Why do people act the way they do socially? What makes one person gregarious and another reserved? Does economics hold the answer? The answer to the last one is, of course, “duh”. Applying economic principles to human behavior of all sorts yields all kinds of interesting results, especially if it’s not strictly economic behavior. So in the spirit of Freakonomics, we’ll look at the act of socialization through a microeconomic lens.

First, we’ll define social capital as a function of time and inclination. Since everyone has the same amount of time in a day and can choose (mostly) freely what to do with that time, we’ll fix T at 24, so the determining factor is inclination. This is more or less innate to a person, and lies along the scale of extraversion. For example, an introvert would be less inclined towards social activity than an extravert, preferring to spend his time, say, developing theories of social capital instead. We therefore say that the former is willing to invest less social capital than the latter.

Inclination is essentially a utility function: a higher inclination means the person in question derives more utility from social activity, and therefore is more prone to invest, having what could be considered a higher “income”. The bulk of this theory is to look at investment behavior – socialization – given inclination.

There is a major difference between social networks and financial markets, however: social networks do not reach equilibrium in the same way that a financial market does. Risk is not proportional to return – in fact, it is generally the opposite. The friends to whom one is closest are at the same time the least socially “risky”, as well as those whose company one enjoys the most (from whose company one derives the most utility). In the financial market, equilibrium pushes prices to cancel out risk so that the risk-neutral investor will be completely indifferent to any of the options, while in the social market, current friends are doubly preferable to new and untested people, and “investors” are far from indifferent.

The extravert’s total utility (red, top) increases much faster than the introvert’s (blue, top) with additional return on social investment, leading to a more spread-out network of friends

Inclination, then, is a measure of the marginal utility of additional return on social investment, which determines how much the person is willing to invest, as is seen on the graphs to the right. For those with a high inclination – extraverts (in red) – marginal utility diminishes slowly, and may even be constant. Thus, though they are not risk-loving, their risk-aversion is very low, allowing them to spread their investments over a diverse portfolio of friends, most of whom probably do not produce a very high return on investment. The introvert’s marginal utility (in blue), on the other hand, diminishes much faster, making them not only more risk-averse with regard to new investments, but less willing overall to invest their social capital.

It is notable that in this model, the scale from introversion to extraversion is continuous, with no qualitative difference between the two. This obviously favors a theory of continuous traits (Cattell, Allport, and the Five Factor Model) rather than discrete traits (Jung and the MBTI model), though that is not to say the latter cannot also function well enough as a continuous model.

So far we have assumed that a person invests all of his social capital that he is willing and no more, but this is not necessarily the case. Risk aversion may be significantly higher than inclination, or the risks may in reality be very high – for example, someone studying abroad without knowing the language would be hard pressed to invest all the social capital he would otherwise invest. Loneliness is social capital that one is not able to invest – uninvested capital that one would be willing to invest.

Likewise if social risk is extremely low relative to one’s risk aversion (an overly gregarious group, for example), it may lead one to socially overinvest. Though one may draw social debt for a while, eventually the pressure to pay it off (to rest) builds until the returns no longer justify the debt, and one is forced to rest.

So what’s the point of all this? Hopefully it’s not only a good model for translating social networks into financial markets, but a robust model for understanding people in itself. Plus, what’s more fun than the cross-pollination of different branches of study?