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Do you know what an opportunity cost is? Do you know what an opportunity cost is?

12-31-2011 , 08:04 AM
Quote:
Originally Posted by clowntable
It's not a difficult question.
Correct
Quote:
Econ PhDs doing bad on this is the result of focusing education in economics on idiotic math puzzles that look scientific.
Incorrect (mainly because that's just a rant against 'idiotic math puzzles'--opportunity cost is part of the mainstream economics cannon, and by your definition, an 'idiotic math puzzle'. So if they're focusing on that, then they should have done better on the 'idiotic math puzzle'. Not that *I* would say it's an 'idiotic math puzzle', just pointing out you can't really have it both ways)
12-31-2011 , 01:55 PM
Keep in mind that I don't have the benefit of a graduate education or a P.h.D in economics. The only thing I remember about economics from college is the persistent problem of oversupply in agriculture, but I instinctively chose option "A" ($0) as the answer. Two points immediately caught my attention in the first sentence - namely that you had won the Clapton ticket "free" (meaning you paid zero $ for the ticket) and the ticket had no resale value - so you either used the no cost Clapton ticket that night or you lost zero dollars. (How can you "lose" the value of something for which you paid not one cent?)

Opting to go to the Dylan concert can't be right since you're going to pay more than "free" out of your own pocket - regardless of what amount you pay. If I were a rabid Dylan fan and didn't think much of Eric Clapton, I would have shrugged and said "I could care less about Eric Clapton so I'm going to go see Bob Dylan," but the question implied that you aren't allowed a preference for one performer over the other - this is a purely "economic" decision. I'm not sure if that would always be the case in real life. If my daughter were given a choice between a free ticket to see Bob Dylan or Eric Clapton - those "old guys" - and a chance to go see Justin Beiber for $50, she would be asking her dad for $50.00.

Anyway, it's very hard to find a better bargain than "free" - isn't it? As soon as I read the first sentence and saw option "A," I didn't bother reading any of the rest of it. I figured I would go nuts trying to think through all the intricate nuances of the other choices. This might explain why I occasionally get stacked at the poker table. Still, despite all my shortcomings, I came close to getting the right answer - although I think the "right" answer is wrong. It "costs" you zero to forgo a benefit for which you paid nothing!

Former DJ

Last edited by Former DJ; 12-31-2011 at 01:58 PM. Reason: Minor edit.
12-31-2011 , 04:42 PM
Quote:
Originally Posted by Former DJ
It "costs" you zero to forgo a benefit for which you paid nothing!
Well, to put the setup in a slightly different (but functionally the same) way, if I were to give you $10 not to go to the concert for which you received free tickets, then there is a 'cost' to going to the concert--the $10 you would have received.

The idea of opportunity cost is very important--it illuminates quite strikingly the difference between explicit costs (which several people have focused on ITT--"not paying one red cent") which are indeed $0 (because, well, you didn't pay one red cent for the ticket) and implicit costs.

Costs are just what you give up for something. For this example, your costs are what you paid for the ticket ($0), but you also gave up something else--the chance of going to the other concert. It's not money, but it is something you gave up, something that you value, in order to go to the concert.
12-31-2011 , 07:16 PM
Quote:
Originally Posted by Former DJ
Keep in mind that I don't have the benefit of a graduate education or a P.h.D in economics. The only thing I remember about economics from college is the persistent problem of oversupply in agriculture, but I instinctively chose option "A" ($0) as the answer. Two points immediately caught my attention in the first sentence - namely that you had won the Clapton ticket "free" (meaning you paid zero $ for the ticket) and the ticket had no resale value - so you either used the no cost Clapton ticket that night or you lost zero dollars. (How can you "lose" the value of something for which you paid not one cent?)

Opting to go to the Dylan concert can't be right since you're going to pay more than "free" out of your own pocket - regardless of what amount you pay. If I were a rabid Dylan fan and didn't think much of Eric Clapton, I would have shrugged and said "I could care less about Eric Clapton so I'm going to go see Bob Dylan," but the question implied that you aren't allowed a preference for one performer over the other - this is a purely "economic" decision. I'm not sure if that would always be the case in real life. If my daughter were given a choice between a free ticket to see Bob Dylan or Eric Clapton - those "old guys" - and a chance to go see Justin Beiber for $50, she would be asking her dad for $50.00.

