• everyday economics and buffet marginal utilitu

    All-You-Can-Eat Buffet Economics

    Jan 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, Households, Labor, Lifestyle, Thinking Economically • 639 Views

    At Aiello’s Italian Restaurant, mid-way between Syracuse and Binghamton NY, researchers observed behavior at an all-you-can-eat buffet. Their goal was to determine how price affects taste.

    Our Goal? To look at some marginal pizza analysis.

    Please imagine the scene during a typical weekday lunch buffet. At the buffet table, diners could eat as much as they wanted of the pizza, soup, salad, breadsticks and pasta. Entering, they were just asked to fill in a short survey and given one of two fliers. While both fliers said they would get a free beverage, one indicated lunch was $4 and the other said $8. With no further indication of price inside, no one was aware that some patrons were paying more than others. After the meal, they had a follow-up questionnaire that included rating what they ate on a 9-point scale.

    And this where it gets interesting.

    Buffet Economics

    People who paid less enjoyed themselves less. Not only did they give the food a lower rating but also, as they ate more pizza, its appeal declined more rapidly than for the diners who paid $8.

    The researchers concluded that price has a sensory effect. When people think they are getting a bargain meal, because they assume it will not taste very good, it doesn’t.

    This takes us to the extra slices of pizza and a little known, fascinating economist.

    Our Bottom Line: Marginal Utility

    More of us should remember economist Alfred Marshall (1842-1924). A professor at Bristol and Cambridge, he was the scholar who encouraged us to think at the margin. Marshall saw that extras matter because their value varies. Because the wage for one extra worker might be less than the extra revenue she generates, we would not want to hire her. When we decide to sleep an extra 15 minutes, we usually compare the marginal benefit (the pleasure) to the marginal cost (no time for breakfast).

    Similarly, at a luncheon buffet, rating the taste of subsequent slices of pizza, we are focusing on the satisfaction–or “utils” as an economist might say– from each extra slice. Called diminishing marginal utility, the pleasure of each extra unit of consumption tends to decrease. As a result, we enjoy the first slice of pizza more than the third one.

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  • Everyday economics and beer product differentiation

    What a Blind Taste Test Showed About Beer

    Jan 4 • Behavioral Economics, Economic Thinkers, Entertainment, Households, Lifestyle, Media, Thinking Economically • 666 Views

    At the Green Dragon beer bar in Portland Oregon, economists from the American Association of Wine Economists (AAWE) wanted to see whether patrons could differentiate three European lagers. Offered no brand cues, participants would just have three glasses placed in front of them to taste. Two glasses would have the same beer (the twins) and the third, a second brand (the singleton). Called the triangle test, the experiment’s design only required participants to decide which beer was different and which two were the same. Czechvar, Heineken and Stella Artois were what they tasted.

    Where are we going? To behavioral economics and consumer decision-making.

    The Beer Triangle Test

    Because of the triangle format, researchers needed three rounds and recruited 138 unpaid tasters.

    • Round 1: Beer A in 2 glasses; Beer B in 1 glass
    • Round 2: Beer B in 2 glasses; Beer C in 1 glass
    • Round 3: Beer C in 2 glasses; Beer A in 1 glass

    The tasters were aged 21 to 70, each of whom participated in one round. 61 percent were men. Their goal was to see whether their results reflected chance or taste recognition. One-third was the dividing line. The results would be categorized as reflecting chance if the singleton were identified in less than or equal to one-third of the round’s responses. But more than one-third of all responses meant people recognized a taste difference.

    In the graph (below), with the red line dividing chance from taste recognition, you can see that, overall, the drinkers’ answers were no better than if they had been guessing and not even tasting the beer. Specifically, in Rounds 2 and 3, they performed worse than chance and in Round 1, slightly better.

    Beer taste does not achieve product differentiation

    From: “Hide the Label, Hide the Difference?”

     

    So, what is going on?

    Perhaps we choose our beer because of something other than taste.

    The Pepsi Paradox

    And that takes us to what Scientific American called the Pepsi paradox. Attaching participants to an MRI, scientists at Baylor Medical School watched the brain respond to Coke and Pepsi during a blind tasting and then when people knew what they were drinking. When people did not know which Cola they were drinking, their ventral putamen (part of the brain that relates to feeling good) displayed their pleasure after the Pepsi taste because most of them liked it better. However, told which was which, a different part of the brain with “a higher cognitive process” became active with Coke. Essentially, the message said, you may like Pepsi better but you should prefer Coke.

    Our Bottom Line: Behavioral Economics

    Psychologist Daniel Kahneman in Thinking Fast and Slow tells us that our decision-making responds to our brain’s System 1 and System 2. System 1 is our fast thinking and System 2 is slow. System 1 involves intuition and the answers we can automatically come up with. We use system 1 to add 2 + 2 and to jump to a conclusion about someone’s mood based on her expression. By contrast, System 2 involves more attention and cognition. It can relate to waiting for a starter gun to sound in a race, to deciding appropriate behavior and to filling out a tax form.

    A father of behavioral economics, Dr. Kahneman won the Nobel Economics prize for telling us that people do not always behave rationally when they make economic decisions. Returning to beer and Coke and Pepsi, I wonder if Systems 1 and 2 relate to our brand loyalty.

    A System 1 or System 2 impact from this Coca-Cola ad?

