Notes on “Snap-Back and Gone-Forever Goods”

The actual title is a bit longer than that: “Snap-Back and Gone-Forever Goods: Understanding the COVID Recession’s Economic Winners and Losers“.

Tyler Cowen had shared this link on MR a couple of days ago, and I really liked this blog post for two reasons: one, a great framework that I can use in the coming semester for teaching Principles of Economics (more about the framework in a bit), and two, it speaks about higher education towards the end of the post.

Let’s get started:

  • “Due to the impending COVID pandemic, businesses, except for essential ones, simply had to shut down. People were essentially forced to stop buying things they actually wanted to buy.”
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    It almost sounds trite put this way, but us economists are so used to thinking in terms of whether it is a “demand-side” problem or a “supply-side” problem that it makes sense to remember this: this one is neither! Folks are (more than) willing to supply, and folks are (more than) willing to buy – in most cases. We’ve imposed on ourselves, as a society, restrictions that prohibit such exchanges from taking place.
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    There will be knock-on effects, some of which are already visible. And that will then take us into familiar territory (supply shock, demand shock etc). But a crisis due to a pandemic is fundamentally different!
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  • First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.” In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.
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    Simple frameworks are such lovely, beautiful things. I think all of us in India experienced “Snap-Back” goods – and to a lesser extent, services – with the winding down of the nationwide lockdown. The number of Amazon deliveries in my own household is proof enough for me. Of course, services such as the ones offered by The Urban Company, for example, is another story altogether – but still, the point remains. “Snap-Back” goods ought to be a thing, especially in 2020.
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  • ““Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever. Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.”
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    Anybody who knows me will know that haircuts isn’t the most appropriate example! But enough of splitting hairs, the point is well taken. There are certain goods and services (am I wrong in thinking that it will be mostly services) that will be “gone forever”.
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    That being said, the nomenclature chosen here is slightly unfortunate. One might get the impression that the good or service in question will not be provided at all, except that is of course not true. It is just the case that business for the barber in question was bad during the lockdown. Fingers crossed, business will return to normal once things get back to normalcy – whenever that may be. And of course, if things open up without a vaccine/cure, business will be lower than would otherwise have been the case. But it still will not be “Gone Forever”.
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  • “Economic booms and busts cause average incomes to rise and fall. As a result, businesses that sell a good or service that people purchase during good times and bad, like haircuts and toothpaste, are more insulated from recessions. Businesses that sell the Fountain Powerboat 32 Thunder Cat speedboat (see below, retail price $400,000), and other goods whose sales depend on people having a lot of money on their hands, fare poorly in a recession.”
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    Tyler Cowen himself had made the point some months ago that certain business will probably not outlast this recession, and mentioned how that may not, on balance, be all that bad a thing. I’m paraphrasing, see the exact quote here. Would the world be worse off if we produced less Fountain Powerboat 32 Thunder Cat speedboats in the years to come?
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    To be clear, I do not at all mean to suggest that Bruce Wydick will lament the potential passing of these speedboats. I am simply suggesting that some luxury goods not being produced may not be the worst thing ever (and yes, I am well aware of the macroeconomic implications).
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Sourced from: http://www.acrosstwoworlds.net/?p=1176
  • This, above, is the simple framework I was referring to at the start of today’s blog post. 2×2 matrices are far too prevalent in management schools, and not prevalent enough in economic textbooks, and this was therefore very welcome indeed. But not just because of that! It really does help clarify my thinking.
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    I need to note that Bruce Wydick has explained what income elasticity of demand is before showing this figure. I haven’t, but a simple Google search will help you learn what the income elasticity of demand is. Alternatively, click here to read about it, or watch this video.
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  • First things first: it is interesting that all of the upper left quadrant is services, and not goods. In fact, I’m hard pressed to think of a single good that would fall in this bracket. Maybe seasonal fruits that you won’t get again until the same season comes back next year (mangoes being a classic example in India, of course). Can you think of any other goods that are “gone forever”?
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  • And now onto higher education.
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    “Enrollments in higher education are typically thought of as a normal good, and estimates of income elasticity are typically slightly inelastic (slightly greater than 1.0), meaning that for each 1 percent increase (decrease) in income, enrollments increase (decrease) by about 1 percent.”
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    That’s from this link, which I got by reading the blogpost we’re taking notes for. Worth keeping in mind for what follows.
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  • “What this means is that the data show college-bound kids keep going to college even in recessions.”
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    That quote is in the context of the income elasticity of education. I have two points to raise in this context, though:
    • First, as Bruce Wydick himself explains earlier on in the blogpost, this year is an example of supply and demand being willing, but markets still not clearing. That is, this time is different. Under normal circumstances, sure – but enrollment may drop because of other factors than change in income.
    • Second, bundling! When you buy an education from a college, you’re buying the signal that you have learnt, you’re buying the learning itself and you’re buying the peer networks you develop because you attend college.
      The current pandemic means that you need depend on college for only the first of these three goods: learning itself, if it is to be online, can happen through multiple online providers, and peer networks in the physical sense is unlikely to happen at least through 2020.
    • Combine the inevitable drop in nationwide income with the fact that only one out of the three “goods” from a college being up for sale, and you reach the conclusion that enrollment will likely suffer this year.
  • The reduction will of course be different for different countries, and different once again for colleges within the same country. But at the margin, my model of the world tells me to expect either a lower number of applications, or a lower number of enrollments – or both.
  • But this article is worth a read and a bookmark for the framework alone!