Anyway, it's very hard to find a better bargain than "free" - isn't it? As soon as I read the first sentence and saw option "A," I didn't bother reading any of the rest of it. I figured I would go nuts trying to think through all the intricate nuances of the other choices. This might explain why I occasionally get stacked at the poker table. Still, despite all my shortcomings, I came close to getting the right answer - although I think the "right" answer is wrong. It "costs" you zero to forgo a benefit for which you paid nothing!

Former DJ
For what it's worth, I thought exactly this way, but then I thought about it more and would up with coffee_monster's line of thought and came up with 10 bucks.
12-31-2011 , 08:10 PM
Quote:
Originally Posted by coffee_monster
Well, to put the setup in a slightly different (but functionally the same) way, if I were to give you $10 not to go to the concert for which you received free tickets, then there is a 'cost' to going to the concert--the $10 you would have received.

The idea of opportunity cost is very important--it illuminates quite strikingly the difference between explicit costs (which several people have focused on ITT--"not paying one red cent") which are indeed $0 (because, well, you didn't pay one red cent for the ticket) and implicit costs.

Costs are just what you give up for something. For this example, your costs are what you paid for the ticket ($0), but you also gave up something else--the chance of going to the other concert. It's not money, but it is something you gave up, something that you value, in order to go to the concert.
coffee_monster:

OK, if you're saying that an "opportunity cost" is created in any situation where an individual has to make a choice between two (or more) competing options, then I suppose the concept makes sense. An obvious case would be two 18-year-olds who have just graduated from high school and both must decide whether to go to college or forgo a college education in favor of becoming a professional poker player. I suppose most people would think there's an opportunity cost for the chap who decided to become a poker pro, although the amount of that cost could be hard to quantify - and the amount of that "cost" might even be positive if your name just happens to be Bryan Devonshire! (See pp 14-15 of the current issue of Card Player magazine.)

However, for a valid opportunity cost to exist shouldn't there be a clear explicit cost associated with each option? In the case of Eric Clapton and Bob Dylan, I don't see how that can be possible since there is no direct (or explicit) cost to you - paid out of your own pocket - for the Clapton ticket. If you chose to take advantage of your "free" Clapton ticket forgoing the opportunity to go see Bob Dylan, you didn't "lose" anything. In fact, you actually saved $40 or $50 since that is the explicit cost you would have had to pay (out of your own pocket) if you chose to forgo Eric Clapton in favor of Bob Dylan. Making the choice to go see Bob Dylan involves a direct explicit cost. Using your free ticket to go see Clapton does not. I don't see how "opportunity cost" (or the idea of opportunity cost) applies to this specific situation, but that may be because I'm not educated.

I'm starting to understand how all those genuises on Wall Street managed to run their Too-Big-To-Fail banks into the ground. Those P.h.D economists and Harvard-trained MBAs ran their spreadsheets and figured out their opportunity cost (and the effect of same on their bonuses) if they didn't make all those subprime loans. There should have been an option allowing taxpayers to line up all those "Master of the Universe" CEOs in front of a firing squad and let them figure out their opportunity cost as they stare down the barrel of a gun.

Former DJ
12-31-2011 , 09:43 PM
Quote:
Originally Posted by Former DJ
coffee_monster:

OK, if you're saying that an "opportunity cost" is created in any situation where an individual has to make a choice between two (or more) competing options, then I suppose the concept makes sense. An obvious case would be two 18-year-olds who have just graduated from high school and both must decide whether to go to college or forgo a college education in favor of becoming a professional poker player. I suppose most people would think there's an opportunity cost for the chap who decided to become a poker pro, although the amount of that cost could be hard to quantify - and the amount of that "cost" might even be positive if your name just happens to be Bryan Devonshire! (See pp 14-15 of the current issue of Card Player magazine.)
You're right about an opportunity cost arising whenever there's a choice of two or more things--the opportunity cost is the benefit of whatever the thing is that you're forgoing.

The costs are always positive--in other words, it's always a loss. You're giving up the next best thing you could be doing. Assuming that next best thing is something you'd want to do (as opposed to doing absolutely nothing), the cost is positive. In the example you gave, what I would say is that the

Quote:
However, for a valid opportunity cost to exist shouldn't there be a clear explicit cost associated with each option? In the case of Eric Clapton and Bob Dylan, I don't see how that can be possible since there is no direct (or explicit) cost to you - paid out of your own pocket - for the Clapton ticket.
That doesn't matter--by going to the Clapton concert you're not giving up the Clapton concert.

