Economists Do It With Models

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Things I Will Never Understand, Ice Cream Edition…

May 7th, 2009 · 9 Comments
Advertising · Behavioral Econ · Econ 101

In pondering an earlier potential post I ended up doing a bit of research on Ben and Jerry’s. I had learned that April 21st was free cone day, and I was going to impart this oh-so-important knowledge on my lovely readers…but then I got disinterested in the post and it never got published. (It happens a lot, in case you are curious. I currently have about 30 or so drafts happening. Call it Economic Attention Deficit Disorder.) I apologize profusely for denying you your free cones, since as an economist I really like to err in favor of thinking that more information is better, but part of me feels like I may have done you a favor. Behold:

That is a damn long line for a free $4 item. (It was actually longer than it looks in the photos.) Let me remind you of Economic Principle #2, courtesy of Greg Mankiw: “The Cost of Something is What You Give Up to Get It.” In economic terminology, this concept is called opportunity cost. I bring up these ideas to make the point that the ice cream cone is not actually free unless your time has no value (and you like waiting in line as much as you like other activities). Let’s think about a few (contrived) scenarios:

  • Suppose you have a job that pays you $10 per hour. To go to Ben and Jerry’s and wait in the line for your “free” ice cream cone takes one hour. Therefore, you gave up the $10 you could have made by working, and the opportunity cost of the ice cream cone is $10.
  • Suppose you don’t have a job and spend your days sitting on the couch and watching TV. In this case, you aren’t giving up money to wait in line for your ice cream, but you are giving up an hour of pleasurable couch sitting and TV watching. I would have to imagine that sitting on the couch and watching The Daily Show, or 30 Rock, or Psych…or whatever floats your boat is more pleasant than waiting in line, so you are still incurring some sort of cost to get your ice cream.

This is not to say that the ice cream is not worth it- rather, I am just trying to make sure that you know how to think about the choice in the most sensible way possible. But wait- psychologically, there is even something else to think about in the decision-making process. I will call this Economic Principle #372: People Like To Feel Like They Got A Good Deal. Richard Thaler would call it transaction utility. In other words, it could very well be the case that the usefulness of the ice cream itself is not enough to make it worth it to wait in the line, but the happiness you get from knowing you got something for “free” could push you over the edge. Food for thought, literally.

In theory, you could extend the concept of transaction utility to account for the fact that some people really like getting things in the mail, since it separates payment from consumption and makes you feel like it’s your birthday whenever something shows up. I am one of those people, and thus I can relate to the following xkcd cartoon:

Tags: Advertising · Behavioral Econ · Econ 101

9 responses so far ↓

  • 1 Dan L // May 8, 2009 at 9:52 am

    Your title is “Things I Will Never Understand,” and then your post gives a straightforward explanation of the thing that you supposedly do not understand. Everyone knows that free food just tastes better.

    In any case, let’s face it. Most of what we do with our free time just cuts into our other free time (your second scenario), so the opportunity cost of waiting in line longer is typically close to zero. Why? Because if you’re waiting in line, you’re probably chatting with a friend or entertaining yourself on your iPhone or whatever, which is comparable to what you’d be doing at home anyway. (Yay technology.) If you’re the rare person who is just standing around in a long line by himself, not doing anything, then yeah, you probably feel like a dumbass.

    Finally, that line does look long, but was it really an hour? Incidentally, I went to free cone day at a very busy location, but the place was a well oiled machine, and I was in and out within a few minutes. I’ve waited longer than that to BUY ice cream on many occasions.

  • 2 econgirl // May 8, 2009 at 4:07 pm

    You readers all up in my brain. I did ponder nixing the word “understand” in the title for exactly the reason you state. But I decided that I really don’t understand, since I can’t tell whether people are using biased decision processes or just really want free stuff, in which case I suppose it’s people’s preferences that I don’t get.

    I would argue that if people take price as a signal of quality they would think that expensive food tastes better. And the line stretched out the door of the Garage, I just couldn’t get a reasonable angle on it on my phone. I don’t know if it was an hour, but I was sitting there on my computer for a while and paying marginal attention to the progress of the line, and it was surprisingly slow for transactions that don’t involve collecting payment.

  • 3 Dave // May 8, 2009 at 7:42 pm

    I think the need to get a good deal comes into play because we know that we can’t conceive of all the money we’re going to make in our lifetime. We’re constantly faced with these opportunities to save money or get a decent ROI on nearly negligible transactions; but we also know that those ought to eventually add up to something decent if we stick to it.

