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Monday, September 16, 2019

Villanueva: Risk & relationships

TWO weeks ago, I wrote about the Economics of Broken Hearts and I thought that it was again one for the archives, much like any other economic paper. Since Economics is highly theoretical in nature and seems high falutin for some people, papers done in this field are often ignored, or if read, either only the first few lines are read because admittedly the title sparked interest, then eventually people would become less interested, or even if the whole thing was read, there is lack of understanding.

It was when I posted the link of the column on my Facebook account recently, as published in www.sunstar.com.ph/bacolod and the piece earned several feedback.

Some were confused. They got lost in the jargons, even if I already simplified them. I purposely defined some terms that can be understood by a layman.

Some were amused that a topic which is the subject of ordinary conversations and drama would actually have connections with Economics and could be understood and analyzed using economic theory.

A friend sent me a message congratulating me for a good piece and that he enjoyed reading it. He then asked me if I will be ever able to write about risk, for which I replied that risk is one factor that is considered in most economic decisions.

One example of decisions where risk is a factor is on production resulting to the optimization of profit. Another example is on investment decisions. In making these decisions, especially on financial investments, the risk of non-payback should be recognized and thus, measured in order to mitigate its effects.

He was not really asking about those risks, but the risks involved in falling in love and entering and being in relationships. I kind of hesitated to answer his query given that I have personal knowledge of his relationship with his beau.

He may have sensed my hesitation so he just dismissed the idea that I cannot write about it. So, challenge accepted.

Romantic relationships are mostly formed by two parties who are in love, ideally, making individual choices to enter a relationship and commit to a lasting loving partnership. Again, choice is the operative word, and for each choice, there are costs, which includes the risks and benefits that go with it.

It is easy to identify the benefits that one may derive from being in a relationship.

One is, of course, happiness or satisfaction or in economic terms, utility. Utility occurs when one consumes a certain bundle/set of goods or services. This utility stems from the market. The consumers and producers will have surpluses, which are the extra happiness they get when they buy or sell a good or service at a price lower or higher than they are willing to buy or sell their goods and services for. At equilibrium, both the producers and consumers have equal or same area of surplus.

In relationships, the mere agreement of the two parties denote equilibrium. Therefore, at that point both parties have equal happiness. As the relationship becomes deeper and longer, one party would be benefitting more from the transaction, thus the surplus of that party would become bigger, while the surplus of the other would get smaller.

When this happens, a dead-weight loss would arise. This loss is negligible at first, but as time goes by, this loss becomes more felt by both parties and would eventually destroy the relationship.

Therefore, it is always best to keep the relationship at equilibrium, a point where both parties’ happiness are equal.

Costs are those that one is willing to give up for a transaction, in order to derive benefit in the future. In production, costs are incurred in procuring raw materials, processing them and selling them, in order to derive revenues after.

In relationships, there a lot of costs that one needs to give up for the relationship to work: individuality, "me-time," money, sleep, pride, ego, sometimes values, and many more. The threshold of one to absorb all these costs determine the stability of the relationship.

Finally, risk. After considering all the benefits and costs of relationships, identifying them and analyzing them in order for the relationship to work, there is the element of risk.

With all the sophisticated tools and softwares that can be used to identify risk, somehow, risk cannot be predicted with certainty, but what can be done is to be wary of red flags that signal the possibility of the risk happening, and to reduce the possible impact of the risk.

Same is true for relationships. The two parties should be vigilant to keep the relationship working. There will always be risk in any relationship, however, the two should be made aware if and when risk may come up, so it won’t go unnoticed.

Knowing how to address the risk is also important. Mutually acceptable plan of action that need to be set so that if the risk comes up, this plan is put into action, steps in order to secure the relationship.

When all things fail, then that’s the time the relationship ends. The next step now is to reduce the impact (specifically, the pain) of a failed relationship.

One thing is for sure, after experiencing the impact of the results of a risk, surely, one may have learned a lesson or two, which he/she will bring once he/she again make a choice to enter another relationship again.
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