 "The problem of hidden information")
Hidden information problems are certainly not limited to the world of dating. George Akerlof received a Nobel Prize in economics for his pioneering work on problems of hidden information, or adverse selection in economics terminology. The key insight of Akerlof's analysis was that hidden information can lead to markets where only the least desirable goods trade hands. Akerlof focused on used cars in his work. He started by thinking about two types of used cars: lemons, which have problems and will be in the shop regularly, and plums, which still run without issue.
Used-car buyers are willing to pay more for a plum than for a lemon, of course. Imagine a very stark world, though, in which the sellers of used cars know whether the car they are selling is a lemon or a plum but the buyers cannot tell them apart. Because sellers know the difference between the types is indistinguishable to buyers, there will be one price for all used cars. In this market, owners of plums will not be willing to part with perfectly good cars, since the fixed price will reflect that many of the cars on the market are likely to be lemons. The outcomes on the used car market become self-fulfilling - all cars on the market are lemons because the plum buyers will not sell for the going rate.
And that is the very essence of adverse selection - if sellers have hidden information, they will offer only the unattractive merchandise for sale. Sadly, the same forces that make the available used cars disproportionately likely to be lemons could also have made the people who used early dating services likely to be loners or losers. Or, thought of another way, just as there is a certain stigma to selling a used car that you cannot prove is a plum, there was a stigma to being unable to find a partner through standard methods of networking. In both cases, the "seller" of the good (whether that good was a car or the dater himself) revealed private information about the good's quality through the way he sold it.
I Am a Lemon
Fortunately, the stigma associated with online dating has largely disappeared over time. While it was initially perceived that only desperate people would use online dating, others began to realize that online dating sites provided a rich source of potential mates and many of the other advantages already discussed. A recent study by psychologists reached the conclusion that "online dating has entered the mainstream, and it is fast shedding any lingering social stigma." So I don't have to worry about adverse selection issues when I go online. Or do I?
While online dating sites may not have a stigma associated with them, I have another problem. I am single and I am in my late forties. What does that tell you? One interpretation is that I am the result of adverse selection because I couldn't sustain a marriage or couldn't even develop a long-term relationship in the first place. In this case, the private information is that I am incapable of a long-term relationship and, though I'd like to hide that fact, it is revealed by my presence on the dating market.
Two things mitigate this particular form of adverse selection. First, there may be perfectly good reasons that a man or woman my age has not had a lifetime relationship, though we are capable of it. Essentially, just as the stigma of online dating has eroded over time, so has the stigma of divorce and delayed marriage. People largely understand that choices made early in life may not be optimal and that we change over time. Second, to the extent that being older and available is an indication of something negative, it is a trait I share with the women I date.
Unfortunately, a much more problematic adverse selection dynamic occurs in the job market. In that case, an unemployed person may have trouble finding a job because potential employers read a lot into the fact that the person is unemployed. Many job listings explicitly state that people who have been out of work for a while should not apply (or at least that currently employed people are preferred). One recruiter told the New York Times that his clients are "looking for someone who's gainfully employed, who's closer to the action." A woman who had been out of work for six months said, "I feel like I am being shunned by our entire society"; one recruiter told the woman that her spell of unemployment made her a "hard sell," despite her impressive skills.
Numerous economic studies have shown that job applicants have more trouble finding a new job as their spell of unemployment gets longer. This finding can be explained by reasons other than stigma, but the previous example (and many others like it) suggests that employers believe people who have trouble finding a job have trouble for a reason.
Reprinted by permission of Harvard Business Review Press. Excerpted from 'Everything
I Ever Needed to Know About Economics I Learned from Online Dating'. Copyright 2014 Paul Oyer. All rights reserved.
