A Penny Saved Is...

Which scenario would you prefer: (a) losing $30, or (b) losing $30, then losing $90, then regaining the original lost $30? While in most circumstances the first option is the unquestionably preferable, I recently found myself in a situation favoring the latter.

As a member of the Marin Sun Farms “meat club CSA” (community supported agriculture), I order a custom package of meats from a local farm that is delivered (frozen) once a month to a pick-up location near my home. While this arrangement offers me an excellent supply of local meat at a discounted price, the difficulty is remembering the monthly pick-up time. As disclaimed on the Marin Sun Farms website, “Packages not picked up promptly will be forfeited.”

This past Sunday I was sifting through emails when I discovered buried amongst online coupon offerings, eStatements, and a “Hello!” from mom, a reminder email sent the previous Thursday: “Pick up your CSA box today!” My heart sank as I pictured my box of grass-fed beef, lamb, and chicken slowly defrosting, decomposing, and ultimately being discarded. It had been a small shipment, only $30 worth, but nonetheless, I cringed at the waste.

Monday morning I awoke to another minor financial misfortune: a $90 parking ticket proclaiming my violation of section VC22500E – DRIVEWAY BLOCKING. D’oh! I knew when I parked that the rear of my car extended a few inches beyond the curb and into the neighboring driveway, but after half an hour searching for a spot I decided to take my chances (always thinking in economic terms, I figured that the expected cost of a ticket—equal to the true cost times the probability of actually receiving a ticket—was outweighed by the benefit from no longer looking for parking).

Chagrined by my back-to-back oversights, I called the number of the CSA pick-up location, just in case. To my surprise and relief, the woman in charge had managed to store my meat—not their usual policy—and I picked it up later that day.

By Monday night I had experienced the aforementioned $30 (perceived) loss, $90 loss, and $30 (perceived) gain, yet I felt better than I had felt on Sunday night when then I perceived only the $30 loss of meat. This may have had something to do with the order of events (after internalizing the loss of the ticket in the morning, the gain of $30 remained more salient at the end of the day), but I think it had more to do with how I perceived the true value of each loss. To a meat-loving economist, a discarded order constitutes a clear waste of resources—$30 of value—gone. The $90 parking ticket, on the other hand, represents a transfer of resources from me to the city of San Francisco, which ostensibly will put the money to use in the creation or maintenance of the public services I enjoy.

In introductory economics, we make a similar distinction between the deadweight loss and government revenue generated by taxes. Deadweight loss reflects the decrease in benefits to society (producers and consumers) resulting from fewer total transactions taking place. Economists view this loss to consumers and producers as different from the revenues a tax generates. Although both come at the direct expense of consumers and producers, the latter provides governments with the means to furnish public goods and services which indirectly benefit consumers, while the former—like rotten meat—is just no good.


Discussion Questions:

1. Why else might the $90 parking ticket be less painful than losing the meat shipment? Think about the “value” I got from time saved by parking illegally.

2. How does risk aversion factor into the decision of whether it’s worth taking the chance of doing something illegal? Consider a person who frequently speeds and occasionally gets speeding tickets. Ignoring the potential effects on others, might this too be a rational decision?

3. Consider other instances in which financial losses of the same dollar value might be felt in different ways (e.g. forgetting to take a $20 bill out of your pocket before washing it versus accidentally leaving an extra $20 as a tip on a restaurant bill?)

The Economics of Love

Those who know me well know I’m not often at a loss for words. Yet, here I find myself truly stupefied.

I thought that, for Valentine’s Day, I’d write a blog post on the economics of love. So I Googled “economics of love” and got Solve Dating. It’s one of the more interesting, if bizarre, applications of cost-benefit analysis I’ve ever seen.

Now don’t get me wrong—I wrote my Ph.D. dissertation on search-based marriage matching models, so I’m not against applying economic principles to questions of matrimony. But I wonder: how useful is it to try to get into the nitty-gritty of quantifying the costs and benefits of love? Is the equation “rejection cost = – (your self-esteem + frequency of past rejections)” a valid one? What units could you possibly use?

On the other hand, some of the conclusions on the site are fairly decent applications of basic economic analysis. For example, just below that equation is the insight “People who are sensitive to rejection are less likely to find their soulmates.” They suggest, “Build up your self-esteem. Convince yourself that it was their loss.”

Now there’s cost minimization for you! Happy Valentine’s Day.

Discussion Questions

1. We use a lot of math and graphs in economics, but some questions are better answered with equations than others. What lends a phenomenon to mathematical analysis? Do the good folks at Solve Dating go too far?

2. What kinds of questions of the heart can you answer with economic principles? Do you apply your knowledge of economics to your own love life?

3. My favorite title of a search-based marriage model paper was “Transplants and Implants: The Economics of Self-Improvement.” This paper discusses the fact that people rationally improve themselves when trying to attract a mate, and then optimally “let themselves go” once they get married. Is that an argument that makes sense to you? How could you test that hypothesis?