Agriculture in England and India, Immigration, Water and Healthcare

Five articles I enjoyed reading this week – and hopefully you will as well

The change that is coming over farming can be summarised in simple economic terms. Intensive agriculture prioritises a bumper harvest – the annual dividend – while the new approach emphasises the preservation of the initial capital – the land itself. For a glimpse of how this new investment priority will affect British farming, it suffices to visit those progressives who have already, to varying degrees, made it their own.

The Guardian Long Read on agriculture (in England). Horizons (one out of choices, horizons, incentives and costs) remain underrated in economics classes, as this article points out. But there is much more to read here: recommended!

It developed an app-based platform that registers orders directly from buyers, analyses category-wise demand, fixes dynamic prices depending on daily demand, and transfers the orders to its network of 1,000+ farmers. Farmpal’s price comparison feature ensures that farmers can sell their produce at rates higher by 20 to 30 percent than what they would normally get in the mandis.
“This is one of our main promises to the farming community. We are able to offer them premium prices because technology eliminates at least four to seven middlemen from farm to fork,” the founder explains.

While on the topic of agriculture, this from Maharashtra, India: Farmpal.

Caplan’s case isn’t entirely about economics: he also makes a moral appeal. Consider the case of “Starving Marvin,” who needs food and is prepared to purchase it legally. On his way to the market, he is turned away by an armed guard. If Marvin subsequently dies of starvation, Caplan asks, is the guard guilty of murder? The philosopher Michael Huemer, who first introduced this hypothetical, in 2012, concluded that the answer was yes. He writes, “If a person is starving, and you refuse to give him food, then you allow him to starve, but if you take the extra step of coercively interfering with his obtaining food from someone else, then you do not merely allow him to starve; you starve him.” Caplan doesn’t go that far, but he does argue that the guard is wrong to prevent Marvin from feeding himself.

Read the paper, read the book, read this profile of Bryan Caplan, and his quixotic quest to get all of us to accept a world without borders.

Geologists and hydrologists, who worked on implementing the project, shared similar views and hailed Jalyukta Shivar. This was mainly due to the interventions undertaken in the existing water reserves, planned de-silting activities, among many others. However, experts agreed that the scheme was not appropriately implemented. Now with Jalyukta Shivar no longer in existence, focused efforts of the past five years, in most likelihood, will go down the drain unless a similar scheme is introduced. With rainfall variations getting more pronounced, in addition to depleting groundwater reserves, the state will need concrete interventions to tackle future water requirements, experts recommended.

As Tyler Cowen is fond of saying, solve for the equilibrium. On the politics of water conservation in Maharashtra.

America’s mediocre health outcomes can be explained by rapidly diminishing returns to spending and behavioral (lifestyle) risk factors, especially obesity, car accidents, homicide, and (most recently) drug overdose deaths. [Please read this post for the full explanation]

The diminishing returns are evident in cross-sectional analysis. Higher-income countries like Norway and Luxembourg spend twice as much as the likes of Spain and Italy and probably experience worse average outcomes.

Via the excellent Navin Kabra, a very, very long article on healthcare in America. Excellent if you are a student of America, healthcare or microeconomics. At the intersection of the three, it becomes mandatory reading. Pair up with Baumol’s Cost Disease (although the name is misleading, it is the most popular way to this phenomenon is referenced)

 

Applied Microeconomics

Every single class that I teach, I end with a little tradition: students must ask me five completely random questions. These questions must necessarily have nothing to do with whatever it is that I taught in that class, but that apart, they can be about absolutely anything under the sun.

There are many, many reasons for this little exercise: a fun way to wrap up class, helps students ask better questions, keeps me on my toes are just three of them. One of the questions that I was asked recently was about the whole Kunal Kamra/Arnab Goswami incident.

