How can you learn to think like an economist? One way is to think about what might be called dinner table economics--puzzles or patterns that arise in everyday life that would be good to understand. Robert Frank of Cornell University and author of The Economic Naturalist talks with EconTalk host Russ Roberts about a number of these puzzles including why grooms typically rent tuxedos but the bride usually buys her gown, why bicycles can be more expensive to rent than cars, the effects of the price of corn on the price of pork, and why scammers who invoke Nigeria keep using the same old story.
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Readings and Links related to this podcast episode
About this week's guest:
Robert Frank's Home page
About ideas and people mentioned in this podcast episode:
The Economic Naturalist: In Search of Explanations for Everyday Enigmas, by Robert Frank on Amazon.com. Introduction, PDF file.
Articles and Blog Posts:
"How Can They Charge That? (And Other Questions)," by Robert H. Frank in The New York Times.
"The Magic of Education," by Bryan Caplan. EconLog, Nov. 28, 2011.
Alfred Marshall. Biography. Concise Encyclopedia of Economics.
Web Pages and Other Resources:
iPhone 6S -- Prince Oseph. Advertisement video, YouTube.
Citi Bike. Bike rental subscription service in New York City and other metropolitan areas.
Robert Frank on Economics Education and the Economic Naturalist. EconTalk. October 2007.
Bryan Caplan on College, Signaling and Human Capital. EconTalk. April 2014.
McCloskey on Capitalism and the Bourgeois Virtues. EconTalk. March 2008. Discussion starting at time mark 48:34 about teaching via economic puzzles.
More economic puzzle podcast episodes
Grab Bag: Munger and Roberts on Recycling, Peak Oil and Steroids. EconTalk. September 2007.
Munger on Many Things. EconTalk. January 2010.
Walter Williams on Life, Liberty and Economics. EconTalk. October 2006.
Cowen on Liberty, Art, Food and Everything Else in Between. EconTalk. March 2007.
Munger on Milk. EconTalk. September 2013.
Podcast Episode Highlights
Intro. [Recording date: December 8, 2015.] Russ: Now, if all goes as planned, this episode will be released on January 4th, 2016. And as we have in the past, we are surveying EconTalk listeners to find out more about you and to let you vote for your favorite episodes of 2015. So, head over to econtalk.org, and in the upper left-hand corner you'll find a link to the survey. Now, for today's episode. With Bob's cooperation, we're trying to do something a little different. We're going to reprise, revisit, and we hope extend an episode we did very, very long ago, back in 2007, which was based on his book, The Economic Naturalist, a book I really enjoyed. And both of us like puzzles for teaching economics. And we are going to take some of our favorite puzzles today, with the idea that if we talk about these on occasion, or have episodes like this that are puzzle-oriented, you, the listeners will get some insights into the economic way of thinking that you might not otherwise get from just our usual style of interview. We're going to try to go into more depth, as I said, than the first time. But I've forgotten most of that 2007 episode, Bob: I had literally forgotten any of the details. I certainly knew we had talked about your book once. But this is a general problem in economic education, correct? Guest: That's right; it's a problem for us as we get older. We may have talked about it a few years ago, but it's as if we are starting all over again. Russ: And I assume--we have some listeners who--I know we have listeners who weren't around in 2007 and didn't know about the episode. Some of you will go back; that's fine. And some of you heard it the first time. But I suspect after 8 years all of you have forgotten some of it. What you've argued is that the standard economics class is forgotten very quickly. Guest: It's an astonishing thing, really, Russ. The studies that have been done after this show that 6 months after our students take the introductory course, they can't answer questions that probe their understanding of basic principles any better than students who never took the course at all. Zero value added, as far as we can measure. That's a really shockingly low level of performance, I think you have to admit. Russ: Yeah. Assuming it's true. Which, let's take it as true for now. Obviously it depends on the kind of course. I don't think that's true of every course, but it's certainly true I would think of certain kinds of courses that emphasize memorizing, definitions, multiple choice exams, certain equations and their relationship with economic variables. I'm not surprised that knowledge of those doesn't persist. Although I am surprised that people who have never taken the course [?] could have any chance of getting any of those. Guest: Well, actually, there is a former student of mine who gave economists a question--a simple question, really it seemed to me--about opportunity cost of attending a concert-- Russ: Oh, yeah; we've talked about that problem-- Guest: The economists got it wrong just as frequently as students got it wrong. The students who had never taken