    Is this option worth seventy five cents? No, probably not, but if I do it every working day, that’s like two hundred bucks! Wait, is two hundred bucks in a year worthwhile?

    It’s overwhelming to try to figure that out, so “seems like a good deal” is a good heuristic for not having to think too hard about anything.

  • 4 Andrew // May 9, 2009 at 2:24 pm

    So the ice cream was $4. For many people this is probably close to 30 minutes of working, so in terms of the opportunity cost argument I’m not sure I buy that everyone is acting irrational here. I really doubt that the line was an hour long, but who knows? Also, the other poster makes a good point. Many of these people are probably with friends so the cost of waiting is not a complete loss (although I’ll argue that for me waiting in line always costs me a strictly positive amount.)

    I think there are two things going on here. One is selection. When ice cream is free, you are going to attract all the people who don’t mind waiting in line and have nothing better to do. So the typical market clearing customer who pays $4 regularly is not necessarily going to be the representative of those in line for the free ice cream. Second, I’d like to know what the line-up is normally. A basic price theory explanation could be that the price is made up of both the dollar amount and the line waiting cost. Even supposing that every customer is identical, a decrease in one of the prices would lead to an increase in the other. If the line-up is long normally, than even though it looks extra long on the free day it isn’t that much of an increase in the wait (the one with $4 ice cream).

  • 5 Dan L // May 11, 2009 at 10:20 pm

    Econ girl says: “I would argue that if people take price as a signal of quality they would think that expensive food tastes better.” True, but that’s not relevant here, because in this case the ice cream is carrying a signal of quality (the usual $4 price tag, which people routinely pay), while being given away for free.

    Maybe it’s just because I’m a loser, but when I was in college, going out for ice cream was something I did for fun, so a (reasonable) wait time typically had zero or possibly negative(!) opportunity cost.

    And Andrew is definitely right about the selection bias: “When ice cream is free, you are going to attract all the people who don’t mind waiting in line and have nothing better to do.”

    On the subject of free food, have you heard about the Oprah-KFC free chicken debacle? There’s a good example of free food gone mad.

  • 6 Daniel C // May 13, 2009 at 12:31 am

    What nobody seems to remember is that at the root of all this is the concept of utility. What is utility? According to the main authority in scholastic matters, “In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one’s utility. For illustrative purposes, changes in utility are sometimes expressed in units called utils. ” (wikipedia, utility).

    So… how do we evaluate the utility function, and what other variables do we have to evaluate… for example, a free ice cream at B&J (we established theoretically that it is good quality above), is an almost sure win for the taste buds. Another variable is the hope that the situation may bring. One could argue that those that need to wait for the free ice cream are close to losers (do not mistake with loosers, like in nuts or wealthy people that like to deprive others of their share), and the expectation that you could, in such as setup, find a community or new friends is enticing enough to calculate that the opportunity cost of that ice cream (whatever it is) is less than the potential of finding the love of your life.

    In summary, by depriving us from the perfect information, Jodi not only sustained her own knowledge monopoly, ensuring that our tastebuds did not get the satisfaction that our waists could not afford, but also deprived us of eternally finding the love of our live.

    And that is why economist do it with models!

  • 7 Scott Ritchie // May 22, 2009 at 8:18 am

    There’s a more powerful explanation here – we judge and remember experiences based on their extremes and how they ended. Put headphones playing pure dissonance on someone for 4 seconds, then do the same thing but play an additional 4 seconds of only partial dissonance, and they’ll report that they preferred the second experience, even though it’s “objectively” worse.

    The same thing’s going on here – spending a minute in line isn’t so bad, and the experience never gets any worse than just waiting around. So it all feels the same. But the experience ends very well – with free ice cream. It’s the same reason you enjoyed Disney Land, even though you probably went on 25 minutes of rides after waiting in line for 6 hours.

    It’s also, of course, why nature gives men an orgasm only at the end of sex. It’s free cone day in reproductive form. Perhaps there’s more to this analogy than I realized.

  • 8 econgirl // Jun 4, 2009 at 1:12 pm

    Random: if you like Ben and Jerry’s, you will be amused by the following ad: “We married fudge, ice cream & brownies. Don’t worry, it’s legal in Vermont.” 🙂

    http://twitpic.com/6lvp8

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