Tuesday, January 5, 2010

The Economics of Relationships

My parents have been bothering me a lot about getting married.  I'm offended that they're so eager to get rid of me.  However, it did make me think about my aversion to relationships.  It made me wonder why certain people find relationships so appealing…

Does anyone else think that it’s kind of unhealthy to be attached to any one person in the world?  The first thing we learn when making investments is diversification!  Relationships are like investments.  Your closest friends and the people you love the most are like stocks – high returns, high volatility (b/c they are the ones who affect your emotions the most).  Your 2nd tier friends are like bonds – low volatility and low returns.  Your frienemies are like cash – zero nominal returns, negative real returns, but you keep them around just in case…
How can you possibly place so much trust in ONE person?  That’s like putting all of your retirement money in Enron stock...OOPS.

I once told a boy that I couldn’t date him because my utility of expected value exceeded expected utility. In other words, I am risk averse.  I know that I can achieve a certain amount of happiness when I’m single, but when I’m in a relationship, it’s a gamble.  But I’m sure my utility function will change once I turn 30?  Or 40?  (I hear 40’s the new 30…)

Also, George Akerlof’s Market for Lemons paper has so many levels…
In his paper, George Akerlof explains how market failure occurs because of asymmetric information.  In the used car market, a seller has good used cars and bad used cars, aka “lemons.” The seller knows which cars are lemons, but the buyer does not.  Therefore, the buyer is only willing to pay the price for an average quality car.  Since the seller cannot receive a fair price for the good cars, the seller will resort to selling only “lemons.” Thus, “the bad drives out the good.” 
It’s the same with men.  I’m assuming that most douchebags know that they’re douchebags.  But it’s not like they’re going to go around broadcasting it.  Even the seemingly nice ones can turn out to be complete a-holes.  Therefore, I am only willing to invest so much in my relationships because there’s a pretty good chance that I am in fact, dating a lemon. 

However, my friend Evelyne points out that as we get older, there will likely be more “lemons”  in the market because all of the good guys will already be taken.  My mother also argues that it is the girl’s responsibility to turn a bad guy (because all guys are naturally bad, of course) into a good guy – take lemons and make lemonade?

Basically, I don’t want lemonade enough to look for a “good lemon.” Or maybe I don’t have the patience to squeeze lemons until I find good lemonade.  

What’s the point?  

It’s only a matter of time before the principle of diminishing returns kicks in and we get tired of each other.  Someone told me that human beings are only made to be “in love” for two years at a time.  That’s fine.  Boyfriends, and future husband, I accept that you may not love me “until death do us part.” All I ask is that you not make a COMPLETE fool out of me the way Tiger did with his wife.

It's a crapshoot, friends.  In general, the romantics will be disappointed and the pessimists will be pleasantly surprised.  I suppose that’s what we would call mean reversion in standpoint…


  1. while I didn't read the post above this one, because it's fucking long, i did sort of read this one-minus weird econ shit- all I have to say is this (please be gentle with me now, I'm not an econ major):

    my understanding of "econ" is that the biggest profits are gained from the biggest risks? or at least, this is one way to look at it. so obviously, if you are the middle path buddhist homo, you're going to be fine with solid steady investments that give you an average return...you're stable...your name is probably dan or sarah. you like vanilla ice cream sometimes when you get excited you might put some sprinkles on there. obviously to this person a relationship isn't worth it, because they don't see the "big return," in fact, they see little to no return and that there are much more things that can go wrong.

    now, what's the big return you ask? while it is "true" that biologically speaking, it makes no sense for us to keep one mate and be "in love" forever and ever. However, that would be a huge oversimplification of the matters here. If you think about it, being "in love" is completely advantageous to not being in love. first of all, there are now two of you, your economic and physical power has doubled (hopefully, unless he/she's a pansy), typically, if you do decide to reproduce (I hope no one does T_T), that little munchkin will benefit from having two parents instead of one (ie two people will stay together if they're "in love")(i'm not even goign to list all the ways that he benefits).

