Chapter 142 Author postscript

By now, you probably have a glimpse of natural economics.You may have relayed some of the examples in this book to family and friends.If you have, each relevant conversation between you will deepen your understanding of the economic principles these examples illustrate. There are no tigers in the mountains, and monkeys are called kings.As I said in the introduction, even people who have taken economics courses in college are largely clueless about how basic economics principles work.So, in relative terms, you have become an expert in economics. You may already be able to see new details and patterns in some of the little things you do every day.Nine times out of ten you will come across various discount thresholds while shopping around the store.If you're looking for a tough example, see if there's a product that's never discounted to customers willing to clear a certain category of thresholds.There are, but very few.Digging through them can reveal a lot of interesting thresholds you hadn't noticed before.

If a friend asked you why so many stores had bed sheets and towels on sale every January, you could probably come up with an economically plausible explanation.You can say that with the discount, some customers who would not have bought it would decide to buy it, so the merchant sold additional copies.Of course, the challenge for merchants is to prevent buyers who are willing to pay list price from buying an item at a deep discount. You can describe to a friend that in order to achieve this goal, the January sales set up two thresholds for buyers.First, a shopper who is keen to buy discounted goods must remind himself when the goods are on sale; second, he must wait patiently and postpone the purchase until the sale.You explain that these thresholds work because people who are willing to skip them would not have bought sheets at all in a year, at least not many sets at a time, had it not been for deep discounts.

Your friends may still ask, why don't other people jump over these thresholds?You answered that those with a high opportunity cost of time often find it too troublesome to jump the threshold.For example, Bill.The Gateses wanted to buy extra towels in June, and they didn't want to wait until January.Such people generally pay the list price. If someone asked you why a manufacturer would give a discount to a customer who sent back a coupon, you would give a similar explanation.People with low opportunity cost of time will generally not buy without a discount.And these are the people who, in particular, are willing to take the time to mail back the coupons and wait patiently for the rebate check from the manufacturer six months later.

My mom is a very price sensitive customer and she does it all the time.If you do the same, chances are you're also a highly price-sensitive customer.But if you've never bothered to send coupons to manufacturers, you're probably not price sensitive.Merchants will not think about giving you a discount, because they know that you are willing to buy their products without a discount. After seeing so many examples of misalignment between individual and group interests, you'll immediately notice a few others.For example, if you have a kid in high school, you've probably noticed that while taking SAT prep classes is a must for every high school student aspiring to get into top colleges, overall, A lot of time and money spent on these courses is really not going to help.Getting into a top university is essentially a competition, and in a competition, no matter how fiercely one competes, there is always a finite number of medals.

There are an astonishing number of such competitions, and the players are behaving as little more than the functional equivalent of an extravagant and futile arms race.Take college football, for example.In order to increase the chances of winning, schools compete to hire coaches, recruit new players, and replace training equipment at high prices.But no matter how much the school spends, half the teams lose every Saturday when they play. People are clearly noticing this waste and racing to invest in performance gains ends up making the investment for nothing.In almost all cases, regulators have taken various measures to limit such investments.For example, in the F1 formula car, the engine displacement is limited to two.Four liters, in case competitors keep changing to higher displacement engines.Likewise, all professional sports leagues impose strict roster restrictions on teams to limit the cost of defending against competitors.

Agreements to limit the arms race are by no means limited to formal sports competitions.In many important areas of life, returns are high or low based on relative performance.So, we have seen in previous chapters all kinds of regulations that limit the arms race, such as mandatory school hours for young children, uniform requirements for students, workplace safety regulations, and laws against polygamy. If you like a tough challenge, here's another one: find an organized activity where participants are rewarded based on relative performance, but the organizers place no limits on how much the participants can invest in competing to improve their performance .Anyway, I haven't encountered such an activity.Rules are data.Look at the rules made by various groups and determine what they are meant to do.

The examples in this book about the theory of compensating wage differentials are especially useful if you are considering changing jobs, or if your children are considering what careers they might pursue in the future.I say this because I have noticed that students who understand this theory start to think more intelligently about their career choices.At first, the only goal of many people is to find a job that pays as much as possible.But as we have seen, higher wages mean compromises in other important areas, such as job satisfaction.If a job has to do something wrong, the working hours are too fixed, the promotion potential is limited, the job security is low, and the natural attractiveness is low, so you must pay a relatively high salary for this.

For the sake of high wages, some people are willing to accept such an exchange, but others are not even aware of the existence of such a transaction.Even if you've just begun to train yourself to look at things through an economic lens, you probably know that when you come across a job offer that pays too well, you have to check it carefully.If the offer is too good to be believed, you'd better not believe it. You also know very well when to take information at face value and when to think twice.If the interests of both parties are completely aligned, there is obviously no need for them to mislead each other.Therefore, when playing bridge, one player uses the standard bidding method to hint to the opponent whether the cards in his hand are good or bad. Then, the opponent only needs to understand what he means, and there is no need to doubt its authenticity.But if a seller brags about how high-quality their products are, buyers have every reason to be skeptical.

Natural economists know that unless such information is expensive and difficult to falsify, it will have little credibility.For example, if the seller offers a comprehensive warranty, this should be considered a relatively reliable signal of product quality, because if the product quality is too low, the seller cannot make money providing this kind of service. The principle that there is no such thing as a free lunch reminds us to beware of the rhetoric of investment advisors.If an investment advisor claims that a company's stock price is undervalued, what he's saying is, in effect, a free lunch is on the table.However, if there is a free lunch on the table, no one will eat it all the time.If other people also know that the stock price is too low, we must wonder, why didn't they rush to buy it?In that case, the stock price would have been pulled up long ago.Is the investment advisor talking about inside information?Astute us, with the keen eye of a naturalist economist, must realize that anyone who boasts of getting rich overnight by buying cheap stocks is a liar.

But looking at things through the eyes of economics has many other rich rewards besides helping you make more informed decisions in the marketplace.Basically, all aspects of a given environment and all features of human and animal behavior are the direct or indirect result of the trade-off of costs and benefits.With a keen eye, we can spot many related structures and patterns in our everyday experience.In the days to come, you can take finding out these interesting phenomena as a wonderful intellectual adventure. (End of the book)