“Theory is an antidote to introspection,” says Hal Varian, a New York Times columnist and professor of business, economics, and information management at the University of California at Berkeley, who co-wrote the book Information Rules.
Reflecting on personal experience has its place, but many of us make the same errors repeatedly before a detectible pattern emerges. Some of us never come to a full awareness of how we relate to other people, though our behavior can be clearly interpreted by observers. A useful predictor could spare considerable embarrassment and short-cut a lot of navel-gazing.
One aspect of economic theory, as Varian points out, is the application of cost-benefit analysis. An obvious predictor when making financial decisions, weighing costs and benefits is indicated in other contexts, as well. Our underlying rationale for forming alliances and then deciding to end them is not only relevant to business operations but to all types of personal interaction.
We typically rely on intuition to guide our relationship choices, or so we believe. Instinct also plays an undeniable part. Surprisingly, some of those instincts may involve economic theory, subconsciously applied. Sound distasteful? In spite of our blindness to it, we’re continually weighing the cost of maintaining each of our relationships and deciding whether its benefit to us makes it worthwhile.
Costs and benefits are dangerously difficult to describe when speaking of personal associations. We tend to downplay the awareness of how our connections to others alter our social status, earnings, self-esteem, and standing in religious and business communities. In fact, though we may not know it, we predict and then modify our assessment of the value of relationships all the time.
Artemio Ramirez, Jr., professor of communication at the Ohio State University, and Michael Sunnafrank, a member of the faculty at the University of Minnesota Duluth, studied the power of first impressions and concluded that snap judgments made in the first 10 minutes after people met were strong predictors of whether friendship developed. Their observations supported Predicted Outcome Value Theory, which was first published by Sunnafrank in 1986. Accordingly, we anticipate the potential for any new relationship and also weigh the costs. If our predictions prove accurate, then we continue to invest in the relationship.
Over time, our perspective of the value of any relationship in which we have a stake can change. One way of extricating ourselves when things go downhill is to escalate the costs, hoping the other person will walk away.
The glimmer of insight provided by economic theory might ensure neither party walks away mystified.