and has something to do with competence at tasks 1 and 2.
  • An additional human reality may make it easier to beat cash gifts: people have limited attention and memory. So there may be preferences that they have explored in the past, but that they’ve forgotten or lost sight of for whatever reason. A gift that brings those preferences back to the receiver’s attention could also beat a cash gift.

There you have it: some theories of gift-giving. Like most theorists, I’m a lousy practitioner.

\( \blacksquare\)