The Economics Of Cheating : Planet Money On today's Planet Money, the cost-benefit analysis of slipping out on your marriage.

The Economics Of Cheating

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MARK SANFORD: It's about incredibly deep conflicts between one's heart and one's value system. And I've had an 8 1/2-year wrestling match on that front.

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CHANA JOFFE-WALT, HOST:

Hey, it's NPR's PLANET MONEY. I am Chana Joffe-Walt in New York City and so happy to have her back - she's sitting right across from me, tan - Laura Conaway.

LAURA CONAWAY, HOST:

Hey, Chana. It's nice to be back. Today is Wednesday, July 1. That was South Carolina Governor Mark Sanford you heard at the top. We've got our own version of that wrestling match on the podcast today. We are talking love, sex, scandal.

JOFFE-WALT: And economics.

CONAWAY: Man, it is always with the economics. OK. First, our PLANET MONEY indicator is 18.9%.

JOFFE-WALT: That's the drop in a major index of mortgage applications last week. This number comes from the Mortgage Bankers Association.

CONAWAY: Yeah. Mortgage applications are down by half from April. And it's not just applications for first-time mortgages that are pulling the overall figures down.

JOFFE-WALT: Yes, the Mortgage Bankers Association also tracks refinancing. And despite President Obama's efforts with his Making Home Affordable plan to encourage people to refinance mortgages, refi applications have fallen to their lowest level since November 2008. They are sliding, Laura, not rising.

CONAWAY: That's right. They're not rising. Our intern, Matthew Katz, made a chart of this stuff on our blog. It's npr.org/money. And we're going to hear a little more on this at the end of today's podcast. But right now, Chana, let's go ahead and get - let's get to the sizzle. I think that's a great way to go.

JOFFE-WALT: Let's do.

CONAWAY: Last month, Governor Mark Sanford in South Carolina made a decision.

JOFFE-WALT: Yes. And here was the decision - do I stay in South Carolina, at home, in the job?

CONAWAY: Or do I secretly fly to Argentina to see my mistress?

JOFFE-WALT: So it's a choice. We now all know which option Sanford chose. He disappeared for a week. No one knew where he was. It turns out he did indeed choose the Argentina mistress option. And now, we can all make our judgments from where we sit - you know, they're personal judgments. We can say that's so unethical. How could he? Or we can say it's not a big deal.

CONAWAY: Right. So Sanford can sit there as the accused husband and the governor, and he can frame it as values versus heart. But economists don't like to talk about values - at least not moral values - in that way, and heart - your feelings in your heart. They like data, and they like rational metrics for decision-making.

JOFFE-WALT: Yes, they like economic models that explain choices. So Tim Harford - he is an economist, and he prefers economics to explain things in the world. And this whole Sanford thing has him thinking about a 30-year-old paper.

TIM HARFORD: This is Ray Fair's piece - an economic theory of extramarital affairs. It's a funny old piece. And what Ray Fair does is model the rational decision to have an affair or not to have an affair. And what he focuses on is the amount of time it takes to have an affair. And when I first read this research, I thought, well, that's a bit strange. I mean, there are all kinds of costs and benefits of having an affair, but, you know, the fact that it takes up time - I mean, you might as well apply the same theory to taking up golf. I mean, golf takes up time, right? So, you know, should I take up golf? Should I have an affair? Am I too busy?

But now I come to think about it - he has a point. I imagine affairs which really are - I can't speak from experience, thankfully - but affairs must take up an awful lot of time. And the decision to have an affair must be - this must be one of the things that weighs on your mind a lot. It's awfully time-consuming. And if you're a busy person, like, I don't know, the governor of South Carolina, for instance, it's going to be very difficult to clear your schedule and make time for some quality, you know, affair.

CONAWAY: (Laughter) All right. I can't speak from experience either, but the thing that is always so weird to me and frustrating to me about economics when it comes to regular, day-to-day things like this is that economics seems to tune out ordinary human traits and, really, in a way, ordinary life. Like, in this paper, the model assumes the faithful spouse won't find out about the cheating. And Chana, wouldn't you think worrying about that would be a major cost for someone like Governor Sanford - just worrying about getting caught?

JOFFE-WALT: Right, right. But this model says, forget that. We're just going to assume with our model that that is not a possibility. And then there will be other economists who will, you know, prefer to put it into the model. And - but they'll, you know, model it as the likelihood of discovery. So assume probability of discovery at X, where X is greater than zero and less than one. And then they'll - you know, that may vary depending on investment in other things, say, private detectives.

