Economists Do It With Models

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Follow Up: Why I’m Beginning To Understand The Economist Dating Jokes…

October 28th, 2012 · 5 Comments
Follow Ups · Just For Fun

One of the main tenets of economics is that people do, or at least should, “think like economists,” either consciously or subconsciously. On the surface, “thinking like an economist” just amounts to being a utility-maximizing individual, but in reality this entails thinking about each and every decision one faces in life enough to figure out what the rational choice is. Behavioral economists acknowledge that there can be significant cognitive costs involved in acquiring information and making decisions, so its not surprising that “thinking like an economist” can be pretty exhausting.

Case in point:

You are planning a nice dinner and are shopping for the necessary groceries. After having already passed the green onions you are reminded that you actually need green onions upon discovering exactly that vegetable, in a bunch, bagged, and apparently abandoned by another shopper. Do you grab the bag before you or turn around and go out of your way to select your own bunch?

1. This bag was selected already, and from a weakly larger supply. It is therefore likely to be better than the best you will find there now.
2. On the other hand, it was abandoned. You have to ask yourself why.
3. You would worry if the typical shopper’s strategy is to select a bag at random and then only carefully inspect it later. Because then it was abandoned because of some defect.
4. But this a red herring. Whatever she could see wrong with the onions you can see too. The only asymmetry of information between you and your pre-shopper is about the unchosen onions. The selection effect works unambiguoulsy in favor of the scallions-in-hand.
5. You can gain information based on where the onions were abandoned.
6. First of all the fact that they were abandoned somewhere other than the main pile of onions reveals that she was not rejecting these in favor of other onions. If so, since she was going back to the onion pile she would have brought these with her. Instead she probably realized that she didn’t need the onions after all. So again, no negative signal.
7. If these bunched green onions were abandoned in front of the loose green onions or the leeks or ramps, then this is an even better signal. She thought these were the best among the green onions but later discovered an even better ingredient. A sign she has discerning tastes.
8. It is true though that compared to a randomly selected new bunch, these have been touched by on average one additional pair of human hands.
9. And also she might be trying to poison you.
10. But if she was trying to poison someone, is it her optimal strategy to put the poisoned onions into a bag and abandon them in a neighboring aisle?
11. In equilibrium all bunches are equally likely to be poisoned and the bagging and abandoning ploy amounts to nothing more than cheap talk.
12. But, she might not be trying to poison just any old person. She might really be targeting you, the guy who wants the best bunch of onions in the store.
13. Therefore these onions are either logically the best onions in the store and therefore poisoned, or they are worse than some onions back in the big pile but then those are poisoned.
14. Opt for take-out.

This is from Jeff Ely, who is an economics professor at Northwestern. I don’t think I’ve ever met him personally, and he’s likely a lovely human being, but I really hope that his wife knew what she was getting into. :) I will admit that I am often guilty of such, well, what normal people might call “analysis paralysis,” and it’s entirely likely that the extra cognitive effort isn’t worth the probably only incrementally better choice in most cases, especially if the result is to punt on making a choice at all. (In related news, I wonder if economists are more susceptible to the overchoice problem.) A truly utility-maximizing individual, then, should be able to tell when this level of analysis has a significant enough potential impact to be worth the effort (i.e. picking one’s battles).

For example, the following anecdote, while still on the crazy economist end of the spectrum, shows a better effort to impact ratio:

After paying for a few groceries with a debit card, I requested to have $50 cash over.

“No problem,” she said, “Is this $50 bill okay?”

Instinctively and somewhat strongly I replied, “No!”

Puzzled, she asked me again. I just said, “No thanks, I prefer to have smaller bills.”

The cashier, still confused, nevertheless fulfilled my request as other shoppers in line chuckled at my rather odd behavior.

I did not feel like holding up the line to explain why. But I had my reasons, which I will describe in this article below.

1. Mistaken identities

In Seinfeld, George Costanza once gets change for $10 when he believed he paid with a $20 bill. He quickly learns there is little remedy in this he-said she-said game, and he ultimately leaves, feeling robbed.

A similar incident happened in the animated show Home Movies. The middle-aged soccer coach, known mostly as Coach McGuirk, intends to tip $1 to a street performer but accidentally gives a $20 bill. The guitar player denies it, and McGuirk is out of money.

The TV shows reflect a larger truth: it’s easy to confuse bills, and if you’re not careful, you can end up in awkward situations.

I am particularly careful about $50 bills because I do not often carry them around. My friend learned the lesson the hard way in Vegas when he tipped a $50 instead of a $20 that he intended. Never mix drinking and large bills was the lesson I took away.

The lesson: $50 bills are less common and can lead to confusion–either I or the person receiving might confuse it for a $20 bill. I will stick to bills that I normally carry around.

2. Impractical

In college, I would often pay for pizza and then ask for money. “Hey, it’s $5 a person.” It was then I realized I was going to be out of luck. Everyone told me all they had were $20 bills, and so they would pay me later.

Luckily my friends were trustworthy and did follow up. Still, it was an example of how larger bills can be a nuisance in some settings.

I mostly use cash for small purchases, and it just so happens that some stores are reluctant to break large bills for small purchases. So all in all, $50 bills can be a hassle that I would rather avoid.

3. Counterfeit bills

There’s an asymmetry to large bills. When YOU use them, stores will check if they are counterfeit. But when stores give them to you as change, how likely are you to check?

And guess what, if you get stuck with a counterfeit bill, you’re on the hook! As the Federal Reserve website warns:

It is important to know what the security features are in genuine currency, because if you end up with a counterfeit note, you will lose that money. A counterfeit note cannot be exchanged for a genuine one, and it is illegal to knowingly pass counterfeit currency.

The odds of a counterfeit bill are relatively small–perhaps 1 in 12,000–but still, it’s a risk you can limit by sticking to smaller bills.

The risk of counterfeit bills is why many places will refuse to take bills larger than $20 altogether. And yes, this is a legal practice.

All in all, there was little gain by accepting the $50 bill. As you can imagine, I didn’t have time to explain my full logic in the store, but there were many things on my mind!

In the end, I got my smaller bills and happily went on my way, and I suggest others consider the same practice.

I think I’m beginning to understand the trend of economists marrying other economists.

Tags: Follow Ups · Just For Fun

5 responses so far ↓

  • 1 Marie // Oct 28, 2012 at 1:48 pm

    I’m married to another economist. I find it helps when I can say diminishing MU or cet par and we understand each other.

  • 2 Eric F // Oct 28, 2012 at 1:54 pm

    “…so I can clearly NOT choose the wine in front of you.”

  • 3 Dan L // Oct 28, 2012 at 4:17 pm

    The Costanza scenario is not completely without remedy. Back when I worked at Publix, there was an incident where there was some uncertainty about some change, so they counted out my entire drawer to figure it out.

  • 4 Lucas M Engelhardt // Oct 28, 2012 at 4:48 pm

    I wonder if what distinguishes economists is largely the fact that our (subjective) cognitive costs are abnormally low, giving us a comparative advantage in thinking like… Well, like economists.

  • 5 The Sloman Economics News Site » Blog Archive » Might thinking like an economist occasionally lead to over analysis? // Nov 2, 2012 at 1:21 pm

    [...] relevant for this question, on her excellent Economists do it with models blog, Jodi Beggs has recently highlighted the fact that the cognitive costs of obtaining the information required to make decisions in this [...]

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