Bryan Caplan  

Stocks, Flows, and Friendship

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Tyler Cowen and Alex Tabarrok... A Paragraph to Ponder...
When a good friend hurts your feelings, what do you do?  I normally chalk it up to miscommunication, and silently forgive them in my heart.  But I seem to be in a minority here.  I often see friends grow apart over the tiniest of slights: A says the wrong thing to B, B tries to get back at A somehow, A wonders what B's problem is... and a trivial incident spirals out of control.

As far as I can tell, the underlying critical difference between me and people who lose their friends is that I judge people as stocks, while they judge them as flows.  When a friend hurts my feelings, it's almost always trivial compared to all the joy they've brought me.  So why would I get upset at someone who, as a package, is still a great deal?  In contrast, many other people focus on flows; their friends are just one faux pas away from getting purged. 

On the surface, admittedly, the flow approach has a lot going for it.  Won't people treat you better if you charge a high price for bad treatment?  And if a friend knows that he's got a huge emotional bank account with you, isn't that an invitation to abuse?

On reflection, though, I think that the stock approach to friendship is vastly better than the flow approach. 

The first and biggest reason: Misunderstandings between friends are much more common than betrayal.  The flow approach raises the price of betrayal, but it tends to amplify misunderstandings.  The stock approach, in contrast, extinguishes the fires of misunderstanding before they can spread.

The second reason and smaller reason: The stock approach gives better incentives for building long-term relationships.  If your friend takes a flow approach, you can do him a long series of favors, and still get purged overnight.  So what's the point of amassing goodwill when you can suddenly lose it all?  In contrast, if your friend takes a stock approach, you don't have to worry about being "expropriated," because your friend won't forget all that you've done for him.

Admittedly, I'm heavily relying on my own first-hand experience here.  But my experience is pretty extreme: I've never been betrayed by a friend, or lost a friend who was dear to me.  You can call it luck; but I think I've made my own luck.

Of course, if I've in any way offended you with this post, the fault is mine. :-)


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COMMENTS (12 to date)
Kit writes:

Or do your friends say behind your back, "Will he ever get the hint?"

Blackadder writes:

I was angry with my friend:
I told my wrath, my wrath did end.
I was angry with my foe:
I told it not, my wrath did grow.

-William Blake, A Poisoned Tree.

Don writes:

Bryan, whatever I said yesterday -- I'm sorry.

Philo writes:

Obviously people are akin to stocks--to sources of a flow (of what we might call "stimuli" or "value" or something). But why do those you criticize make the hasty assumption that a bad flow in the latest time-period will be followed by bad flows in subsequent time-periods, when the flows in prior periods must have been good (else the other person would not be a "friend")? Whatever the targets of your criticism are doing, it must be wrong to treat it as a simple stock/flow confusion.

blink writes:

Bryan, I agree that misunderstandings are more common than betrayal, and I agree that we are often too quick to cut others off. But doesn’t this suggest discounting perceived hurts – and perhaps very highly – rather than viewing the relationship as a stock?

Consider: My friend saves my life, so the “stock” is extremely positive. Then my friend intentionally (not an accident or misunderstanding) slices off my hand. The stock analysis suggests the friendship is still positive, so I should shrug it off and remain friends. I say no; I would prefer there to be some threshold of badness (appropriately discounted to account for most misunderstandings) beyond which the friendship is over. You might try to limit your stock/flow distinction to emotional harm, but I don’t think such a distinction can stand.

Also a question: Do you treat all people as “stocks” or is there some trial period/initiation to “friend” status before you treat a person this way?

Fabio Rojas writes:

As Bryan's friend, it's an honor to know that my stock (symbol=F Ro) is doing well and that he finds no reason to sell his shares.

On a more serious note, psychologists who study marriage find that it can be modeled as a running account. Positive interactions create a reservoir of good feeling, and that can be eroded by negative interactions. When the running count gets too negative, people get divorced.

The interesting thing is that there are multiple paths to non-breakup. One way is simply not to be negative. Another is to have "make up" interactions - you immediately be positive to make up for the negatives.

And "Blink": According this model, chopping off one's hand would definitely create negatives feelings that would terminate the relationship. I suppose dismemberment and murder are different, but your friends would see it as equally bad and hard to reverse.

Bob Murphy writes:

Somebody who actually knows what he is talking about, please correct me, but I remember reading that Buddha (?) viewed people as rivers. The river is actually not a thing that's sitting there, but rather it's different things flowing past you. So e.g. the person who wrongs you today was not "the same person" who went to your birthday party last month; you are seeing a flow of actions over time.

In the context of Bryan's post, it sounds as if Buddha would be telling you to blow off your friend, but obviously that wasn't what he was saying.

Come to think of it, I can't remember what the point was. But it was deep. Like a river.

Zac writes:

Bob Murphy: "e.g. the person who wrongs you today was not "the same person" who went to your birthday party last month; you are seeing a flow of actions over time."

There is actually something to this. The stock model fails because it makes sense to weigh recent actions more heavily than any single event in the past, since what a person is doing now is likely more indicative of future behavior than what that person was doing last year. Of course, a minor transgression should not nullify years of friendship and goodwill, so the "what have you done for me lately" attitude is also flawed.

So rather than thinking about stock vs flow, we should think of it in Bayesian terms. The hypothesis is that someone is truly your friend and worthy of continued friendship. Consistent friendly behavior raises the prior probability P(H). If your friend crosses you in a way that seems unfriendly, you've observed some new evidence. Some events would be so contrary to the definition of friendship (made you eat your parents?) that the calculation is easy-- P(E|H) = 0, but what about when its not so clear (something says something that rubs you the wrong way). In those cases, what are the chances that this could be a misunderstanding between friends (E|H)?

Overestimating P(E|H) is naive, underestimating it is neurotic. When Bryan says "Misunderstandings between friends are much more common than betrayal" he is claiming that P(E|H)/P(E) is usually high and underestimation is common. I think this is true, and wise, is just another way of saying "Never ascribe to malice that which can be adequately explained by incompetence" - or accident, as the case may be.

AB writes:

Stocks can go bankrupt.

Gene Callahan writes:

Or perhaps we really shouldn't treat our friends like investments at all?

caveat bettor writes:

Aren't stocks decomposed into expected future dividends? Or is this a struggle with sunk costs?

I am glad to see that you forgive easily, and am not surprised. How divine!

Carl The EconGuy writes:

The stock/flow concept sort of works, but you have to introduce uncertainty into it. It's more of a signaling game, actually. Every action you observe from someone reveals something about that person, but you have to interpret it through the noise for the signal is never (?) completely clear. When the signal to noise ratio is adequate, you add it to your stock of information, but you always discount it because of the noise -- which is not always white but could be systematic. So every new signal becomes another piece of information by which you evaluate every past action. Therefore, the stock, like any asset, is under constant reevaluation. Only consistency is truly valuable, in every friend as in every foe. Can someone who displays randomness ever be a true friend? No, because the stock of past accumulated signals are immediately devalued. Thus, if you want to be a friend, be a true one, and don't count on forgiveness. Keep the signal/noise ratio as high as you can in your own behavior, and never waiver. Don't trust anyone who deviates beyond your own tolerance. Reputation is everything, as we all know. A good name lost is lost forever -- that's the essence of this signaling game, I'm afraid.

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