Here’s the quick summary of how I answered that question in class: I am not (and this is putting it mildly) a fan of Arnab Goswami, but I wish Kunal Kamra had not done what he did.

In what follows, I try to think like an economist in explaining the latter half of the summary above.

  1. Many more people have a heightened awareness of both Kunal Kamra and Arnab Goswami than before the incident took place, and to the extent that their professions benefit from more publicity, they gain in this one regard. (It is, of course, more complicated and nuanced than that, but this is a blog post.)
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  2. One reason I wish Kunal Kamra hadn’t done what he did is because the ensuing publicity of the video normalizes heckling somebody on a flight/in a public space. Yes, I have seen the video in which Tejaswi Yadav was heckled by the Republic employee, and of course I wish that hadn’t taken place either. My point remains the same in both cases: it has become more acceptable to heckle somebody in a public space, and that isn’t great for civilized discourse.
    In economist-y terms, the price one pays in terms of social disapprobation is lower for everybody. In plain English, it is now ok to do that, is the message that people are left with.
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  3. Both points above taken together imply there is a higher benefit (in terms of attention on social media) to be gained at a lower cost (lower social disapproval), which should lead the economist to predict that we should see more such incidents take place in public. The point remains true no matter who is doing it to whom in terms of the (for lack of a better phrase) ideological divide.
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  4. But then again, the fact that the supply of such incidents will rise effectively means a shifting out of the supply curve (with the quantity of such incidents on the horizontal axis and time spent being informed of these incidents on the vertical one). In English, the more such incidents are reported, the less time we will spend thinking about them.
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  5. That will either disincentivize people from being a part of such incidents, or normalize it entirely to the point of it becoming almost banal. As a cynic, my bet is on the latter.
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  6. Which, by my standards, is society becoming definitively worse off.
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  7. And by that standard, my normative prescription is that one should not engage in heckling somebody in a public space…
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  8. … and, in equilibrium, one should also make this the last article about this topic! This applies as much, of course, to the writer as it does to the reader.

 

Addendum: a friend to whom I had sent this post for feedback pointed out that in equilibrium with regard to point 5., people will have to be ever more attention seeking. My friend was horrified by that conclusion, and I agree on both counts.

 

 

 

EC101: Links for 13th June, 2019

  1. “A September 2018 article from Eater tells us that Miguel Gonzalez delivers directly to 120 New York restaurants. As an avocado supplier, he works with farms in Mexico’s Michoacán state. To maintain consistency and minimize bruising, he monitors truck temperatures and how the boxes are stacked during their 2600 (or so) mile journey.”
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    What happens when you raise the tariff on a commodity? Who do you think will (ultimately) pay? Econ texts give you the answer – this article provides an example.
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  2. “Across the United States, a similar cocktail seems to be keeping inflation at bay: Employers are reluctant to charge more, unsure how consumers will react, and they’ve found an untapped supply of workers. It’s partly great news. More Americans are getting jobs than policymakers once thought possible, and wages and prices aren’t spinning out of control the way history would predict.”
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    Think you know macroeconomics? Short answer: you never really do. The NYT provides an example of a conundrum that is keeping the Federal Reserve up at night: full employment, low inflation. A nice problem to have, right? You’d have thought so…
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  3. “Economists have written about topics that we would now classify under the headings of “microeocnomics” or “macroeconomics” for centuries. But the terms themselves are much more recent, emerging only in the early 1940s. For background, I turn to the entry on “Microeconomics” by Hal R. Varian published in The New Palgrave: A Dictionary of Economics, dating back to the first edition in 1987.”
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    On the etymology of micro and macroeconomics.
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  4. “Belloy’s misfortune stemmed from more than bad luck. He was the victim of unscrupulous traders known simply as operators, who might sell fake elevator receipts, or move prices in their favor by spreading false news. Or they might pull off an especially cunning manipulation known as a corner, in which they would buy future wheat while simultaneously buying all physical wheat.Later, when it came time for the operator to take delivery of his future wheat, the other trader had to first go buy some. But there was none. The operator owned it all. Thus trapped, or cornered, the victim had no choice but to pay whatever price the operator demanded. Cornering was the ruin of many a trader, like our Belloy, to whom the only apparent recourse was to find the nearest saloon and shoot himself in the head.”
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    Rarely are classes in financial economics so very entertaining. A lovely history (maybe apocryphal, who knows) about the early days of the CBOT in Chicago.
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  5. “There is no simple remedy for the curse of knowledge, but let me offer a suggestion. Keep a particular person in mind as you teach. That person should be someone you know well—a parent, a spouse, or a best friend (as long as that person is not an economist). Pretend you are explaining the material to them. Are they getting it, or are they lost? If you know this person well, you may be able to more easily empathize with their learning challenges. You might prevent
    yourself from going overboard.”
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    N. Gregory Mankiw comes up with a short six point guideline about how to teach economics better. It is worth going over this list, irrespective of whether you are learning economics or teaching it. Also, taken a look at Eli5?

