The Risk-Free Rate of Social Media

While Facebook and Twitter and Instagram are said to be addictive, I think the better way to understand the banal consumption of social media for most people is through risk, or more specifically, the risk-free rate.

Allison Schrager, author of the new book An Economist Walks into a Brothel recently made the connection on a Planet Money podcast, saying,

The foundation of every risk decision in finance is what we call the risk-free rate, which is how much you get for taking no risk at all…

We go out less because, why? The risk-free return is so good. Like, I remember in my 20s — I remember going on dates because there was no good TV.

TV and movies and sports and video games are in high definition and highly interactive. These quality options change the risk free rate and thus shift the risk profile of other leisure options. Why choose to learn a new hobby or go out when you know that going online, or strumming through Instagram, or watching Netflix will probably be a good choice?

Yes, Millennials go online more than any other cohort, and yes there are risks involved with going online. But older cohorts still watch a lot of TV. Indeed, the 20–34 year olds spent the least amount of time watching TV compared to all subsets at just over 2 hours per day. As age ticks up, so does TV watching; those 65 and older watch 4.19 hours a day. And while the total leisure time for Millenials is about two hours less than those 65 and older, they are only spending an hour or so playing games or using computers for leisure.

If you want the full breakdown, the BLS has got you covered:

For all ages, consuming high quality video, be it through TV or online interactions, is the central leisure activity. That’s got to say something right?

It is also worth noting that Millennials seem to have a different risk profile for all sorts of other activities. They are less likely than other generations to engage in behaviors like drinking, drinking and driving, drug use, delinquency, and committing acts of violence. According to some surveys on the matter, Millenials are more financially conservative than either Baby Boomers or Generation Xers, having come of age in the middle of a deep recession. My generation is keenly aware of the risk involved, even if they might not frame it that way.



Senior Research Fellow | Center for Growth and Opportunity | @WillRinehart

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Will Rinehart

Senior Research Fellow | Center for Growth and Opportunity | @WillRinehart