Thursday, September 02, 2010

The OC

The concert idea seems to mess with peoples' heads on Opportunity Cost.

(I managed to get Angus's question right, btw, and am amazed that an economist could get it wrong).

Here is my example of concerts and opportunity cost, from EconLib

(UPDATE: Commenters on post d'Angus below....Good lord, people. If the answer is not ten, then the concept of OC itself has no meaning.)


Tom said...

I read your article, Mungowitz, and my comment is "true enough for small amounts". But a dollar gained does not equal a dollar lost. To illustrate, imagine a wealthy eccentric wants to bet on a coin toss -- the amount is All Your Assets versus double that. You could triple up... or go flat broke. It's a fair coin; this is a very good bet, no?

Would you take that bet? I wouldn't. Losing everything would be a life changing event, while winning double that (even if not allowing for taxes) would be mildly euphoric and only for a little while.

People rightly value gains less than losses. Change from dollars to chips -- Tournament poker pros have made an exact science of the effect.

Mungowitz said...

Not surprisingly, there is a large academic literature on this question, though of course poker players lead the way.

No one is claiming that OC is only guide to behavior, or even a good predictor of it.

But the OC in the problem Angus posed is $10. It is definitional, not a matter of discussion.

That's all I was claiming.