Blogs | February 12, 2013

An economist does Valentine’s Day

With emotions running hot and expectations high, Valentine’s Day can be a testing time-– here’s an economist’s guide.

What might surprise is that the occasion plays to so many aspects of traditional and behavioural economics that lessons from that seemingly-unrelated realm may actually help the more romantically-inclined. From supply and demand (of roses as well as romantic partners) to loss aversion, sunk costs and more.

Rational decision making processes, which economists often enthuse about, appear to be thrown out the window. Roses bought on 14 February are much more expensive than those bought on 15 February. Restaurant tables full on the day will be close to empty the night after.

Say it with flowers
One explanation is peer pressure, which as we all know can be a verypowerful force for good or bad habits. The mere act of celebrating romance on 14 February is heavily influenced by peer pressure – partly, we do it because many others are. It has become the norm in many cultures not only to “say it with flowers” but also with a premium bouquet of a dozen red roses. At a much higher price than on 13 February. But it is possible to break out of this cycle. One idea is to bring in a substitute occasion and celebrate the day after on 15 February, as one of my economist colleagues does – it’s easier to get a restaurant booking and you might get flowers at half-price.

Delay it by a day
However, if you think your partner will baulk at delaying by a day, the economics idea of loss aversion could well come into force. It means you may not even suggest postponing by a day. Loss aversion comes about because we feel the pain of a loss at twice the level (depending on who you talk to) as the joy of a win. The thought of insulting your partner by asking to celebrate later is so painful that 'the win' if they say yes isn’t worth the risk. Aversion to loss here means sticking with the tried and tested.

And then there is the problem of efficient gift giving. There is nothing necessarily wrong with conforming to the 14 February roses if that is what the receiver wants. Identifying another’s wants and desires can be difficult, which is why cash is often given as present. Cash is malleable and divisible. But arguably devoid of thought and sentimentality.

Sunk cost trap
As unromantic as it sounds, the sunk cost trap can also apply to matters of the heart. You might know someone who won’t break up with their partner because of all the time, effort and perhaps money they’ve put in. I’ve heard of someone who delayed calling it off with an unsuitable other because they jointly owned a couch. A hard-nosed economist might recognise the emotional bond (which can also apply to property and other investments, although in a slightly different way) then encourage an objective analysis of the situation.

However, even the most hard-headed of economists might understand that the gift giving and squeezing into a busy restaurant is rational if the primary aim of the ritual was to send a signal to another. The costs may then outweigh the benefits.

Peer effects

Ian Bright
Ian Bright

Senior economist at ING
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