A benefit of doing PhD is the people you meet, more importantly, the ideas that you encounter. It encourages you to constantly look at the world from different lens, entertaining outlandish ideas. On this occasion is no different. Talking to many of my friends about relationship, a common theme that I encounter is that our society expects our romantic ritual to develop sequentially from “two complete strangers negotiating for sex” to “attempting to become friends.” What if we explain this ritual dance from the view of behavioural economics.
A main assumption in the study of economics is that all players are utility maximisers. That is, given two options to anyone, they will ALWAYS choose the one with most value to them. We now know through the works of cognitive psychologists Daniel Kahneman and Amos Tversky that, in reality, human often operates far sub-optimally.
One of the great ideas in behavioural economics is the concept of loss aversion, which I briefly discussed in here. The idea is simple: we experience the pain from loss roughly twice as intense as the pleasure derived from gain. Below are some consequences of loss aversion on making a decision with uncertain outcomes.
- We tend to lock in profit. We tend to choose certain gain over gambling for even more gain.
- We tend to keep the loss for longer. We tend to hold on to a lost for longer with expectation that it will break even, instead of cutting the loss now.
So, how would loss aversion help explaining the ritual? But first, let me clarify two points.
- This is only an idea to entertain. Personally, I don’t believe that people really consciously use this line of logic. Having said that, I believe that they may use this reasoning to justify their choices.
- It is easy to explain by assuming that most people believe that friendships are PERMANENT, which is not the case. Idea of loss aversion does not require this assumption. Friendships are just as fluid as relationships. Think about how many friends and families that you have lost touched over the years.
- There is an implicit assumption that romantic relationship is of higher value than platonic friendship. I don’t believe that, but it would be an interesting exercise to assume and see where does it lead us to.
With those points in mind, here is an idea. What is the alternative to the ritual? Dating your friends. If people generally don’t date their friends, then they tend to do the other.
Let say that Jo and Ben are really great friends, but one day Ben asks if Jo want to take their relationship further. Jo is now thinking: Right now, I have Ben as a great friend, and relationship may not work out and I will probably lose a friend too. So, we should not mess this friendship up by dating.
In term of loss aversion, the pleasure gained from forming new relationship is not as intense as a potential for the pain felt by losing a friend. So, our response is to hold on to the perceived certainty of friendship (investing: locking in profit too early) and suffers from opportunity cost (having a great relationship).
On the contrary, when we are in a bad relationship, there is a tendency to hold on to the partner with an expectation that they will change for the better (investing: holding on to a losing trade) That is because by breaking up the reality of being single becomes a certainty. I am not saying that people should break up with their partners if they are unsatisfied. I am saying that there is a cost associated to holding on to them longer than necessary. How long is too long? I have no idea.
This is just a thought. I am interested in verifying this idea. Anyone who want to collaborate with me, please send me an experimental design.
Dirtbagonomics 
Regarding the concept of loss aversion as you described above, how does that apply to gambling itself? As in, the punter sitting at a table slowly gambling away their savings (and those who get addicted to the pass time) are certainly experiencing losses roughly as often as gains (with the statistical probability slightly in favour of the casino of course). However as we can see from the sheer size of that industry, the experience of pleasure from the “gains” keeps them sitting there, even though they should experience a net deficit of “feeling”, should it not?
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Unfortunately loss aversion isn’t the only irrationality we have, and I think gambling addiction is generally a case of other irrationalities at work: an uncontrollable need for excitement and potential upside, whatever the cost.
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There’s an experiment that shows that we receive a positive brain rush when we win in gambling. But is some people (a group with high correlation with problem gamblers) they also get that same rush when they have a near win, which is quite often. For this reason, they might come away from a night of gambling having lost, but from their brain rushes, they feel like they’ve had a successful night.
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There is an implicit assumption that romantic relationship is of higher value than platonic friendship. I don’t believe that, but it would be an interesting exercise to assume and see where does it lead us to.
I’m not sure that the above is the case. I think often what people are reflecting is the likely higher opportunity cost of romantic relationships – they usually consume more time and have far higher potential economic and social (kids) costs, particularly for women. Also, and importantly, they tend to be exclusive; you can have as many friends as you can reasonably manage, it’s a bit dangerous to try that with romantic partnerships.
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I think you’re right that people display loss aversion in dealing with relationships.
My favourite example of this is people’s reluctance to ask someone out, or even chat them up in a bar. Rationally, the outcome of rejection is barely worse than the outcome of not asking, but it is still enough to put many people off.
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