Economists Do It With Models

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On Auctions And Sunspots, Sort Of…

March 5th, 2010 · 10 Comments
Buyer Beware · Incentives · Just For Fun

This has been going around the Internet for the past couple of days…(HT to Gizmodo and others…)

My first thought was “the guy on the right must be an economist.” Also, I’m surprised that no one popped up to offer $52. The comments on the sites that were running this, however, got me thinking a little more. Some observations:

  • I initially thought that this was a very low reward offer, but then I noticed that it was for a lost iPod Touch rather than a lost iPhone. I would probably offer a reward higher than MSRP if I lost my iPhone, since I am terrible at backing up phone numbers and such. (Ah, the value of information. I also get confused when people offer rewards for lost dogs that are lower than what it would cost to buy a new dog. Aren’t you people willing to pay more to specifically get YOUR dog back???)
  • This is a good example of what social scientists sometimes refer to as “sunspots” – why do people usually pick such round numbers? I mean, there’s little stopping someone from offering a reward of $68.24. The Internet has pointed out that, as such, people for the most part assume that the $50 offer is the real one, both because it’s a round number and it’s the lower of the two bids. But how do we know that the real person didn’t offer $51 and the imposter offered $50 to try to make it seem like she was the real iPod owner? (Note that if people were solely going for the reward rather than being nice people, this would be a non issue, since the highest bid would win and undercutting would be pointless.)
  • I conjecture that the $50 reward is the real one because it has a name attached and the other does not.

For the record, this is my iPhone (and my living room rug):

It has been like this since last April- I ran the entire Boston Marathon without dropping the thing and then faceplanted it on Clarendon Street 10 minutes after I finished. Luckily, I was too tired to care. (And yes, it still works just fine.) As an economist, I point out to people that I am happy with this setup because it doesn’t bother me much and it greatly reduces the likelihood that anyone is going to try to steal my phone. Perhaps if the thieves understood more economics, they would realize that I would probably pay a decent amount to get the information back if nothing else. I think this is the first time I’ve ever been glad that some people don’t understand economics. 🙂

Tags: Buyer Beware · Incentives · Just For Fun

10 responses so far ↓

  • 1 Scott Ritchie // Mar 5, 2010 at 4:49 pm

    If thieves understood economics they would be white collar criminals.

  • 2 Warren // Mar 5, 2010 at 4:52 pm

    As you’ve surmised, I’m sure, people are terrible judges of value. Thankfully, people know that. That’s why they offer such round numbers. Fussing over pennies, quite literally, is not worth digging them out for the reward. It’s a simple, yet mostly subconscious, cost/benefit analysis.

    And I have a researcher whose I-Phone looks just like that…

  • 3 Braden // Mar 5, 2010 at 6:27 pm

    FYI, if you lose or replace your iPhone, iTunes will automatically restore all of the data onto the new one. It’s pretty cool.

  • 4 Dan L // Mar 5, 2010 at 9:03 pm

    Using that iPhone is like driving a brand new Mercedes with an ugly dent in it.

    Or to make another analogy, my wife is disturbed whenever she sees iPhones like yours–sort of like seeing an abused puppy.

    More importantly, THAT IS MY RUG!

    Finally, what Braden said.

  • 5 Charles Dolci // Mar 6, 2010 at 12:56 am

    Forget the iPod, what’s with that rug???

    And on the question of rewards for lost dogs – why should the amount of the reward reflect the owner’s valuation of the dog or the cost of buying a new one? Shouldn’t the reward be only the amount necessary to motivate the dog finder to hold onto the dog and make a call? Granted, a very high reward may induce some to go out and hunt for the little bugger, but it is still tied to motivating a prospective finder.

    Alternatively, should the reward be the amount equal to the value to the owner less the economic value of the natural tendency of people to return lost dogs. By offering the owner’s value, the owner is offering a reward greater than is necessary (thereby creating inefficiency) and is not accounting for the good samaritan effect.

  • 6 econgirl // Mar 7, 2010 at 3:21 pm

    @ Braden: What you say is true as long as you’ve synced the data to your computer. As I admitted that I am terrible at doing this, the feature doesn’t help me very much. (And yes, I know that whatever happens as a result is my own fault…but I feel that the sync feature is way more complicated than it needs to be, since iTunes threatens to remove stuff that it doesn’t find in your computer library, etc etc…)

    @ Dan L: Given that the iPhone pictured is one of the old ones, I would argue that it’s like driving an old Mercedes with an ugly dent in it. And isn’t that how people work- once they get the first dent in the new car, they are way less uptight about future dents?

    @ Charles: The rug is awesome, so shut it. 🙂 On a more useful note, I was waiting for someone to say exactly what you just said. Chances are that there will be a gap between the willingness to pay for the lost dog by the owner and the willingness to sell amount for the person who found the dog. Usually when this type of situation arises the price is arrived at through some negotiation process and ends up somewhere between the willingness to sell amount and the willingness to pay amount. However, in this scenario there is a risk to offering too low of a reward- it’s probably not like the dog finder is going to call you up and say he found the dog and will give it back for more money, since if he is going to be a jackass and keep the dog, he probably wants to stay anonymous. If my dog was missing, I doubt that I would be sitting here and doing calculations regarding the increased probability of dog being returned versus reduction in consumer surplus for every extra reward dollar offered and would probably be risk-averse enough to offer up my true valuation of the dog.

    P.S. Please don’t steal my dog. Things would get very ugly very quickly.

  • 7 Justin // Mar 7, 2010 at 8:26 pm

    Wait a tick!

    How did you take a picture of your broken phone without the use of your phone?

    That must’ve been tricky to set up.

  • 8 econgirl // Mar 8, 2010 at 3:13 am

    I had to use an actual camera, and it was all very perplexing. Sadly, I did pause for a second and think “wait, how am I going to take a picture of my phone when I usually use my phone to take the pictures?” So I went the complete overkill route and dragged out the digital SLR. I’ll have you know that that is a very good quality picture of my poor phone- I played around with the ISO and the white balance and everything.

  • 9 Victor // Mar 8, 2010 at 2:55 pm

    “I also get confused when people offer rewards for lost dogs that are lower than what it would cost to buy a new dog.”
    I believe that your point here is that we should offer to the person who finds the dog his oportunity cost to give the dog back, but I think that it shouldn´t be the price of a new dog because a puppy is worth much more than an old dog.

  • 10 Justin // Mar 23, 2010 at 10:50 pm

    I wanted to let you know that I recently cracked the ever-loving heck out of my phone this week, and it made me want to revisit this thread. My screen is about as busted as yours now. I sympathize.

    But I do have one question. Do the glass-shard splinters ever go away? 🙁

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