The Economic Man’s Valentine

The Economic Man was utterly out of gift ideas for his girlfriend, the Economic Woman, for Valentine’s Day.

They had just celebrated their fourth anniversary. Between birthdays, Christmas, and anniversaries, he had exhausted his imagination.

The Economic Man is not exactly a romantic. Love is irrational, but Rational is the Economic Man’s middle name. Love is blind, but the Economic Man wants perfect information. Love is priceless, but the Economic Man believes in the price mechanism.

Take gift giving, for example. Gifts are a useful signal. An expensive gift will show how much the Economic Man cares about the Economic Woman, even if the gift does not improve the Economic Woman’s welfare. The gift of the Magi may well be futile and decrease the consumption-possibility frontier, but the sacrificial giving makes the young couple and the reader sob for true love. The demand to show credibility in commitment creates a market for diamond rings. The wildly expensive gem may have broken many wallets, but its absence will lead to more broken (non-credible) promises and hearts.

Ever since the Economic Man showed up unannounced at the Economic Woman’s Princeton dorm two years ago for her birthday, he has found it harder and harder to surprise her. The Economic Man faces a tricky intertemporal decision. If he plans this Valentine’s Day too perfectly, it will be harder to please the hedonistically adapted Economic Woman in the future. If he plans the day too poorly, he may not spend the next Valentine’s Day with the Economic Woman at all. Even in the irrational world of love, the Economic Man understands the importance of the interior solution.

The Economic Woman is more of a romantic. She enjoys the annual rose delivery by the Economic Man. But even she is dissatisfied with Valentine’s Day. She wonders why Economic Man only gives her roses and brings her to prix fixe dinners on the same day that high demand for such goods generate high premium. She does not like that her beloved “Veblentine” goods are more popular as prices increase, breaking the law of demand.

She reasons that the point of Valentine’s Day is not for romantics to enjoy romance. The romantics can celebrate privately on their anniversary—or any day, really. Valentine’s Day is for romantics to publicly flaunt their romance with conspicuous consumption. Love is not simply a mutually beneficial exchange between two individuals, as she thought. It has negative externalities and deadweight loss, because all her single friends collectively become slightly bitter. The social cost of public display of affection makes it socially distasteful, but much less so on a publicly sanctioned day to celebrate romance. The extra cost of Valentine’s Day consumption may be a just price to pay for the acceptance of her public display of affection.

The Economic Woman was facing a liquidity crisis, as her paycheck did not arrive on time. So the Economic Man decided to give her $70 in cash. He thought it was his best gift idea ever, because cash allowed the Economic Woman to maximize her consumption bundle as it pleased her. Most economists, however, disagree with the Economic Man. His professor Eric Maskin says, tongue in cheek, “Only an economist could think like this”.

Surprisingly, the Economic Woman, who does not study economics, agreed with the Economic Man and enjoyed the gift. Despite their bounded rationality, the Economic Man and the Economic Woman magically solved the principal-agent problem together because they think so alike and have the same utility function. The best signal is not an expensive or surprising gift, but the will and ability to maximize the other’s utility like it is one’s own. The best relationship is not just the double coincidence of wants, but the merging of two people’s wants into one. Somehow, the Economic Man found the right Economic Woman that he can please just by following his heart.

Maybe love is rational after all.

Jonathan Z. Zhou is an applied mathematics concentrator in Eliot House. His column appears on alternate Mondays.