So it has come to this… Two days to go and you are worried about your Valentine’s Day plans. You’re not quite certain what you need to plan, and how seriously you need to treat this day. After all, it is not a holiday, and you might have only been out with your partner on x number of dates (where x ∈ R). Should you do anything? How much should you spend (in terms of time, effort, money, or any combination thereof)?
Well fear not young lover, Behavioural Economics has an answer (well, kind of). First, however, we need to clarify a few things:
- While it might be obvious, we should state right up front that time and effort are costly (as is money, but that is a given). This is an important consideration for optimality, as spending too much can yield an inefficient outcome.
- Money (and also time/effort) yield diminishing returns to happiness (Veenhoven, 1991; Frey and Stutzer, 2002; Inglehart, 2000; Garhammer, 2002; Clingingsmith, 2015; though it is a contention issue, see: Easterlin, 2005). In particular, Kahneman and Deaton (2010) show that emotional well being rises steadily with income, but has diminishing returns (i.e. no additional increase beyond a certain level of income).
Figure 1 from Kahneman and Deaton (2010) shows that (for a sample of US residents), emotional wellbeing stabilizes after an annual income of approximately 75,000 USD per annum (approximately 58K GBP per annum)
- Happiness (or subjective wellbeing) is subject to “reference-dependent preferences” (Koszegi and Rabin; 2006; Kahneman and Tversky, 1979), that is, we evaluate outcomes relative to a reference point.
The figure above is a stylized representation of how we evaluate outcomes, where point A is the reference point. Note diminishing marginal returns in the gains domain (above the reference point).
- The reference point alluded to in the earlier point is typically based on beliefs or expectations (Rutledge et al. 2014).
Taken together, these findings paint a rather simple picture of human interaction. The key point is this: in order to make someone happy, you need to exceed his or her expectations. Exceeding expectations by a small amount can generate a large increase in happiness (in line with the figure above). However, as there are diminishing returns, exceeding expectations by a large amount can be inefficient (marginal returns can be low, but costs can be high). Hence, it seems the optimal route to everlasting love is to exceed expectations, but by only a small amount.
How would one go about establishing expectations without explicitly asking for expectations? Remember, explicitly asking for expectations would be rife with misreporting due to strategic considerations (and would somewhat ruin the surprise…). Well, we can calibrate this using other holidays that you might have experienced. One way is to identify the importance of Valentine’s Day amongst all other celebratory days in a relationship. Clearly, Valentine’s Day is likely to be less important than your partners’ birthday, so one can use that to establish an upper bound (no need to exceed the expenses incurred celebrating a birthday). The same would also be true of other days that represent an exchange of gifts (for example, Christmas). At the other end of the spectrum, Valentine’s Day would be expected to be more important than a standard date, so we can use that to establish a lower bound. The likely answer is to fall within this range.
The other strategy one could adopt is to credibly change the reference point for a partner. This could be achieved by intentionally lowering expectations, perhaps through a series of mediocre dates in advance of Valentine’s Day. However such a strategy needs longer term planning and is likely to backfire, particularly in the two days that are left in the lead up to valentine’s day! (Maybe something to consider for next year?). Changing expectations would mean changing the reference points that you may have established with your partner already (which is impossible to achieve retrospectively).
Overall, the key point is to recognize what your partners’ expectations are, and to exceed them by a small amount. That is the optimal strategy, and of course the most romantic!
Please enjoy the day responsibly and have fun. Happy Valentine’s Day everyone!
Further Reading (For when you need to exceed expectations)
Clingingsmith, David. “Negative emotions, income, and welfare: Causal estimates from the PSID.” Journal of Economic Behavior & Organization 130 (2016): 1-19.
Easterlin, Richard A. “Diminishing marginal utility of income? Caveat emptor.” Social Indicators Research 70.3 (2005): 243-255.
Easterlin, Richard A., Laura Angelescu McVey, Malgorzata Switek, Onnicha Sawangfa, and Jacqueline Smith Zweig. “The happiness–income paradox revisited.” Proceedings of the National Academy of Sciences (2010): 201015962.
Frey, Bruno S., and Alois Stutzer. “Happiness and Economics: How the Economy and Institutions Affect Well-Being.” Princeton, NJ (2002).
Garhammer, Manfred. “Pace of life and enjoyment of life.” Journal of Happiness Studies 3.3 (2002): 217-256.
Inglehart, Ronald. “Globalization and postmodern values.” Washington Quarterly 23.1 (2000): 215-228.
Kahneman, Daniel, & Amos Tversky. Prospect theory: An analysis of decision under risk. Econometrica, 47 (1979), 263-291.
Kahneman, Daniel, and Angus Deaton. “High income improves evaluation of life but not emotional well-being.” Proceedings of the national academy of sciences 107.38 (2010): 16489-16493.
Kőszegi, Botond, and Matthew Rabin. “A model of reference-dependent preferences.” The Quarterly Journal of Economics 121.4 (2006): 1133-1165.
Rutledge, Robb B., Nikolina Skandali, Peter Dayan, and Raymond J. Dolan. “A computational and neural model of momentary subjective well-being.” Proceedings of the National Academy of Sciences 111, no. 33 (2014): 12252-12257.
Veenhoven, Ruut. “Is happiness relative?” Social indicators research 24.1 (1991): 1-34.
UEA ECO Blog 
Leave a Reply