CONAWAY: And when you're talking about something that - I once read it described in an Anne Carson poem as lights on all night, lights still on in the morning and taxis back and forth and wine glasses flying. I mean, you're talking about being discovered in an infidelity, and you want to talk about X and Y. That kind of economic speak really comes across as very reductionist. But Harford says economics can be really useful in understanding all sorts of things.

HARFORD: The way economists tend to think about any problem - any choice - is you have preferences. You can't satisfy all the preferences all at once 'cause you've got a budget constraint, you've got a time constraint. And so given all your different preferences - given all the options you've got - you maximize your happiness. You choose, rationally, the best option for you. And that is the way that economists have always thought about, say, how many hours should I work? Should I work part-time or full-time? What should I buy? What should I spend my money on? How - what do I allocate to saving for the future or to spending now?

JOFFE-WALT: And one of the things that's interesting about reading - like, reading Fair's paper is that you're talking about this very personal relationship that lots of us talk about all the time. But you're using - you know, what are the goods supplied by your mistress? What are the goods supplied by your job? What are the goods supplied by your spouse? And then that's going to inform how you make a decision. What's...

HARFORD: You've kind of got these visions...

JOFFE-WALT: ...Your time...

HARFORD: ...Of these economists there with these Excel spreadsheets, right?

JOFFE-WALT: Right, right.

HARFORD: You know, what am I getting from my mistress - you know? - making a list. But really, economists don't believe that people consciously think in this way. It's much more an unconscious thing. So when an economist says, you know, what goods does your mistress supply? You know, she's not talking - they're not talking about, you know, whether, you know, she does the washing up or whether she's - they're not talking about specific things. It's much more of an economist shorthand for saying basically, well, you know, how much do you like being with your mistress versus how much do you like being with your wife? How much do you like being with your husband? Somewhere deep down, we are making these rational decisions about what to do.

CONAWAY: Wow. This is the tape that just keeps on giving, Chana. It's - they're...

JOFFE-WALT: (Laughter).

CONAWAY: ...Definitely not talking about what kind of washing up the mistress is doing. There's no question.

JOFFE-WALT: (Laughter).

CONAWAY: With regard to this business about whether it's all rational or how much of our behavior is rational, that seems to me pretty much an open debate.

JOFFE-WALT: Sure. I mean, lots of very rational people would say that, when it comes to sex and sexual attraction, we are very irrational beings. But Harvard would say, still, economics has something to offer in framing decisions like, you know, whether or not to get married or divorced or have an affair or take up smoking - decisions that seem emotional - that economics still has something to say about them.

CONAWAY: Like actual advice.

JOFFE-WALT: Yeah. So Harvard has an advice column. It's called "Dear Economists." It runs in the Financial Times. And he has this, like, funny persona. He's this nutty guy who only reads economics papers, and that is how he answers all very personal, intimate questions. So here is one.

(Reading) Dear Economist, I have just joined a dating website in the hope of finding true love. Friends of mine have started dating someone they met online, only for a better offer to arise on the website. If this happens, what should I do? Duncan in London.

So what should Duncan do?

HARFORD: When I got Duncan's letter, I immediately thought not of economic research into marriage and divorce and affairs, but economic research in industrial organization. How does a business deal with its suppliers? The economists who developed these ideas would never have imagined they'd be used in this context, but has a very detailed and deep literature studying, should you have a single relationship with a single supplier who is totally dependent on you, who'll invest in all the machinery and all the tools and everything you really need to make your business work, or should you be buying all your supplies off eBay and, you know, online auctions and have thousands and tens of thousands of suppliers competing against each other and just take the best bid at any one moment?

And, well, the answer is it depends. It depends what sort of thing you're buying. And many economists have found that, in many situations, the ideal number of suppliers is two. And the reason is that each of these suppliers has a real commitment to the relationship. They're willing to invest in the relationship to make it work, and, at the same time, if one of them doesn't work out, you can always favor the one that's working better. You can pitch them against each other. You can use them to compete with each other.

JOFFE-WALT: So that means that - you're saying that, if you're a business, and you have people supplying you some part that you use, maybe, to make your car. So you're Toyota. You're making cars. You have people who supply...

HARFORD: Catalytic converters, for instance.

