Monday, December 27, 2010

Remember the Rational Model

Say there's a two-sided matching game, where you trade a good with another; not trading generates no utility, so you want to get the highest possible value. All goods, including yours, are of uncertain value, and you have a noisy, unbiased estimate of all the values, as do others. Some have less noise around their estimations than others, though you do not know who. So, when someone shows up, and really really wants to trade their good for yours good, are you excited? No. They probably they have value well beneath yours. What is most interesting is if the person is marginally interested in trading with you, because that means they might be right in the sweet spot: not so low you could do obviously better, but high enough to be practically optimal given search costs.

This is exactly what they find in dating markets, surprising no one. People are attracted more to those who are kind of interested, as opposed to really interested. This is consistent with the simple, rational bayesian model that is perfunctory for economists. It is almost more common than not that a popular book on economics caricatures this model as insanely unrealistic. We should remember that this model actually explains a lot, and when it fails often points out we are missing something in people's information sets, as opposed to something in their neurology. When a company announces positive news, the stock generally rises, when Treasuries fall, its usually because people are forecasting lower inflation or lower future real rates. These are uninteresting 'dog bites man' stories because they are so common and make sense using the standard rational model.

6 comments:

Tal said...

Aren't you misreading the study? Women were more attracted to men who were liked them a lot, vs. liked them an average amount. There is no analogy there to the first situation you proposed, since the less someone else wants to trade with you the more you should want to trade with them, without limit. If they're actually crying and gnashing their teeth at the prospect of trading with you, you should REALLY want to trade with them.

Eric Falkenstein said...

Say average values are around 5, with stdev of 1. They really want to trade when they have values of, say, 3, and you're a 7. This is a bad trade for you, you can do better.

Robert Johnson said...

I think Tal (sort of) has a point here. There is, potentially, more than one objective while dating. Someone who believes that you are a great catch may be less than the best you can get, but they will be constantly grateful to have you and that kind of leverage is valuable in a long term relationship. Also, some of us like to be adored.

J said...

Number one nargaining rule in any Middle East shouk: Never show you want to sell or to buy anything.

Frater Taciturnus said...

Enjoy your blog and sympathize with your ideas. I would kindly suggest that you read some Rene Girard. You may find his hypothesis regarding the mimetic mechanism of human behavior and social structure helpful to your arguments. Kevin.

In Passing said...

I believe you misread the abstract: "Participants were more attracted to men who liked them a lot than to men who liked them an average amount." Which is consistent with the belief that women desire security in their relationships. The women most desired the men whose level of desire was uncertain.

You might be interested in this study on speed dating, where decisions are made quickly, and the low latency between dates allows for efficient sorting. http://ssrn.com/abstract=954165