An Economist’s Take on Valentine’s Day

As the world is busy celebrating Valentine’s week by splurging on gifts and reserving tables at high-end restaurants, economists have called this behaviour as an inefficient allocation of resources (deadweight loss) in the economy.

Prominent economist Joel Waldfogel explains how asymmetric information – both parties have information that the other party does not – regarding the preferences of gifts might leave the recipient worse off than before. For example, in Friends, think of Joey buying Chandler a gold bracelet to show his appreciation and how keen Chandler was to get rid of it.

Moreover, spending hours searching for the appropriate present leads to a higher opportunity cost i.e. the person could have spent his/her time doing more productive tasks, hence incurring an additional deadweight loss on the economy. Economists have theorised how giving cash instead of gifts would be efficient as the recipient can spend this money on the product of their choice and enhance their utility.

So, what drives the incessant and often irrational spending on flowers, candies and the race to surprise one’s partner with the perfect present? The answer lies in the concept of signalling in economics.

Giving one’s partner money would be deemed unromantic. Far less from being perceived as a rational agent (yes, economists do find a way to eulogise economically efficient behaviour), they would come across as lazy and uncaring.

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Another prominent economist, Michael Spence, developed a mechanism to solve the problem of asymmetric information by engaging in signalling – since the recipient of the gift would know what is best for them. While this information is not shared with the other parties, their partners on Valentine’s Day can signal their intentions and feelings by sharing a gift that they think is best for them. For example, if one happens to gift an object that is of value to the other person, say the first edition of their favourite book (did your thoughts wander to Chandler hopping around New York to find the gift for Joey’s girlfriend in Friends  – the rare copy of The Velveteen Rabbit), or creation of a memory to help your partner cherish a moment (think Sheldon gifting Amy a picture of himself sitting on Santa’s lap in The Big Bang Theory), then the partner is effectively sending a signal.

This signal is useful to let them realise that they know them well enough to anticipate what was needed the most, they consider them valuable enough to spend time looking for the perfect gift for them, and that all their efforts were worth seeing a smile on their face.

This is why cash, although efficient, would be the worst signal of affection.

The effect of signalling would be even stronger in case one half of the pair has a host of potential suitors. It would help the person set themselves apart from the competition by engaging in product differentiation. It is a concept used in economics and marketing where the firm offers an attractive product that sets them apart from the competition. The person can successfully send a signal to their suitor that they are willing to do something that jerks and indifferent individuals are not: indulging them with thoughtful gifts.

The recipient is now free to interpret this signal and adjust their behaviour accordingly. If the recipient now becomes the gift giver, then this signals the reciprocation of feelings, solving the asymmetric information problem (did you just imagine Sheldon giving Penny several gift baskets and a special “hug” when he received a treasured autograph of Leonard Nimoy from her on Christmas in The Big Bang Theory?).

To a reader, this article might seem absurd. People are sentimental and just want to make their partner feel special. But alas, economists imbibe the unique talent to complicate things only to find more convoluted explanations to simply them!

And on that note, Happy Valentine’s Day!

Payal Seth is a Consultant at Tata-Cornell Institute, Cornell University and a PhD Scholar at Bennett University. Views expressed are personal.

Featured image credit: S. Hermann & F. Richter/Pixabay