Quote:
If you chose to take advantage of your "free" Clapton ticket forgoing the opportunity to go see Bob Dylan, you didn't "lose" anything. In fact, you actually saved $40 or $50 since that is the explicit cost you would have had to pay (out of your own pocket) if you chose to forgo Eric Clapton in favor of Bob Dylan.
That is the (explicit) cost of goign to the Dylan concert. However, since the benefit is higher, the net benefit of going to the Dylan concert is positive. And that net benefit is what you'd be giving up.
Quote:
Making the choice to go see Bob Dylan involves a direct explicit cost. Using your free ticket to go see Clapton does not.
Yes. But the idea of opportunity costs includes implicit costs--not just explicit costs. By going to the Clapton concert, you're giving up the opportunity to go to the Dylan concert. The net benefit from going to the Dylan concert is what you're giving up.

Quote:
I'm starting to understand how all those genuises on Wall Street managed to run their Too-Big-To-Fail banks into the ground. Those P.h.D economists and Harvard-trained MBAs ran their spreadsheets and figured out their opportunity cost (and the effect of same on their bonuses) if they didn't make all those subprime loans. There should have been an option allowing taxpayers to line up all those "Master of the Universe" CEOs in front of a firing squad and let them figure out their opportunity cost as they stare down the barrel of a gun.
Yeah, I don't think that was their problem.
01-01-2012 , 01:43 AM
thread turned into "coffee monster explains the most basic econ concept that exists"

wtf


Former DJ manages to get the question in the OP wrong, demonstrate total misunderstanding of this basic concept AND explain financial crisis in two posts. Plus he sent couple of people in front of firing squad, all that while keeping his belief in legitimacy, and correctness, of his econ opinions intact.

awesome

gotta love mises.org
01-01-2012 , 02:06 AM
hahahah. Oh well. Happy new year.
01-01-2012 , 03:12 AM
I blame selection bias. Obviously anyone who really understood the concept of opportunity cost would have declined to participate.
01-01-2012 , 05:16 AM
Quote:
Originally Posted by roblin
I blame selection bias. Obviously anyone who really understood the concept of opportunity cost would have declined to participate.
Explain?
01-01-2012 , 12:02 PM
Quote:
Originally Posted by wil318466
Explain?
I thought about explaining, but realized it would take too long and I'd rather do something else.
01-02-2012 , 09:19 PM
Quote:
Originally Posted by PJA
I thought about explaining, but realized it would take too long and I'd rather do something else.
talking with someone who understand opportunity cost can be soo deep, i guess i dont though :P
01-03-2012 , 05:23 AM
Quote:
Originally Posted by coffee_monster
Actually, the question is fine.
Yes, when they clarified the question slightly there was a 100% increase in correct answers. Sound survey, obviously, lol.
01-03-2012 , 05:58 AM
Quote:
Originally Posted by roblin
I blame selection bias. Obviously anyone who really understood the concept of opportunity cost would have declined to participate.
When I first read the thread I considered trying to make this play myself, but decided it wasn't worth the effort.
01-03-2012 , 07:23 AM
Seriously though, I wonder how much the fact that the question is about a subjective emotional experience as opposed to mundane boring but necessary stuff sways the result. When I had my econ introductory course, I was always angry when the questions were about concerts or stuff like that. Because when I'm thinking about going to a concert, I not only don't get so anal about the financial side, I emphatically try to avoid getting anal about it. Make it a tank full of gasoline or something boring like that, for christs sake.

Of course, I got the answer wrong Not that I stopped to think for a whole long time, but I replied $50. Because the value of the experience is $50, amirite, and of course the $50 itself now isn't worth anything, because I don't think about money when I go to a concert, goddamit!
01-03-2012 , 07:54 AM
Quote:
Originally Posted by Low Key
Yes, when they clarified the question slightly there was a 100% increase in correct answers. Sound survey, obviously, lol.
Well, there's 'clarification' and then there's 'leading'.
01-03-2012 , 09:22 AM
Quote:
Originally Posted by clowntable
I'm guessing not many of those econ PhDs were Austrian. Obviously a correlation right there.
Wouldn't an austrian just say the answer is meaningless? You can't really know someone is willing to pay $50 for something unless they actually pay for it. Since they didn't and went to Clapton instead all you can really say is they prefer free Clapton to $40 Dilan (and that preference is crazy obv ).
01-05-2012 , 03:26 AM
Quote:
Originally Posted by coffee_monster
Correct

Incorrect (mainly because that's just a rant against 'idiotic math puzzles'--opportunity cost is part of the mainstream economics cannon, and by your definition, an 'idiotic math puzzle'. So if they're focusing on that, then they should have done better on the 'idiotic math puzzle'. Not that *I* would say it's an 'idiotic math puzzle', just pointing out you can't really have it both ways)
Nah I probably should have clarified. I wouldn't characterize knowing what OC are and especially identifying them in the real world as a math puzzle. The math involved is trivial enough.
I'd characterize this as knowing a concept and its application.