EVERYTHING I EVER NEEDED TO KNOW ABOUT ECONOMICS I LEARNED FROM ONLINE DATING
AUTHOR: Paul Oyer
PUBLISHER: Harvard Business Review Press
Price: Rs 995
Just like the willingness to settle only for a perfect job can lead to unemployment, holding out for the perfect mate leads to loneliness or 'romantic unemployment', Oyer tells Ankita Rai
The book says for signalling to work, it has to be costly. That is, if one is really interested in something, one must incur cost to prove that. Does this theory work every time? Can there be exceptions?
Signaling is a great theory but it is difficult to make it work. We need some sort of institution to arise to help make it work. In the book, I discuss an online dating site where people could "signal" very effectively because they were only allowed two special invitations during a brief period. That example worked great but, if it had gone on longer, it might have broken down because users could have registered for multiple accounts to get more signals. This would have watered down the value of the signal.
The general principle is that an effective signal has to be something that only a "qualified" person can do at a reasonable cost. In many cases, unqualified people can fake it for a while.
I am hopeful, however, that institutions will build in job markets to help firms sift through the mountains of resumes that are now available on LinkedIn and similar sites to find the best applicants for the specific positions they are hoping to fill.
Can one find a perfect match by following the economic principles of signalling, thick markets and adverse selection?
You are, indeed, never going to find the perfect partner. So, just as you settle for a good job that doesn't have every challenge or perk you would like, and you settle for a nice house that doesn't have every feature you saw in a model home in a magazine, you should also realise that it is best to settle for a life partner who is wonderful even if that person has a few 'quirks,' you would ideally want to modify. The willingness to settle only for a perfect job can lead to unemployment. Similarly, holding out for the perfect mate leads to loneliness or "romantic unemployment".
The bigger the market, larger the number of choices. However, the concept of positive assortative mating makes one small prefer niche markets over large markets. Is there a contradiction between the two theories?
No, these two ideas go very well together. You may have very specific tastes. But still you should look for maximum possible options. For example, if you want a tennis player as a date, you should not choose only a niche 'tennis dating site'. Because there may be potential partners matching your criteria on other big sites who play tennis but don't want only a tennis player as a date. Thus, a niche tennis dating site is not a liquid market.
Therefore, whether looking for a job or a date, I advocate going to larger sites and then being very specific about the criteria that are important to you.
Used-car buyers are willing to pay more for a plum than for a lemon, of course. Imagine a very stark world, though, in which the sellers of used cars know whether the car they are selling is a lemon or a plum but the buyers cannot tell them apart. Because sellers know the difference between the types is indistinguishable to buyers, there will be one price for all used cars. In this market, owners of plums will not be willing to part with perfectly good cars, since the fixed price will reflect that many of the cars on the market are likely to be lemons. The outcomes on the used car market become self-fulfilling - all cars on the market are lemons because the plum buyers will not sell for the going rate.
And that is the very essence of adverse selection - if sellers have hidden information, they will offer only the unattractive merchandise for sale. Sadly, the same forces that make the available used cars disproportionately likely to be lemons could also have made the people who used early dating services likely to be loners or losers. Or, thought of another way, just as there is a certain stigma to selling a used car that you cannot prove is a plum, there was a stigma to being unable to find a partner through standard methods of networking. In both cases, the "seller" of the good (whether that good was a car or the dater himself) revealed private information about the good's quality through the way he sold it.
I Am a Lemon
Fortunately, the stigma associated with online dating has largely disappeared over time. While it was initially perceived that only desperate people would use online dating, others began to realize that online dating sites provided a rich source of potential mates and many of the other advantages already discussed. A recent study by psychologists reached the conclusion that "online dating has entered the mainstream, and it is fast shedding any lingering social stigma." So I don't have to worry about adverse selection issues when I go online. Or do I?
While online dating sites may not have a stigma associated with them, I have another problem. I am single and I am in my late forties. What does that tell you? One interpretation is that I am the result of adverse selection because I couldn't sustain a marriage or couldn't even develop a long-term relationship in the first place. In this case, the private information is that I am incapable of a long-term relationship and, though I'd like to hide that fact, it is revealed by my presence on the dating market.
