Friday, September 25, 2009

Economics of Engagement Rings

The Freakonomics Blog recently gave its readers a chance to ask author, blogger, and economist Tim Harford questions. His answers are all worth reading, but here's my favorite:
Q. It doesn’t seem rational for a young man to give his girlfriend an expensive engagement ring when he proposes. My thought is that the most efficient use of that dollar is to invest it into something that a young couple would value most e.g. a down payment on a first house, etc. The diamond market is a monopoly and diamond prices are manipulated so that prices are always high. Can you construct a concise and logical argument that young men across the world can use to not buy diamond rings? After all, you already are offering the most valuable thing that you have (your heart) to your soon-to-be bride.

A. You have a point. Engagement rings took off in the U.S. when the courts refused to hear “breach of promise” lawsuits. These suits were brought by women who had slept with their fianc├ęs and then been abandoned. These women were then less attractive marriage prospects for anyone else.

Naturally, such lawsuits were sensational fun for the newspapers, and eventually the courts put a stop to the whole thing. The problem then became: how could a young affianced couple have sex with each other when she had no recourse to the law if he changed his mind? Both of them might well want to, but for the lady the risks were pretty high. And so the institution of the engagement ring came about. Such rings are non-returnable, meaning that if the man breaks off the engagement he doesn’t get the ring back. The system discourages him from running off and provides automatic compensation if he does. Very clever.

Given all this history, I tend to agree with you. Tell your girlfriend that you doubt she is a virgin and don’t care much either way, and you will thus be spending the engagement ring money on something more useful. Be sure to let me know how it works out for you.

9 comments:

  1. Ah, the jackass leading the jackass.

    Little known fact: wedding rings for men didn't become a common practice in WWII, as a means for soldiers overseas to signal they were married.

    ReplyDelete
  2. Wait, which jackass am I? I've tried to do some extra searching online, but every source says something different. Where did you hear about your version?

    ReplyDelete
  3. Haha no no, you're not a jackass. I'm sorry, I should have been more clear. Both the guy asking and the guy answering in this post are looking at the romance of tradition and custom completely objectively, which is just silly. They need to stop being jackasses and buy their fiances engagement rings.

    Don't know where I originally heard that, but there seems to be a lot of people who believe it: http://is.gd/3GTQN
    Of course, I guess it could still be a folktale.

    ReplyDelete
  4. What you'd need in order to know who is right is the average engagement ring cost in the early 1900's and today.

    I know people say "two months salary," but was that always the case?

    If Tim Hartford is right, the engagement ring has serves less as a contract device, thus, the average wedding ring price should be falling over time, signifying that men have bought cheaper signals and indeed do spend the extra money on downpayments and other important items.

    In the end, I'd say you buy a engagement ring such that her value of an additional dollar spent on the ring is equal to her value of that dollar spent elsewhere.

    Or in other words, you buy her a ring of the size and quality she would have bought for herself.

    ReplyDelete
  5. Dude you guys. I'm told, though I've never encountered it myself, there's such a thing as over-thinking things.

    ReplyDelete
  6. Well said Bryan.

    And Justin, you might be right. How would we know if we were over-thinking them? Could economics help us evaluate that? Ha ha, just kidding.

    ReplyDelete
  7. Screw engagement rings. I mean really... I'm a poor grad student. How does it prove anything if I drop two thousand dollars on a ring that she'll probably lose on the honeymoon?

    ReplyDelete
  8. Trust me Kevin, 99% of girls will care. If you find that other 1%, let me know. I don't think they actually exist. It doesn't have to be super fancy, but it should be somewhat of a sacrifice to you. That's the point, in my opinion.

    ReplyDelete
  9. I understand the sacrifice, sure. But when what's *my* money will soon be *our* money, shouldn't my fiancee want me to spend it on something more useful, and arguably, more wise, like a down payment on a house, or a college fund for the eventual baby?

    Maybe I'm just too utilitarian to understand women...

    ReplyDelete

You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.