FWIW I think there's certainly some more complicated math in economics that I concider quite relevant. Game Theory comes to mind.

What I'm talking about is endless empirical studies or mindlessly grinding through calculations without ever stopping to wonder why you do those calculations.
My pet peeve, the DSGE models would qualify.
Most economists (in training or with a degree) that I know and/or have talked to remind me a lot of poker players that just randomly make plays because they were told it's good without thinking about it too much.

Quote:
Originally Posted by roblin
I blame selection bias. Obviously anyone who really understood the concept of opportunity cost would have declined to participate.
Quote:
Originally Posted by PJA
I thought about explaining, but realized it would take too long and I'd rather do something else.
Quote:
Originally Posted by Vantek
When I first read the thread I considered trying to make this play myself, but decided it wasn't worth the effort.
*geek smile*

Quote:
Originally Posted by Bremen
Wouldn't an austrian just say the answer is meaningless? You can't really know someone is willing to pay $50 for something unless they actually pay for it. Since they didn't and went to Clapton instead all you can really say is they prefer free Clapton to $40 Dilan (and that preference is crazy obv ).
Yes we wouldn't answer the question in money terms but rather just say "whatever you have to give up to see that concert" (opportunity cost = next best alternative forgone). The question becomes moot since costs are subjective. Alas that's not an option in the MC test and while many non-Austrians struggle or are unwilling to change their POV to an Austrian one the reverse isn't true for me.

Last edited by clowntable; 01-05-2012 at 03:41 AM.
01-05-2012 , 04:11 AM
Quote:
Originally Posted by Bremen
Wouldn't an austrian just say the answer is meaningless? You can't really know someone is willing to pay $50 for something unless they actually pay for it. Since they didn't and went to Clapton instead all you can really say is they prefer free Clapton to $40 Dilan (and that preference is crazy obv ).

To which Clowntable replied:

Yes we wouldn't answer the question in money terms but rather just say "whatever you have to give up to see that concert" (opportunity cost = next best alternative forgone). The question becomes moot since costs are subjective. Alas that's not an option in the MC test and while many non-Austrians struggle or are unwilling to change their POV to an Austrian one the reverse isn't true for me.
Here's the thing--in this case/question, what mainstream economists are trying to get at is how a person 'correctly' makes a choice. See the adjusted question later in the linked paper as an example--they say that they're not really changing things, but the modified question is more in line with what I'm saying--it's how a person makes a decision for himself, not how someone makes the decision for them. So it's not a "you" saying "they" think/want something, there's no needing to 'get inside someone's head' at all.

So you are correct in saying what we can get from observation, but again, that's not what's going on. What is going is the following:

"Well, *I* have a free ticket for Clapton. *I* could purchase a ticket for Dylan at a cost of $40. What *I* would be willing to pay is $50 for that concert. That means I'm giving up $10 worth of enjoyment by forgoing the Dylan concert. Given this, should *I* go to the Clapton concert?"

Note that there is only one person involved, the economic actor. No second or third parties at all. No need to base what we know from observation, because the person making the decision/calculation knows their own valuations.

Quote:
Originally Posted by clowntable
Nah I probably should have clarified. I wouldn't characterize knowing what OC are and especially identifying them in the real world as a math puzzle. The math involved is trivial enough.
I'd characterize this as knowing a concept and its application.
I'd agree with where the failure is.

Quote:
FWIW I think there's certainly some more complicated math in economics that I concider quite relevant. Game Theory comes to mind.

