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Management education changes a person in more ways than one can imagine. That would be an understatement actually. One is completely metamorphosed. I am not sure about my colleagues, but I sure have. The following exploration into the factors that make relationships work, is just one such exhibit of how my thinking and outlook has changed, rather, metamorphosed.

RELATIONSHIPS

Let me first begin by defining the scope of relationships. We will not be concerning ourselves with working or professional relationships which have been very well explained through various game theoretic models. We will worry ourselves here with relationships between a male and a female, the statistically dominant case. However, it is equally applicable to other cases. So what makes relationships work? I have an explanation.

DEFINING POSITIVE NPV OF A RELATIONSHIP OR ATTRACTION

The idea here is simple: for any two persons to be engaged in a relationship and continue to do so, they individually need to derive (or perceive, in the least) a positive net present value by being in the relationship (be attracted to each other, in simple words). Chapter 11 from a certain dreaded text from Term 2 tells us that positive NPV comes from economic rents. What are these economic rents?

My contention is that the NPV for any individual in a relationship can be formulated into three Mutually Exclusive Collectively Exhaustive parts.

NPV = Information Rent + Feelings Rent + Etc Rent1

Let us look as all 3 components individually.

INFORMATION RENT

This arises because of information asymmetry between the two individuals. Person A lacks some information about person B and vice versa. Person A places a higher value on the information that is disagreeable to him/her – because of clash with belief and value systems – to him/her and is missing in person B. This information asymmetry results in the information rent for person B. As an outsider, person A resultantly values person B highly.2 So, this valuation is basically the information rent which leads to positive NPV, causing attraction. Any attraction caused because of these factors is what we refer to as infatuation. It’s good at the start but it never lasts. With the passage of time, new information will come into light. It is highly likely that some of it, one just can’t get oneself to agree with. That is when the information rent decreases bringing down the NPV or net attraction.

It is a common belief that new information that any individual in a relationship acquires which s/he agrees with would increase the magnitude of feeling. The universal reference, Google, returned no previous studies which could prove or disprove this hypothesis. A primary research can be undertaken to establish empirically once and for all the truth of the statement. One may not have to travel far, as there are sufficient data points available on campus for the study.

Where data is unavailable (as in most situations it is), we must exercise judgment. In my judgment, agreeable information does not have any effect on the information rent or even the feeling rent to be discussed later. It is basically the myth of positive information. If a person A was faced with identical twins B and B’, will the attraction be same in either case for person A. It won’t be. Agreeable information has no effect. It is disagreeable information we are concerned with.

FEELING RENT

Let me begin here with separating emotion from feelings. We know that there are ten emotions.3 The idea is emotions are triggered by some chemical reactions happening in the body. Feelings on the other hand are more difficult – nearly impossible – to explain. For the purpose of this discussion, we will concern ourselves with only one type of feeling – love. Hate is nothing but negative love or inverse of love.

What affects love is difficult to understand and so also it is to estimate its magnitude. So, in this case we will consider that either love exists, does not exist or inverse of love exists. Agreeable information as explained above is most definitely not one of the factors that affect the feeling rent.

Feeling Rent is determined (in magnitude and direction) once in any relationship, after which it is invariant. So, if you feel love for someone then that you will continue to do so forever. However, whether the feeling rent will be high enough to cover the other two components is what will determine if the relationship will survive.

ETC RENT

Etc Rent as the name suggests includes rent due to several other considerations, primarily social. We will restrict ourselves to rent arising due to social imperatives here. These social imperatives could arise in situations like:
  1. All my friends have boyfriend/girlfriend. How can I not have one? Classic herd mentality
  2. I need to have a date for social events: show-off case!
A classic situation in Indian context where this Etc Rent is higher is the social stigma of not getting married early in life. Of course, the form of relationship also gets determined in this case.

In yet other cases, Etc Rent could be higher simply because of search costs involved in breaking an existing relationship and getting into a new relationship: a case of pure laziness.

SOME APPLICATIONS

When you felt attracted to that particular girl/boy you saw, say during orientation, it was basically because of the high information rent. There could have been a feeling rent, but it is highly unlikely. And when you lost that attraction eventually, it was because the information rent got reduced. And attraction was lost and so was any chance at a relationship.

Romeo and Juliet, Heer and Ranjha or Laila and Majnu - eternal love stories! I beg to differ. High information rent was the reason for their attraction. Since, they were never together, as in a marriage, this information rent never reduced and so did their attraction. Eventually, an abrupt termination of the relationship never allowed them the opportunity to gather the requisite information. The villains in the story should have just allowed them to be together. Time and reduced information asymmetry would have taken care of separating them. Feeling rent might have been there, but given the facts, it is highly likely that information rent drove the attraction more than anything else.

The reason why girls or boys groom themselves is to consciously increase the information asymmetry – hiding one’s true self, increasing information asymmetry and thus the information rent. The feeling rent is almost always nil.

In cases, where feeling rent is positive, as in the movie Notting Hill, when after knowing a lot about each other that one does not agree with (information rent going down), the two still are attracted to each other. I spent a lot of time looking for real life examples, but I guess relationships were love is present, exist only in movies.

We can also explain the relatively low rate of divorce in India. The social stigma associated with divorce increases the Etc Rent, making relationships attractive even when information rent has turned negative. The feeling rent was always zero, in any case. But Etc Rent could be so high that attraction still exists.

The theory also offers insights into extra-marital affairs. The information rent goes down over the period of time in any relationship, and so it does even in marriage. The feeling rent was always absent. Etc Rent though positive is not enough to sustain NPV levels comparable to the other opportunities where the NPV could be substantially higher. Consequently, individuals engage in relationships beyond marriage.

There are several other cases that the theory can explain. But, I would limit myself here and allow the readers to examine their own relationships in the light of it.

1 I would like to thank a certain F-Topper here, for he was instrumental in completing the theory by bringing to my attention the Etc Rent component
2 The Fin Studs would argue that person A should actually discount this information asymmetry. But it needs to be understood that this discount rate will be same. The risk involved due to information asymmetry would be same across all candidates. If not identical, it will definitely not be hugely different. As such, what will matter will be the magnitude of the Information Rent more than the discounting effect. Although, with new information the discount rate will go down, the reduction in Information Rent will be, more often than not, such that the NPV will continue to decrease.
3 Reference: Unmaad 2008 Posters

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Sachi said... @ April 18, 2008

Nice one AP...
A bit of graphs to explain the behavior of the 3 vars would help qckr understanding of the concept...

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