Links for 4th June, 2019

  1. ““Alexa, are you recording everything you hear?” It is a question more people are asking, though Amazon’s voice assistant denies the charges. “I only record and send audio back to the Amazon cloud when you say the wake word,” she insists, before referring questioners to Amazon’s privacy policy. Apple’s voice assistant, Siri, gives a similar answer. But as smart speakers from Amazon, Apple, Google and other technology giants proliferate (global sales more than doubled last year, to 86.2m) concerns that they might be digitally snooping have become more widespread. And now that these devices are acquiring other senses beyond hearing—the latest models have cameras, and future ones may use “lidar” sensors to see shapes and detect human gestures (see article)—the scope for infringing privacy is increasing. So how worried should you be that your speaker is spying on you?”
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    The article doesn’t answer the question it frames in as direct a fashion as readers might wish, but read this to understand that there is (as with everything else in life) a benefit to this technology, as also a cost.
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  2. “Many voters may have felt that others, more wealthier than them, were also being hurt by demonetization, and hence supported the adventurist move.The results of the second round of the YouGov-Mint Millennial Survey conducted in early 2019 suggest that even today and, despite all the evidence to the contrary, many urban youths who support the ruling party consider demonetization to be a great success of the government.”
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    Can you drive in reverse in a tunnel, Professor Hirschman? Livemint does a three year review of demonetization, and it is worth reading for a variety of reasons.
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  3. “Not all New York City views are created equal.Direct Central Park views may be the most valuable amenity in Manhattan real estate, but in a market filled with soaring new developments — some of which wind up blocking the views of other buildings — even a partial glimpse of a river, park or the city skyline can also command a hefty premium.”
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    This article is proof that microeconomics can be fun. But beyond that, it is also worth going through the article to take in the photographs. New York looks gorgeous!
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  4. “What Microsoft figured out is that it made far more sense for both Microsoft and their customers to pay on a subscription basis: companies would pay a set price on a monthly or annual basis, and receive access to the latest-and-greatest software. This wasn’t a complete panacea — updating software was still a significant undertaking — but at least the incentive to avoid upgrades was removed.There were also subtle advantages from a balance sheet perspective: now companies were paying for software in a rough approximation to their usage over time — an operational expense — as opposed to a fixed-cost basis. This improved their return-on-invested-capital (ROIC) measurements, if nothing else. And, for Microsoft, revenue became much more predictable.”
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    Ben Thompson helps one understand Microsoft, SaaS, Slack, Zoom and a simple way to understand what makes new businesses potentially attractive – be sure to read through the entire article to reach the four quadrant diagram at the end. Entirely worth your time.
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  5. “When it was finally time to deploy, with no hint from the U.S. or China or Brazil or India that anyone would send out a countering air force to simply knock the planes out of the sky, the three billionaires went back to the island and sent the aerosols tumbling through the stratosphere. There was no ceremony, no champagne, no photographs. This was nothing to be celebrated.”
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    My phrase-I-learned-today: Solar Radiation Management.