What I'm talking about is endless empirical studies or mindlessly grinding through calculations without ever stopping to wonder why you do those calculations.
My pet peeve, the DSGE models would qualify.
Most economists (in training or with a degree) that I know and/or have talked to remind me a lot of poker players that just randomly make plays because they were told it's good without thinking about it too much.
Note: I haven't played with DSGE models. But what I can say is that you might just be seeing some bad economists. I've known good and bad Physics, good and bad Economists, and good and bad poker players. I'd go a bit further--I'm a theorist. Most of the people I've come in contact with have tried to base their calculations on intuition. An important part of a paper (one my adviser kept reminding me about) was the interpretation of the model/work. I would just have to disagree with you in that respect. I would say though that I agree with you if you're just gathering data and 'doing' econometrics on those data sets. I have seen a lot of what you're describing there. At the risk of sounding like a 'no true scotsman' argument, I don't really consider econometrics 'true' economics. Or, to put it in a nicer way, a lot of the people using econometrics are using it as a tool, and not really doing 'economics'. Well, that might not be coming across correctly--what I'm sort of getting at is that I'd like to separate those two areas.

That said, I'm going to a huge economics conference this weekend, and I'll keep the 'intuition question' in the back of my mind. With 15-20 minutes to present a paper, one *should* be focused on the intuition. I'll report back what I observe.
01-05-2012 , 09:53 AM
To me, econometrics is simply the study of statistical methods that are most useful for dealing with economic data. learning from economic data is really important and certainly falls under "true economics" imo, but I know that some top theorists (like Rubinstein iirc) have a different view.
01-05-2012 , 01:49 PM
coffee,

this one? http://www.aeaweb.org/Annual_Meeting/index.php

if so, trip report please

ty
/econ-nerd
01-05-2012 , 03:13 PM
Quote:
Originally Posted by razrback
coffee,

this one? http://www.aeaweb.org/Annual_Meeting/index.php

if so, trip report please

ty
/econ-nerd
Yep.
01-05-2012 , 03:23 PM
Quote:
Originally Posted by Vael
To me, econometrics is simply the study of statistical methods that are most useful for dealing with economic data. learning from economic data is really important and certainly falls under "true economics" imo, but I know that some top theorists (like Rubinstein iirc) have a different view.
I guess to me it depends how it's done. If it is taking a model (theirs or someone else's) and using data to validate or refute the model, I would put that under the umbrella of economics. But I've seen a lot of throwing stuff into a regression, seeing what comes out and trying to fit a model to that result.

That said, there is information to be learned even in those cases. And perhaps I'm being a bit too harsh on econometrics. I definitely don't want to come across as against looking at data, so maybe when agreeing with clown table about his point about what he's observed, maybe I should say "I've seen that too, and they're doing it wrong". Or at least not as good as they should be doing.
01-05-2012 , 06:11 PM
Quote:
That said, there is information to be learned even in those cases. And perhaps I'm being a bit too harsh on econometrics. I definitely don't want to come across as against looking at data, so maybe when agreeing with clown table about his point about what he's observed, maybe I should say "I've seen that too, and they're doing it wrong". Or at least not as good as they should be doing.
I can completely agree with that. I've scouted some econ PhD job offers recently and snap remove any that mention econometrics at all...thinns the field by a good margin

I also think statistical analysis can be usefull but I squarely put usefull analysis in the business (i.e. entrepreneurship) camp. Or tl;dr: Prediction in the realm of economics=entrepreneurship.

I think economics as an academic discipline is very guilty of breeding lemmings and non-thinkers...of course I can't prove that.
I have my (very Austrian...nofair-why-wecannot-haz-mainstream ) theories about why that may be the case and I have a feeling that/science theory/philosophy will take up a good chunk of my PhD thesis if I'l gambooool and find someone that would accept something very Austrian (I have some business profs in mind, really doubt I'd ever try to do it at an econ department. Went the same route for my masters thesis)
01-06-2012 , 01:44 AM
While reading this I knew the answer they "wanted" was $10, even though I think based on the wording the answer should clearly be $0. But obviously in the economics field it's $10 based on how they define things. But the question states Bob Dylan is the next best alternative. This implies Eric Clapton is the preferred choice. Thus, if on a normal night you'd be willing to pay $50 to see Dylan, then on a normal night you'd be willing to pay >$50 to see Clapton. If Clapton's ticket is worth >$50 then going to see Dylan, your inferior choice, is a net loss comparatively.

If someone is given 2 free cash gifts but can only chose one, $60 or a $50 one, the opportunity cost of choosing the $60 one shouldn't be $50 for all intents and purposes. I guess as a poker player since we often have to compare various scenarios comparing value in each then chose most +EV one it feels odd to call it an opportunity cost. If I'm offered a free $10 to go to some buffet for lunch but would have been going to Nobu instead, going to the buffet is what has the real opportunity cost, obviously.

      
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