如夢？如花？Adverse Selection and Online Dating

如夢？如花？Adverse Selection and Online Dating

Many people (in HKUST) in the society nowadays find it difficult to find a girlfriend / boyfriend. As a result, many of them resort to online dating in order to complete their dream. Unfortunately, many people complain that the quality of their dating partner is much lower than their expectation. Worse still, some unscrupulous liars make use of the dating platform to scam people’s wealth. The reason behind is that adverse selection is inherent in these types of dating platforms.

What is Adverse Selection?

Adverse Selection is one the most crucial concepts in Economics. Professor George Akerlof introduced the concept of Adverse Selection in 1970. The story is that due to asymmetric information between buyers and sellers, buyers cannot distinguish the quality of the products. Therefore, buyers will pay for the average price of the high quality products and low quality products. Sellers of high quality products will leave the market if the average price is lower than their cost. As a result, only low quality products are left in the market. The low quality products (which is called lemons) repel the high quality products (which is called peaches).

Applications of Adverse Selection

Adverse Selection can be found in many cases. For example, in the insurance market, insurance companies cannot distinguish between high-risk insures and low-risk insures. Therefore, insurance companies will set the premium equals to their expected cost (probably with a mark-up). In this case, the low-risk insures will think the premium be too expensive and reject the offer. As a result, only high-risk insurers will buy the insurance.

Another example is in the car market. The buyers do not want whether the car is a peach or a lemon. Thus, buyers will place the average price between a peach and a lemon when they are offered a car. When this price is lower than the value of a peach seller, the peach seller will leave the market. Eventually, only lemons are left in the market.

Adverse Selection in Online Dating

The adverse selection problem is that many of the dating prospects are lemons. In other words, the quality of clients tends to be lower than expected. You thought that your prospect is如夢, but eventually you meet up with 如花.

This is an inherent problem due to asymmetric information. First, people are free to manipulate their information at the online platforms. In order to achieve their goals (to get a partner or to cheat money), the dating prospects would try to exaggerate their types, such as claiming that they are 1.8meters high, having several properties, making $50,000 per month, or even be able to swim to international waters easily by just using single hand and battling with sharks, and blocking hailstorm by single arm. Thus, quality is lower than expected.

Second, people participating in online dating are the lemons in real life. If they are not the lemons, they are able to find their partner in traditional way and do not need to rely on online platforms. Therefore, only the losers and scammers would like to join the online dating platforms.

How can the Adverse Selection be mitigated? You might try to think about it and leave the comments.