The Dating Market: Asymmetric Information, Sunk Costs and How to Find a Peach

How do you prove that you’re a peach?

It’s almost Valentine’s Day. There’s nothing like a greeting card industry fashioned holiday to prompt us all to reflect on our love lives (or lack thereof). So if the economically informed tips I provided last year haven’t paid off, I’m here to try and explain why.

In 1970 the economist George Akerlof published a paper entitled The Market for Lemons: Quality Uncertainty and the Market Mechanism. In this paper Akerlof uses the example of the market for used cars to illustrate the problem of quality uncertainty. In the used car market the seller of a car knows much more about the quality of the car than the buyer. This is asymmetric information, a concept that Akerlof believes can cause markets to disappear. If we imagine that the probability of a used car being a ‘lemon’ is 0.5 with the corresponding value for it being a ‘peach’ also 0.5. If this is the case then the average price of a car will be half the price a good quality used car should receive. Therefore, sellers with good quality cars will have no incentive to sell them. This is an example of Gresham’s law of ‘bad driving out good’. The bad cars will drive the good ones out of the market. In Akerlof’s example he shows how theoretically this effect can continue till the market disappears altogether.

So what does all this have to do with dating? Well the dating market is perhaps the most extreme case of asymmetric information. Let’s take the example of two Durham freshers going on a blind date; we’ll call them Jack and Rose. Now Jack knows that he is a rugby-loving, beer-chugging, action film enthusiast. Equally Rose knows she is an aspiring actress who enjoys fine wines and black and white French films. Yet before a blind date they know absolutely nothing about each other, therefore they are unable to assess each others ‘quality’. Jack doesn’t know if Rose is a ‘lemon’ or a ‘peach’, and equally neither does Rose. Whilst they might well find love against all odds, most of us would agree that perhaps they aren’t the most compatible pair. However, by committing to go out on that first date Jack and Rose encounter another economic concept: sunk costs. If they choose not to follow that first date with a second they will have wasted both time and money. These ‘sunk costs’ of dating accumulate over time and can lead to both Jack and Rose continuing in a relationship they would perhaps rather not have started.

This all sounds a bit gloomy, and of course Jack and Rose could easily, and perhaps sensibly, just end their fledgling relationship after one date and therefore incur relatively small sunk costs. Still, this is obviously not an optimal result and one that we should try to avoid. One way in which people get around the asymmetric information problem in the dating market is by signalling. Much like the peacock fluttering its feathers for potential mates we also signal to each other. Through the clothes we wear, the subjects we study, the bars we frequent (and to what extent we frequent them), the sports we play, the societies we join, how we talk and who we are friends with to name just a few, we provide potential romantic interests with a wealth of information on which they can judge whether or not they are interested in us. All that’s before the Facebook stalking begins. To some extent signalling gets around the problem of asymmetric information, but not entirely.

If you believe the major online dating websites then they have all the answers. The comprehensive levels of detail on interests, hobbies, political affiliation, religious beliefs and intention to have children certainly in theory ensures that both parties to a potential date have plenty of information about each other. Sadly, in reality online dating is often famously regarded as being full of misrepresentation of information. Be that posting a picture from your university days as you enter your late thirties or claiming to enjoy long romantic walks when really you’re a coach potato. This inability to trust the information provided is a major flaw in online dating. Whilst it is true that if you believe some surveys online dating is now rivalling the friendship circle as the most common way of meeting your future husband/wife the fact that people can provide incorrect information so easily is a major problem.

So given that the dating market is incredibly inefficient due to asymmetric information and online dating is riddled with misrepresentation how do we go about shifting through all the lemons and finding that illusive peach? Perhaps more importantly how do I show that I’m a peach and not just another lemon? Signalling is of crucial importance here; you’ve got to provide the person you’re interested in with some evidence that you’re someone worth getting to know. Equally it’s important to keep a look out for a peach that is subtly trying to get your attention.

In summary, we all know that dating is hard. The dating market is riddled with asymmetric information, confusing signals and rivals. Even if you manage to negotiate it to the extent that you gain a relationship there is the issue of the sunk costs of dating to consider. In many ways successful relationships defy fundamental economic logic. If that’s not a greeting card waiting to happen then I don’t know what is.

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