It is Valentine’s Day, an occasion for romance, for the celebration of the magical connection two people share when Cupid’s arrow strikes and true love blossoms.
But this is Wonkblog, and we won’t have any of that. Instead, we will explain a little bit about the economics of love—and specifically, what dating has in common with financial transactions.
Think of it this way. In a dating marketplace, everyone is trying to get the best match they can find. Somehow, as millions of people each pursue their own best interest, mutually beneficial arrangements result. It is not unlike when buyers and sellers, each pursuing their best interest, come together in a marketplace.
Online dating is for relationships what modern, electronic financial markets are for people trading stocks or bonds. Those looking to buy and sell financial assets once crowded onto the streets of Lower Manhattan or the City of London, all coming to one place to engage in trade. Those are the equivalent of the bars that singles traditionally go to meet other singles.
But both those markets are awfully inefficient. When stock or bond traders are trying to do business in person, it’s hard to be sure that they have canvassed all the potential buyers and sellers to get a good deal—and there might be an even better deal lurking in some other market in another city. Similarly in a crowded bar no one can meet all their potential dates to ensure that they connect with the one who is the best match. And a bar can only hold a few hundred people; there might be thousands of potential dates out there who just don’t much like loud music and meat-market establishments.
In that sense, online dating services bring the same thing to the market for relationships that modern, electronic trading platforms bring to the financial markets: In a word, liquidity.
In a financial context, liquidity is simply the knowledge that there are always many buyers and sellers that you are likely to trade with at a reasonable price. Want to buy 10,000 shares of General Electric stock? On the New York Stock Exchange you can always be confident that there is a seller at the ready. Want to sell 1,000 options betting on a drop in the price of frozen orange juice? On the Chicago Mercantile Exchange you can always do so.
Suppose you are a not-particularly-handsome 47-year-old divorced guy with a doughy physique, a mediocre job, and a hatred of loud nightclubs. In the old dating marketplace, finding a woman who would consider you more attractive than her other alternatives might be hard, leaving you lovelorn and spending Valentine’s Day drinking beer by yourself at a bar, hitting on women who are too young and attractive to consider dating you. The market would fail to clear, not because you ware fundamentally undatable, but because the market is illiquid, failing to find partners who are an appropriate match.
But with the likes of Match.com and E-Harmony, with thousands of single people looking for love at any one time, you are more likely to find a person who is your match simply because it is a more liquid marketplace. You’re more likely to succeed in finding the similarly attractive, appropriately aged woman who doesn’t mind your doughy physique.
Note that just because the market is more liquid doesn’t mean everyone gets everything they could possibly want. Our shlubby guy, after going on a dating site, isn’t going to meet a 25-year-old model who is really into him any more than I can buy shares of General Electric for $5 each on the New York stock exchange. But a liquid market is one in which more people are able to enter mutually beneficial exchanges at a price both acceptable, whether it’s in pork belly futures or a new girlfriend or boyfriend.
But there is also a dark side to greater liquidity, both in financial markets and relationships.
In classic economic theory, more liquidity is always a better thing; you always want more freedom to trade rather than less. But in practice, as it turns out, many individual investors lose money because they trade too much. According to a wide range of studies, people who trade often are more likely to cost themselves money than to make it. Here’s one 2011 study from Brad Barber and Terrance Odean, for example, that shows that individual investors who trade stocks tend to, among other things, underperform the results of just buying and holding stock indexes, sell winning investments while holding losers. They even, in what seems a fitting metaphor for many peoples’ tendencies in matters of romance, “engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain.”
The dark side of liquidity in finance is that, when it is too easy to buy and sell, people can do so rashly and in ways are not in their longer-term best interest. Similarly, if finding a new mate is too easy, people may be too quick to dump a partner, confident they can find a new one with little effort.
When people trade financial assets too much, part of the reason they lose is because of transaction costs. With stocks, that might be the $7.95 paid to an online brokerage. With relationships, that is the psychic toll taken by a damaging breakup. So with romance, as with finance, liquid markets are a great thing—if we use them wisely.