Links for 15th February, 2019

  1. “This sounds boring, you might conclude. It sounds like work, and it sounds like life. Perhaps we should get used to it again, and use it to our benefit. Perhaps in an incessant, up-the-ante world, we could do with a little less excitement.”
    And also…
    “In a much-read story in The Times, “The Relentlessness of Modern Parenting,” Claire Cain Miller cited a recent study that found that regardless of class, income or race, parents believed that “children who were bored after school should be enrolled in extracurricular activities, and that parents who were busy should stop their task and draw with their children if asked.”
    An article written in praise of boredom, and I couldn’t agree more. Every now and then, it makes sense to get a little (or plenty) bored.
  2. “Back in November, Instacart changed how it paid its delivery workers, saying that it would provide them with an “earnings estimate, and a minimum $10 payment for their work. The controversy arose when it became clear that part of that $10 minimum payment was coming from tips that customers left for their Shoppers, allowing the company to pay less towards that minimum payment. Faced with lower weekly earnings, Shoppers complained, and the company said that it would keep tips separate from that minimum payment.Amazon and DoorDash have similar policies, and despite that outcry at Instacart, they have indicated that they’re sticking with them.”
    Not only a PR disaster, which it is. But also a great way to work through your understanding of elasticities of supply and demand.
  3. “More to the point, having big aircraft puts downward pressure on ticket prices. Carriers typically like to fill up at least four-fifths of their seats to maximize the revenue on each flight. The bigger the aircraft, the more discounting and promotions sales teams need to do to hit this target — one reason that the trend elsewhere in the industry has been away from the A380 and Boeing 747.”
    And if the second link above whetted your appetite about using concepts of elasticity in the world outside – then this article about large airplanes, availability of alternatives and changing partnerships will be quite useful.
  4. “The economy of favours that he describes in long, carefully researched chapters on the genesis of the Genco Pura Olive Oil company was familiar, too, because that was how much of New Delhi and north India’s business clans worked and still work, stepping in to dispense justice, protection, retribution where the government either failed or was absent.”
    There is always a rule of law in society – that may well be a definition of society. That law need not always come from government – where governments are weak, other institutions will step in to form, change and enforce the law. That’s the Godfather, and that’s why it is such a great read.
  5. “A welfare state makes sense if it means the state providing education and health care for all. Alternatively, handouts are affordable in a lower-middle income economy if you divert money from the less deserving, or if the promised benefits are not open-ended so that you don’t get a runaway bill. Without any of these, the old question begs an answer: Should you give a man fish, or teach him how to fish? Lurking hidden in the new bout of welfarism seems to be an admission that the state can’t deliver for the poor anything other than cash.”
    The earlier part of the article points out statistics that show how much India has grown over the past decade and a half. But competitive politics and botched policies mean that we’re once again in dole-out season. The more things change…

Update from Day 1, Beh Econ

Teaching undergraduates is a whole lot of fun, because generally speaking, their curiosity hasn’t been completely killed just yet. And this seems to be true with the people who have chosen to attend the behavioral economics workshop as well – they’ve (hopefully voluntarily) chosen to spend their afternoons attending a workshop over the course of every workday this week. Catch ’em young!

We kickstarted things yesterday by speaking about ways and means to think about microeconomics in a rather conventional sense. I chose to not bore them to death by talking about utility functions and all of that, firstly because it is the worst way on the planet to get people thinking about economics, and secondly because they are all economics students to begin with – the indoctrination has been done by their colleges already.

I spoke instead about the Choices, Costs, Incentives and Horizons framework, which I have spoken about earlier on the blog. Within each of these concepts, however, I added a sprinkling of behavioral economics. What, for example, are your choices when confronted with a buffet spread?

And how long before you realize, if at all, that not eating it is also a choice? Sometimes, being presented with a choice to consume blinds us to the option of not doing so – which explains why checkout counters at supermarkets tend to have chewing gum on sale.

When it comes to costs, we spoke about opportunity costs and how it is often misunderstood – the people attending the workshop are paying me the fees of the program, plus they are paying fifteen hours of their time. Fifteen hours that they could have spent doing something else.

In addition, we spoke about sunk costs. My favorite example is of how I and my wife were finally able to go out for a movie together after the birth of our daughter – and we ended up watching Happy New Year. And yet, even though the movie was tripe of exceptional quality, we chose to sit through the whole thing. Neither of us enjoyed the movie, and by the end, every second was exquisite torture, but we went through the whole experience. This after I’ve been teaching the concept of the sunk cost fallacy for over a decade.

Incentives are both fairly well understood and applied in conventional economics – but how about negative incentives? Rather than reward yourself with a nice shirt if you lose weight, how about allowing a friend of yours to post a picture of you on Facebook where the paunch is especially noticeable? Which is likelier to be more effective?

Finally, horizons: exercise today evening, or finish an episode of your favorite series on Netflix? We tend to go for short term pleasure over long term gains – and that is to our detriment in the long run. But our brain, unfortunately, is not trained to think about long term consequences.

Finally, we spoke a little bit about signaling and it’s importance to us. That’s a topic deserving of a separate blog post entirely, but I will ask you guys a question I asked everybody in class:

Imagine you are able to attend the best college in the world, and are able to handpick the people who will teach you whatever courses you want. The ideal education, structured just the way you want it. The only problem is, you won’t get a degree at the end of it. Or, you could get, right here and now, a degree of your choice from whichever college you like – but you will not be able to attend a single class. Which of these options would you pick?

The question is based, of course, on a question that Bryan Caplan asks in his excellent book: The Case Against Education. Let me know your answer, I am genuinely interested.

Finally, we spoke about Kahneman’s “fast and slow” thinking. How and why it evolved the way it did, why it may have been of help in the fast, but isn’t much use in the world we live in today.

It was an exceptionally fun session, and hopefully it will continue in a similar vein for the rest of the week.