Dating Markets and the Sub-Prime Crisis

I wrote in a previous post about various mate selection models. These are based upon the idea that, in the period before you develop an emotional attachment to someone, you will work out whether hooking up with them is optimal. If they look to be about as high-quality as you can manage, you will begin to become emotionally attached, otherwise let them go and continue the hunt.

This is fine and well, but leaves aside a possibility. What if the initial due diligence process returns the `all clear--engage emotions' report, but the underlying partner is of poor quality? They are junk bonds spliced, diced and packaged up to be AA-rated debt?

This is the situation our banks find themselves in today. They have wed themselves to large amounts of debt--holdings over houses which are plummeting in value--without the knowledge of their partner's hidden drug addiction, or shoe fetish.

Singles periodically find themselves in cycles of `crush and crash'. They meet a prospective partner, and after an initial attraction build up a large picture of how they imagine that partner to be. This is entirely rational; we find it difficult to manage incomplete pictures of people, even though these pictures may not be correct. On becoming emotionally attached, and spending some more time around the person, the picture is gradually painted over by reality. The reality could be much like the assumptions, or the girl could end up being a nutjob.

Whether or not the crush couples or crashes is dependent on how initial behaviour is altered by the perceived value of prospective partners. That is, if a man meets a lady, and perceives her to be of a certain quality, he may alter his behaviour in order to woo her. This is like the bank, which on acquiring what it thought was high-quality debt, accelerates its loan-writing, comfortable with the strength of its balance-sheet. If the lady meets the man's expectations, his altered behaviour is rewarded. However, if she fails to meet his expectations--the bank's purchased debt is junk--his efforts were emotionally damaging. The bank's balance sheet ceases to balance.

The policy response for both dating markets and mortgage markets is mandating better levels of transparency. Failing the government's giving all prospective partners comprehensive personality tests (which, funnily enough, a girl I dated once gave me, before ceasing to date me), those prospective partners must employ better due-diligence techniques. They must abstain from emotional attachment until they have thoroughly examined each other's books (or bookshelves, which I've always thought to be a good indicator), and decide upon purchase, or partnership, only when it looks like the books are in order.

I wonder if Moody's offers potential partner risk analysis?