The Behavioral Economics of Love

Love might not be an equation, but economics still explains a surprising amount of what our hearts do.

Why We Stay in Suboptimal Relationships: An Economics View on Love

So here's something interesting: Prospect Theory, developed by Kahneman and Tversky, suggests that people value gains and losses differently, leading to decisions that deviate from classical utility theory. And prospect theory stems from loss aversion (the tendency to avoid losses rather than acquire equivalent gains), which helps explain why people stay in unsatisfying relationships.

It tells us that people do not like to lose or take a risk that could lead to a loss. The pain of losing a partner looms larger than the prospect of gaining a new one. So, we remain with suboptimal partners to avoid the emotional torment of a breakup.

Our happiness is also relative. We judge how satisfied we are by comparing our lives to a reference point, like how our peers are doing or what our expectations are. After time together, we adapt to consider our partner the norm even if we would never accept similar behaviors early on. Our shifting reference point causes us to settle.

Diminishing Returns

You know the saying "money can't buy happiness"? Well, money can't buy you love, as the Beatles sang, but it sure does not hurt your chances. Up to a point, at least. Research shows that having more money and buying nicer things makes people happier, but only to a certain level. After that, spending more does not move the needle on your mood.

A 2010 paper finds that satisfaction increases with earnings up to around 75,000 dollars per year. So, maybe give me 75k on the dot and I am all set.

A better way to explain this would be using the concept of a hedonistic treadmill. Basically, as a relationship progresses, it takes more and more effort, and we have to keep stepping up our game just to maintain the same level of happiness. I know, I know, Valentine's Day is the worst for this.

Hyperbolic Discounting

We tend to discount the future hyperbolically. In other words, we prioritize immediate rewards and short-term satisfaction over long-term fulfilment. Hyperbolic discounting makes us irrationally overweight present thrills and underweight future consequences. Our choices end up guided by temporary passion rather than compatibility and potential as a couple.

The solution? Commitment devices. The idea is to restrict your future choices voluntarily so your impatient present self cannot sabotage your future self's bigger goals.

Remember Sheldon's infamous "Relationship Agreement" from The Big Bang Theory? While this is not a good example, he actually spells out dating terms and conditions for him and Amy, like hand-holding quotas and even a mandatory monthly date night.

Closing Thoughts

Happy Valentine's Day, or as economists like to call it, the annual audit of the heart. While love might not be a science, a little economic insight could be just what Cupid ordered.