It’s all happened to us at some point or another. It’s Christmas, or your birthday, and you’re holding an ugly grey sweater while your grandma is standing in front of you with a beaming smile on her face. She waxes poetic about how as soon as she saw it she knew it was destined for you. You feel slightly guilty knowing that she went to all this effort and money to try buy something that you’d like, but is really destined to be regifted to another unsuspecting victim, or unceremoniously stuffed at the back of your closet.
The process of gifting is an incredibly inefficient one. The basic premise of giving a gift is trying to predict what someone’s preferences are, and making a buying decision based on your assumptions, in an attempt to maximise the utility of the recipient. In this context, utility refers to how much value is placed on something. It can be a bit easier to think of it in terms of “happiness” – you might place a value of 10 on eating a cheeseburger, but a value of 4 on eating a salad. As per the altruistic nature of gift giving, it is only natural that we try to make sure that we maximise our recipients’ happiness.
The problem arises when we try to predict other people’s preferences. Already, we can see that it is quite difficult for someone to accurately predict what you might want to consume. For myself, I know that I would have rather received cold hard cash compared to that sweater, and my sister would have rather received a book instead of a painting set. People generally known their own preferences best, and rarely do we become privy to other people’s preferences – no matter how tasteful we are, or how well we know the recipient. Joel Waldfogel estimates that we lose approximately 20% of the value of the gifts – just because they aren’t that useful to us. Whether it is a result of regifting, selling off or just simply to be forgotten, gifts often result in large deadweight losses.
As for the solution?
Why not cash? An increasingly large amount of people now give cash as gifts. Given that money is interchangeable with almost any good or service imaginable, the deadweight loss associated with the present is reduced to almost zero because the recipient can effectively buy whatever they desire.
But it’s not all good news. Because giving cash means that people can now spend their money however they like, money that would have otherwise been spent on ugly sweaters now goes towards home improvements. As such, retailers have a strong incentive to ensure that as much money is spent in their stores as possible, resulting in gift cards. While gift cards are quite similar to cash, in that they reduce the prospect of an unwanted present to some degree, a recipient is still limited to the retailer that issued the card. This constrains the recipient’s choice, so there is still a corresponding deadweight loss. Given the restrictions on these cards, the same question appears – why not just give cash?
Before we completely dismiss the idea of purchasing gifts, there are some cases where it might actually be better to receive a gift rather than cash. For example, I might be developing an interest in painting with watercolours. I probably wouldn’t buy a watercolouring kit by myself, as they are quite expensive and other things require the attention of my wallet. If I were to receive a watercolouring kit as a present, this would probably bring me quite a large amount of utility. However, this ignores the reason as to why I didn’t buy the watercolour kit – I was gaining more utility from something else over the watercolour kit, which still makes this present inefficient.
One other problem is that even if our gift giver knew what would maximise our utility, these are often the least exciting things that we could receive as a present. An example would be if my gift giver gifted me a car service, maximising my utility. However, as useful as a car service is, it doesn’t make for a particularly exciting, or inspiring present. The same could be held for goods like groceries, or school textbooks, furniture and so on.
It necessarily follows that cash is the best option for giving presents because it enables the recipient purchase exactly what they want. If we go one step further, most of us would like to give similar value presents back to our gift giver, as a result of our innate desire for reciprocity. If someone gives us an Xbox, we probably wouldn’t return the favour with a box of chocolates. With cash, we know the exact value of the gift given to us, which means that we would return the same amount given to us earlier. This would just result in us passing money between each other ad infinitum.
Maybe we just shouldn’t give gifts at all…