    thirdly, you talk about diversification, i don't know what this would be called in econ, but investing in a relationship is NOT equivalent to investing in one company, I suppose it's more like mutual funds? lol because by investing in this "one person" you typically benefit in more avenues than one, and those benefits are not necessarily contingent on that one person, that person may merely be a stepping stone (wow that sounds horrible)...

    lastly, putting "econ" aside. I feel that to grow as a person having relationships is irreplaceable. so from that standpoint...you lose...lol

    anyway, I think i make a fantastic boyfriend O_O ask Kirsten.

  2. i don't know man. being kicked out of house without shoes = epic fail in my book.
    and damnit carrie, vanilla IS my favorite ice cream flavor! DAMN YOU! haha. <3 you!

  3. and read nami's post - it's so funny!

  4. What if you're sugar and can make ANY lemon into lemonade?


    p.s. I LOVE lemonade! LOVES IT!!!!

  5. Carrie brings up some pretty good points. Unfortunately for me, though my favorite flavor of ice cream is peanut butter, I HATE sprinkles. Does the fact that my favorite flavor is not vanilla cancel out the sprinkles? I hope so!

    When do the final results of the survey get revealed?

  6. ... for the first three months of my relationship I was constantly justifying to Bing that I was useful and that she had a better time with me than by herself. Looks like lots of girls think this way (and she's not an econ-phile like yourself).

    Anyways, some points:

    Way to be egocentric. Who's to say that only the female has to worry about the male being a dud? Guys worry that girls aren't worth it all the time. In dating, information is not asymmetric, rather it is symmetrically limited. Therefore, your example with the lemon market is not applicable.

    Also, you can throw any arguments you made with "utility function" out. For the same reason why you claim "economics" is your boyfriend while your other classmates claim "Goldman Sachs", "Morgan Stanley", "UBS", etc etc as theirs, is the same reason why relationships cannot be simply modeled with a utility function: intangibles. The utility of wealth fits the risk aversion model nicely because it is based on something very tangible: $$$.

    For all you know, your utility function for relationships could have jump points, discontinuities, etc etc. For (a very simplified) example, you could model a guy's relationship utility function much like a step function where you have a jump discontinuity at t=t* where t* is the point in time where he gets laid. This greatly changes the mathematics behind your utility of expected value and expected utility (taking stochastic processes next semester so perhaps I'll get back to you on that). The point is, you have no idea the properties of your utility function so you can't really make a statement like that.

    Lastly, diversification and your quest to maximize the Sharpe ratio of your portfolio of friends leads to the classic "picking nickels up in front of a steam roller". I'm making the big assumption that you don't want grow old by yourself, but unfortunately your basically settling for a high probability of small positive gains at the risk of the low probability, but catastrophic event: growing old and dying by yourself. People seeking relationships, on the other hand, are like John Paulson: taking small losses at the chance of hitting it big (to the tune of ~$3 billion).

    While it's human nature to pick the gambling structure with the highest probability, you are exposing yourself to a high value-at-risk and possibly disregarding the expected value of the scenarios.

    Of course though, lets be real. Math wasn't a great predictor of financial markets (a derivative of human behavior). It probably isn't a good predictor of something like love and relationships.

  7. Susan, I'm not sugar at all. You can be sugar though! Evs, we'll post results of survey next week. Lin, your comment is of admirable length. Haha.

  8. You're right that pessimists get the benefit of low expectations. I sometimes joke that if there are two old ladies walking down the street and a young punk knocks one over and steals her purse, the economist's response is "Look, the other one made it!"

    Good luck in love (or not) from me and my girlfriend Laura (3 years and counting)!

  9. lol I think "of admirable length" might be my new compliment to everyone, for everything. Also, I WANT THE RESULTS NOW GOD DAMN IT.