JOFFE-WALT: ...Catalytic converters. And should I just - the question is, should I just get one supplier that's really good that supplies catalytic converters and is going to be loyal to me, or should I have more than one?

HARFORD: Yeah, and if you just have one, well, you know, what if they go off the boil? What if they start taking advantage of you? You got no outside options. Marriage can go stale - so can a supplier relationship. So of course, it depends whether Duncan is an attractive a proposition as Toyota is. I mean, if Duncan is really worth having, then he could keep both of these women interested and committed.

CONAWAY: So "Dear Economist" tells Duncan, if he finds someone he likes, he should go for it. But he shouldn't close the door to other possibilities. He should consider two so there's competition.

JOFFE-WALT: Right, but not more than two because, if he has a ton of them, then they'll all be insecure, and they'll be less, you know, loyal and willing to invest in the relationship. OK. You want to hear another one?

CONAWAY: Yeah. They're so great.

JOFFE-WALT: Here it goes.

(Reading) Dear Economist, I'm starting to suspect that my husband is having an affair. How can I find out? Yours sincerely, Mrs. F. in Oxford.

HARFORD: Yeah. She's got a problem, in that, often, when your partner is having an affair, people know. You know, quite a few people know. But no one really wants to be the person who's going to tell you. And we have this problem much more widely. In a business, for example, you've got the boss. He wants to know whether some new product is going to be delivered on time. Is it going to meet customer specifications? And people will tell him, yes, yes, yes, everything's fine. It's absolutely going to be fine. No one wants to be the person to go into the boss and say, you know what? This is going to be a complete disaster, you're going to be humiliated, and we're going to lose a lot - a ton of money.

What companies have started to do is set up something called information markets. And an information market - Google does this, for example. Hewlett-Packard also does it. There are others. So a Google information market - Google would say, well, do you think that we are going to get, you know, to 500 million subscribers to our Gmail service by the end of the third quarter? And if you think we are, well, you can make that bet. If you think we're not, you can make the other bet. And by looking at the number of people willing to make each bet on the information market, you start to get a sense of what people in the company really think. And they can bet anonymously. So you've got - the marketing team will bet. The technology guys might know, well, you know, actually, we haven't got the servers. The technology's not going to work. Everybody's got different private information. But the guys at the top of Google can look at the market, look at the odds, and say, well, this is what people in our company think, and nobody out there actually has to stick their head above the parapet and bring them the bad news.

I advised Mrs. F. that she should do exactly the same thing with her husband. She should issue a bond that would pay money if her husband was caught having an affair by a certain date, another bond that would pay money if her husband was not caught having an affair by a certain date. She should tell her friends, and she should just sell these things off on eBay. If people were pretty sure her husband was having an affair, maybe the person who her husband was having the affair with, well, they would have an incentive to try to bid for the bond that would pay money if her husband was caught. So by looking at the price of these two bonds, she gets a sense of whether there are people out there who think that her husband is betraying her.

CONAWAY: And we could make a chart about bond yield spreads, Chana.

JOFFE-WALT: And use it as our indicator.

CONAWAY: That's right. OK. Anyway, all right. If we're going to run it like that, I can think of a couple of things that I would like to bid on.

JOFFE-WALT: Are you trying to tell me that I should set up an information market to see if Lincoln is sleeping around?

CONAWAY: Let's not fill in too many details here.

JOFFE-WALT: You know, I'm getting tired of being the one with the love troubles. You read this last one.

CONAWAY: All right, I'll read it. Let's see. It goes like this - (reading) dear economist, my partner and I have well-defined boundaries to our relationship. They're already liberal, and we're now considering permitting liaisons with others. The benefits for my partner are enormous, as she is an attractive young woman interested in men and women alike. I, on the other hand, I'm an awkward wallflower of unremarkable appearance who has trouble attracting women - or at least I was until I met my partner. In the years we've been together, I've received a startling amount of unsolicited attention from women who would not have looked at me twice when I was single. Can economics explain why I'm unappealing as a singleton but hot property when with a stunning girlfriend? More importantly, will I still be hot property in a non-monogamous setup? Confused In Paradise.

What's he got to say about that, Chana?

HARFORD: So you take Confused In Paradise, and he's not a terribly attractive package. But of course, he could have hidden depths. So what people are doing is deducing that he has some of these, you know, attractive, hidden attributes from the fact that he has this tremendously attractive, sexually voracious girlfriend who, you know, everybody admires. Everyone is thinking to themselves, what does this girl see in him? And they don't know the answer, but they know it's got to be something. You know, herds run together for a reason. It's not irrational to buy the latest single because everyone else is buying it. It's not irrational to watch the latest movie because everyone's watching it. Presumably, they know something.