     

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Marijuana to the Metric System

    Jan 3 • Economic Growth, Economic History, Economic Humor, Economic Thinkers, Government, Health Care, Households, International Trade and Finance, Lifestyle, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 901 Views

    Our Posts Roundup

    Everyday econ omics and the metric switch Sunday 12.28.14 Why we cannot make the metric switch…more

     

    everyday economics and the cost of curing diseases Monday 12.29.14 Diseases that cost too much to cure…more

     

    Everyday economics and the Fed's dual mandate Tuesday 12.30.14 A tough choice for the Fed…more

     

    Everyday economics and the scale of harmful substances. Wednesday 12.31.14 The surprising scale of harmful substances…more

     

    everyday economics and ways to sound like an economist Thursday 01.01.15 A top ten list for the new year…more

     

    Housing problems foreshadow business cycle contractions. Friday 01.02.15 The fast way to see the housing crisis…more

     

    Ideas Roundup

    • cost and benefit
    • transaction costs
    • globalization
    • tradeoffs
    • opportunity cost
    • healthcare
    • inflation
    • employment
    • dual mandate
    • monetary policy
    • negative externalities
    • economic humor
    • GDP
    • recession
    • business cycle

     

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  • Housing problems foreshadow business cycle contractions.

    A Short Version of the Housing Crisis Story

    Jan 2 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, Financial Markets, Households, Lifestyle, Regulation, Thinking Economically • 412 Views

    Hyman P. Minsky was an economist who worked at Brown, Berkeley, Washington U. and the Mark Twain Bank in St. Louis. Perhaps reflecting the synergy between an academic and a business background, more than 25 years ago, he described a boom bust sequence that we seem unable to avoid.

    The Minsky Moment

    Moving from a “hedge” to “speculation” to a “Ponzi” phase, the stages of lending in the U.S. housing crisis were just what Minsky predicted. In the beginning of the cycle, financial institutions loan money to home buyers who can afford to service debt and pay back principal. However, as their demand boosts home prices and spreads a wealth effect, lower lending standards open markets to more buyers. With speculation intensifying, borrowing standards further plunge as buyers and lenders realize that increasing prices facilitate the resales and refinancing they need to buy unaffordable homes. Once prices stop rising, like a Ponzi scheme, it all collapses in what has been called a Minsky Moment.

    The Housing Chronology

    The following sequence of NY Fed maps, lets us compare monthly home prices to where they were the previous year. Moving closer to a Minsky Moment, most counties on the Fed’s 2006 map (below) display rising home prices.

    Great recession housing price changes.

    Way beyond a five percent “sweet spot,” during 2005, home price increases in California and Florida exceeded 25 percent. By contrast, below, we can see the first seconds of a Minsky Moment.

    Great recession housing prices

    While county by country housing markets vary, still the spread of the Minsky Moment was unfolding with more defaults and subsequent foreclosures.

    Great recession housing prices 2008

    And continuing.

    Great recession home price change 2009

    And continuing.

    Great recession home price changes 2010

    And continuing.

    Great recession home price changes 2011.

    Here, the NY Fed suggest prices had reached their nadir and begun to rise.

    Great recession home prices changes 2012

    And rise.

    Great recession home price changes 2013.

     

    And now, a slowdown toward that five percent sweet spot for home price increases?

    Great recession home prices 2014

     

    And here it is, animated.

     

    Our Bottom Line: Business Cycles

    As the four stages of a business cycle–peak, contraction, trough, expansion–unfold, housing can provide signals about where the economy is going. In an Econtalk discussion, UCLA economist, Ed Leamer points out that most of the recessions that followed World War II were preceded by housing problems.

    Looking at the trajectory of the business cycle before and during the Great Recession, we see a trough in November 2001, expansion until a peak in December 2007, and then the contraction that ended in June 2009. In our housing price maps, you can see the Minsky Moment that foreshadows the beginning of the December 2007 contraction.

     

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  • everyday economics and ways to sound like an economist

    Economic Humor: The Top Ten Ways To Sound Like An Economist

    Jan 1 • Behavioral Economics, Economic Humor, Thinking Economically • 643 Views

    If one of your New Year’s resolutions is to “think economically,” please remember the following top ten list…and do send in your own entries.

    Here is one I got last year from Kevin Denny (Thank you!):

    To reject any inconvenient fact, “The econometric evidence is not clear on this.”

    My Top Ten List

    1. Whatever the question, always answer, “There’s no such thing as a free lunch.”
    2. Defend a decision by declaring, “It was worth the opportunity cost.”
    3. Whether you like or dislike government, point to, “The power of the market.”
    4. Explain a love of low prices with, “It’s the law of demand.”
    5. Explain high prices with, “It’s the law of supply.”
    6. Preface a position with, “on the one hand…but on the other…”
    7. Justify your Thai T-shirt, Japanese camera, and Sumatran coffee beans by repeating, “comparative advantage, comparative advantage…”
    8. When asked, “How are we doing?” just cite the GDP, CPI, and S&P.
    9. Know that the size of the pie has nothing to do with food.
    10.  And finally, the most dependable way to “think economically” is to remember that, no matter what the topic, “It’s about the economy…”
     

    Note: I wrote this list several years ago and repost it on January 1st. Enjoy and happy new year!

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