The Economics of Relationships Part 2: ROI (Expectations)

In the first part of this series I talked about NPV of a person and how it changes with respect to each relation over time. In this attempt I would like to explore how the concept of Return on Investment (ROI) holds good for Relationships. I will reiterate here that relationships could be in any form; partners, family, friends etc.  Also, in an attempt to compare the concepts I may have exaggerated some things and you may not agree with me.

In business, the purpose of the "return on investment" (ROI) metric is to measure, per period, rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment. While making a decision to invest, the “expected” return on investment is taken into consideration. If the expected ROI is low compared to the Cost of Capital or the Internal Rate of Return (IRR), you may not invest. If the expected ROI is higher, you most probably will invest. So you can see that “expectations” play a big part here. And if these expectations are not met, you lose money and are disappointed. There may still be a chance to withdraw the investment and stop the loss. But that is not always possible.

Now drawing an analogy with relationships, to make any relationship work, we invest a lot of time and emotions and sometimes money too (although counting money when it comes to relationships is frowned upon, and for good reasons). Maybe subconsciously or sometimes consciously we try to gauge what return on this investment is possible. Just like the investment, the return is also intangible and so measuring it is difficult. But generally speaking, the ROI in this case is success or failure of a relationship.

So here you “expect” certain things to happen. You “expect” the person to behave in a certain way, do or say certain things, react in a certain way. You get into the relationship with a certain set of expectations (Returns). When you compare this expected ROI with the actual ROI, you are in for a pleasant surprise or a disappointment. Things are nice and sunny as long as these expectations are met. Some buffer for variance is generally assumed. But when the person starts to fall short of these expectations or some things totally out of expectations start happening in a relation, you feel the gloom or see storm clouds brewing. That’s when you say that the relationship is turning sour, or things aren't working out. It causes great mental anguish to you and you may start behaving irrationally or simply drift apart and go silent. You can pull on till the expected ROI drops down to match the IRR. If it drops further and goes below the IRR, we clearly enter the negative returns territory.

I forgot to mention that unlike business, these expectations are generally not documented or discussed. It is something in your mind. The person may guess some things because of your level of understanding with each other but some things remain unknown. And when these expectations are not met the problem occurs. If you look at the case of finding the correct life partner, consciously and subconsciously you do consider many things like emotional compatibility, intellect, physical attributes, financial stability and maybe potential for future cash flows (basically NPV). But depending upon the stage of the relationship and many external factors, it may not be possible for the person to meet all your expectations. Just as you would study the health of a company, fund or market and revise your goals and modify your portfolio, you need to think about what you are expecting in a relationship. Now, having no expectations seems to be a great solution; in that way whatever you get is a bonus. But being humans, this is not practical. So a good way to deal with it is to revisit your expectations from a relation from time to time and revise them, bring down the Cost of Capital/IRR and start viewing the relationship from a revised perspective. This can go on till expectations reach NIL. Beyond that we can only start dis-investing, withdraw from the relationship, emotionally, bit by bit, because you now know that the relationship is going sour. Many a times, it is not possible to back out from this investment you have made, due to the very nature of human relationships. Finding a way to make the investment work, to get the best possible returns is the only way ahead.

Mind you, in some cases the exit route exists and people do choose it because that’s the best option at the given time. That’s when you see broken friendships, divorced couples and estranged siblings or parents.  But it’s a painful route and losses are huge. The pain in withdrawing out of a relationship is like an exit load on a mutual fund investment. So I think the smart way is to manage your investment better. Make an attempt to see the side of the other person. Maybe it’s a temporary slack or maybe it’s something that has changed for life. Do not assume things and draw conclusions. Try to find facts and if the situation in your relation allows it, have a talk to set the expectations. But doing so will definitely spare a lot of mental anguish and a possible drift. Maybe you can also see your relationship actually making a U shaped recovery.

Investment in anything is a big commitment, especially long term investments. Simply investing and sitting on it without monitoring can be risky business. You need to be vigilant and make the right moves at the right time to get your “expected returns”. Analogies can be fun. It gives a whole new perspective to look at things. Economic theories assume a rational human. But comparing the success or failure of a relation with economic concepts fails where human irrationality comes into picture. If we could think of every relation in economic rationality, building your relationships portfolio would be a whole new game.