JOFFE-WALT: So he's become attractive because he has a hot girlfriend. People look at them together and they say, well, she's hot, so there must be something great about him.

HARFORD: Absolutely. Otherwise, why would she be exclusively committing to him? It's costing her so much if he's actually, you know, not rich, not interesting, not terribly good in bed, why is she interested? But here's what's difficult for him - his girlfriend has suggested moving to a more open relationship. Well, if they're in a more open relationship - and so people look and say, well, you know, this girl sometimes hangs around with this guy but she sees all these other people, both men and women. She doesn't actually seem to spend much time with him. Spending time with him doesn't seem to cost her anything since she can hang around with all these other people. Maybe she's worked out he's not that interesting, after all. So I advised Confused In Paradise that he was likely to get hurled out of paradise if he took her up on her offer because his attractiveness was exclusively dependent on the fact that they had that exclusive relationship with each other.

JOFFE-WALT: And she might benefit from having an open relationship, given that she's the hot girlfriend, but he wouldn't benefit as much.

HARFORD: Absolutely. And economics is usually about making sure you, rather than other people, benefit.

CONAWAY: OK. On that happy note, here's to hoping that all of your relationships, romantic and otherwise, are not all about making sure that you, rather than other people, benefit. For now, let's thank undercover economist Tim Harford for economic insights into our intimate lives. We'd love to hear what you think out there.

JOFFE-WALT: Yes. I'm guessing quite a few of you will have thoughts on this. We will post more of the undercover economist's advice, including how to use game theory to catch your cheating spouse. It'll be on our blog, npr.org/money.

CONAWAY: All right. A little more on house and home today. We've been talking on the blog about mortgages lately - a very tamer form of house and home. We're talking about 30-year mortgages and 15-year mortgages and refinanced mortgages and the big question being whether anyone ever really pays them off.

JOFFE-WALT: Yeah, a number of you wrote in to say, yes, absolutely, you've paid off your mortgages. Why wouldn't you? It's great to be debt free. But then we also got a couple different letters.

CONAWAY: Like the one we got from Eric and Tina Laube. They live outside Houston, Texas. A few years back, they bought a house with a 15-year mortgage.

JOFFE-WALT: And we don't want to get too far into their personal details here, but they came into enough money that they could pay off their mortgage. And Eric Laube says that for them, the choice was whether to invest the money in the stock market or their house.

ERIC LAUBE: We really agonized over it for a while but just decided that we were - even if we might make more money in the market or some other kind of investment, just the peace of mind of being debt free really won us over.

CONAWAY: So, Chana, this spring, Eric and Tina Laube talked to their bank, set up a wire transfer and paid off their mortgage.

JOFFE-WALT: But they didn't just get rid of their debt. Eric and Tina Laube also got rid of a good-sized tax break because the IRS lets you write off the interest you pay on your mortgage. For them, it amounted to about $5,000 a year.

CONAWAY: Which has the Laubes thinking of taking out another mortgage but not - he told me - on their original house.

LAUBE: We're actually looking at a vacation property in North Georgia because that seems a lot more fun.

CONAWAY: (Laughter).

LAUBE: It can be listed by the IRS as an income property, but then you can still use it for two weeks a year, and you can write off a trip out in terms of to do maintenance and repairs and things like that.

CONAWAY: Chana, I think it's interesting how government policy ends up influencing individual decisions 'cause here's a family that's about to invest money, and the tax law gives them a nudge, in this case, toward buying a second property. That's the choice they're looking at making.

JOFFE-WALT: Right. But they're such individual choices. It's your personal family's choice. And yet, there are these huge government programs that are, you know, trying to sort of manage the way that millions of people make those decisions. I have, you know, friends who would never have thought about buying a house before. But now that there's all these homes in foreclosure and there's a big tax break for first-time homebuyers, they are now seriously considering it.

CONAWAY: We can talk a lot more about this on the PLANET MONEY blog. That's it for the podcast today. We'll be back podcasting next week.

JOFFE-WALT: Yes, we are taking off the Fourth of July, but we will look forward to being back with you Monday, July 6. I am Chana Joffe-Walt.

CONAWAY: And I'm Laura Conaway. Thanks so much for listening.

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