As an economist, one of the most common questions I get is inquiries on which stocks to buy. As I’ve explained before for FEE, economics doesn’t actually equip me to answer this question. However, economics has provided me with good rules to aid me in (believe it or not) parenting.
There’s a good chance that parents will hear or discover these rules on their own, but the underlying logic for why they are good rules is based on a sound understanding of economics.
So, after five years of parenting and three years of being a professor, I present to you the three rules of rational parenting.
Rule 1: Cave Never or Cave Forever
One common struggle of being a parent of young kids is the possibility of tantrums. Kids frequently throw tantrums publicly when they don’t get what they want, and your response to tantrums needs to be strategic.
Any time you encounter a situation where your best decision depends upon the actions of another person, we can think of that interaction as a game. Something being a game doesn’t imply there is a loser or a winner, it just means your best action is dependent on the action of someone else. These sorts of interactions are analyzed by economists with the tools of game theory.
So let’s think of what we’ll call the tantrum game. In the tantrum game, a child makes a decision whether to throw a tantrum; and the parents, in turn, are given the opportunity to respond.
We’re going to analyze the decisions of the child and parent using a diagram called a decision tree. At the end of each branch of the decision tree, we can see the final payoffs each person ends up with. The only important thing to understand with the payoffs is that bigger is better.
So say you’re at the store, and your son or daughter wants you to buy a toy. You refuse, and a tantrum ensues. Let’s look at your options.
Let me explain each result. If the child chooses not to throw a tantrum in the first place, the parent is very happy and receives a payout of 10. The child receives no toy and 0 payoff.
If the child does throw a tantrum, the parent is left with two options. Cave in and buy the toy or hold strong and do not buy the toy.
If parents cave in, they are unhappy with the tantrum starting, but they stave off the embarrassment and headache of an extreme tantrum. Preventing the full tantrum is precisely why many parents do cave in situations like this. The child is happy and receives a payoff of 10, and the parent has a bad payoff of -2.
Alternatively, parents could hold strong and not buy the toy. The downside to this (at least immediately) is large. The tantrum continues for longer. This leads to an unhappy child with a -1 payoff and a parent who has a big headache and a -5 payoff.
It appears that the best option in the case of a tantrum is to simply buy the toy to make life easy, but this is a deceptive result. If children only threw one tantrum in their lives, this might be the best answer. In fact, this same logic is why grandparents are notorious for spoiling kids and saying yes. If you spend time with a child in limited amounts, why let that time be destroyed by the tantrum?
The problem for parents is this is not a one-shot game. It’s what economists call a repeated game. In other words, if you cave and buy a toy, the next time you go to the store the child believes their options are to either not throw a tantrum and get a 0 payoff, or they can throw a tantrum and get a toy with the attendant 10 payoff.
With this choice in front of them, the child will throw a tantrum every time.
If, instead, the parent holds strong during the tantrum and doesn’t buy the toy, the child will learn the only two options are 1) get no toy (0 payoff) or 2) get no toy and scream (-1 payoff). In other words, the tantrum is not worth it if the parent never gives in.
So this leaves us with our rule. If you cave and buy a toy, you should expect a tantrum every time you’re in the store. That doesn’t mean you can’t buy your kids toys; it just means you shouldn’t do so when threatened with a tantrum. If you’re going to cave on something, you should prepare to always cave on that thing.
For example, my wife and I have set up expectations for our kids during church time. My kids know that if they ask for the candy given out to kids at church my wife and I will say no. This led to some drama at first, but now they expect the answer and have moved on.
Note, the rule is not simply never cave to demands. Sometimes it is okay to give kids what they want! If you think it’s reasonable, buy kids popcorn when you go to the movies. I’m not saying deny them out of principle! You should just be prepared for them to expect you always to cave on that particular demand if you often do so.
Rule 2: Don’t Make False Threats
A similar logic underlies Rule 2: “don’t make false threats.” Just like in Rule 1, the best solution for a one-shot game is not always the same as the solution for a repeated game.
I still own my first Gameboy Pocket and copy of Pokemon Red. My daughter, a Pokemon lover, frequently asks me if she can play it. Whether or not she’s allowed to depends on how she treats her little sister. If she’s been nice, I’ll let her. If she is mean, I don’t.
If I really want my daughter to do something like clean her room, one option I have is I could say that if she doesn’t clean, I’ll never let her play the Gameboy again. That threat would probably convince her to clean, but it’s a bad threat nonetheless. The problem is, I like that she gets to play the Gameboy. It’s fun to watch her figure out the same things I figured out when I was a kid. I don’t want to enforce that punishment.
There is a chance that if I made that threat, she might still leave her room a mess. If that happens, I have two options. I can either carry out my threat and take away the Gameboy forever, or I can renege on my threat.
If I choose the second option, I’ve created a big problem for myself in repeated interactions. From now on my threats are not credible. If I said she would lose the Gameboy forever, and she didn’t, why would she believe anything I have to say about the consequences of actions?
So, if I don’t want to take away the Gameboy forever, the rule is simple—I shouldn’t threaten to take it away forever. A more reasonable threat that I’d be willing to make is, “you can’t play it today if you’re mean to your sister.”
A quick way to tell that discipline has gotten out of hand is if parents frequently issue nuclear level threats which kids ignore. Don’t make threats you won’t keep.
It’s very tempting to dial threats up to 10 to assure your kids listen to you, but you need to keep a cool head and offer reasonable consequences you know you will enforce. Otherwise, frankly, your kids shouldn’t believe you.
Rule 3: Be Transparent
The “games” above have results which make sense because I’ve spelled them out explicitly. The actions and consequences have been made clear enough to understand. This brings us to our final rule: be transparent.
Kids should understand they do have choices (this is true whether you want them to or not) and those choices do have consequences. I don’t have a rule for which particular consequences you have if your children, for example, hit each other. I’m not a parenting savant. But I can tell you that the consequences you establish should be clear.
Without clear payoffs or consequences, players in a game cannot make the best decisions. Imagine how frustrating basketball would be if your points per basket were totally random. Why would you ever try from 3 point distance if you might end up with 1 point? Ultimately, the game of basketball would be frustrating and unwatchable if players and viewers couldn’t understand the rules. The “game” of parenting fares no better.
Not only is it not fair for you to impose arbitrary mystery consequences on children, but it also won’t help you make things better. Inconsistent or illogical consequences will leave a child unable to figure out the best option. Instead children will either underestimate the consequences and ignore them, overestimate the consequences and be afraid of you (which you shouldn’t want), or some combination of both.
So although economic theory can’t tell you which stocks to pick, it is full of valuable insight for all sorts of everyday interactions. And these insights are, in my opinion, worth more than a well-picked stock.