Two things mitigate this particular form of adverse selection. First, there may be perfectly good reasons that a man or woman my age has not had a lifetime relationship, though we are capable of it. Essentially, just as the stigma of online dating has eroded over time, so has the stigma of divorce and delayed marriage. People largely understand that choices made early in life may not be optimal and that we change over time. Second, to the extent that being older and available is an indication of something negative, it is a trait I share with the women I date.
Unfortunately, a much more problematic adverse selection dynamic occurs in the job market. In that case, an unemployed person may have trouble finding a job because potential employers read a lot into the fact that the person is unemployed. Many job listings explicitly state that people who have been out of work for a while should not apply (or at least that currently employed people are preferred). One recruiter told the New York Times that his clients are "looking for someone who's gainfully employed, who's closer to the action." A woman who had been out of work for six months said, "I feel like I am being shunned by our entire society"; one recruiter told the woman that her spell of unemployment made her a "hard sell," despite her impressive skills.
Numerous economic studies have shown that job applicants have more trouble finding a new job as their spell of unemployment gets longer. This finding can be explained by reasons other than stigma, but the previous example (and many others like it) suggests that employers believe people who have trouble finding a job have trouble for a reason.
Reprinted by permission of Harvard Business Review Press. Excerpted from 'Everything
I Ever Needed to Know About Economics I Learned from Online Dating'. Copyright 2014 Paul Oyer. All rights reserved.
EVERYTHING I EVER NEEDED TO KNOW ABOUT ECONOMICS I LEARNED FROM ONLINE DATING
AUTHOR: Paul Oyer
PUBLISHER: Harvard Business Review Press
Price: Rs 995
| There is no such thing as a perfect partner or a perfect job: Paul Oyer |
| |
The book says for signalling to work, it has to be costly. That is, if one is really interested in something, one must incur cost to prove that. Does this theory work every time? Can there be exceptions?
Signaling is a great theory but it is difficult to make it work. We need some sort of institution to arise to help make it work. In the book, I discuss an online dating site where people could "signal" very effectively because they were only allowed two special invitations during a brief period. That example worked great but, if it had gone on longer, it might have broken down because users could have registered for multiple accounts to get more signals. This would have watered down the value of the signal.
The general principle is that an effective signal has to be something that only a "qualified" person can do at a reasonable cost. In many cases, unqualified people can fake it for a while.
I am hopeful, however, that institutions will build in job markets to help firms sift through the mountains of resumes that are now available on LinkedIn and similar sites to find the best applicants for the specific positions they are hoping to fill.
Can one find a perfect match by following the economic principles of signalling, thick markets and adverse selection?
You are, indeed, never going to find the perfect partner. So, just as you settle for a good job that doesn't have every challenge or perk you would like, and you settle for a nice house that doesn't have every feature you saw in a model home in a magazine, you should also realise that it is best to settle for a life partner who is wonderful even if that person has a few 'quirks,' you would ideally want to modify. The willingness to settle only for a perfect job can lead to unemployment. Similarly, holding out for the perfect mate leads to loneliness or "romantic unemployment".
The bigger the market, larger the number of choices. However, the concept of positive assortative mating makes one small prefer niche markets over large markets. Is there a contradiction between the two theories?
No, these two ideas go very well together. You may have very specific tastes. But still you should look for maximum possible options. For example, if you want a tennis player as a date, you should not choose only a niche 'tennis dating site'. Because there may be potential partners matching your criteria on other big sites who play tennis but don't want only a tennis player as a date. Thus, a niche tennis dating site is not a liquid market.
Therefore, whether looking for a job or a date, I advocate going to larger sites and then being very specific about the criteria that are important to you.
Paul Oyer
Fred H Merrill Professor of Economics, Stanford Graduate School of Business
Fred H Merrill Professor of Economics, Stanford Graduate School of Business