any economics were more likely to get it right than the students who had. So I think it's really--probably your course, they do better. I'm going to claim in my course they do better. But, you know, these are thousands of courses being offered around the world, and the overwhelming finding is that students really done acquire or retain much in the way of basic knowledge about our discipline. And I think that's partly, as you say, what we choose to throw at them. But it's how much we throw at them. I think the typical instructor walks into the classroom asking how much can I cover today. And then when he's flashed a hundred slides on the screen in the course of 50 minutes, he feels really productive. But that's not the right question to be asking. Russ: Yeah. I always got in trouble because it would be close to the midterm and students would come into my office panicking because we'd only covered 2 or 3 chapters of a 27-chapter book; and they figured that the second half of the class would be 24 chapters. And I assured them: 'We're only going to cover about 4 or 5, because those are the ones I find interesting. Those are the ones I think will change the way you maybe look at the world, that will help you understand the world.' But I was not a very good surveyor of economic theory when I taught micro [microeconomics], because I didn't find a lot of interesting-- Guest: Well, you shouldn't be, though. I mean, there are really only a half a dozen ideas that do the serious lifting in our discipline. And you can't learn those except by doing them over and over again in different settings. And seeing a thousand little ideas doesn't help you learn the 6 big ones. Russ: Yeah. My favorite course evaluation was, I got a 1 out of 5 from an angry student who said, 'Professor Roberts is a horrible teacher. He expected us to be able to apply the material to things we'd never seen before.' Guest: [laugh] Russ: Yeah, I know; it's funny. Tragicomic. And I warned them. I told them that was the goal of this class. But I think it's very hard. Economics is difficult; the economic way of thinking, not so much economic theory; it's difficult in a different way. My other favorite quote from a student is a student who told me that she wanted me to make the class really hard; and to her that meant lots of calculus. But to me it meant lots of thinking, of a different kind. Guest: Right. Russ: And, if you want to learn the economic way of thinking and apply it to areas that you haven't seen before, to see the similarities in a problem, to know which concept of those 6 or 8 you should be thinking about, you have to drill a little bit--not in what the facts are, not in the definitions, not about the ratio of the prices and the marginal rate of substitution, but rather in thinking like as economist; which, as you say, doesn't even come naturally to some economists.
Guest: There is a question that grows out of the ineffectiveness of a Principles course, which is: Why don't parents sue the universities for taking $40,000 a year of their money and then teaching students economics in a way that doesn't really add any value? I think a reasonable guess at an answer to that one is, since none of the people that we've turned out over the decades knows any economics, either, the fact that our students go out into the world not knowing any isn't really evident to people. So, if they realized that we were charging them $40,000 and not adding any value, then I think we would see some lawsuits. A lawyer does a bad job, he gets sued. A doctor does a bad job, she is dragged into court, first thing she knows. Why not an economist? Russ: Yeah. I think--well, I guess there's two ways to approach this problem. One--I want to think about students, first. The parents don't have the best idea of what's going on in the classroom. But the students usually, if they show up--of course they don't always show up--but assuming they are there, they get some perception of what they are learning. They may not have a good idea of what they could be learning. That remains to be seen. But I can't tell you how many economics students have told me when I meet them casually at a party or at a friend's and I find out they are studying economics; and I say, 'What do you think of your professor?' And they--sometimes, tragically about someone in my department; if I meet this student who is not in my class but taking another class, I'll say, 'What do you think of that professor?' And they'll say, 'Well, you know, he really knows his stuff but he has trouble communicating it.' And that's always, to me, a red flag that the person either doesn't know their stuff, or they are trying to dumb down their graduate-level theoretical training to an undergraduate level that just isn't very effective. So I think that a lot of people come to hate their economics classes because--either because they are really hard, because they weren't prepared for the math, or because they are really easy: they are good at math and it's a breeze for them. It's low-level math. So for them, for math students, technical STEM-type [Science, Technology, Engineering, Mathematics-type] students, engineering majors, it's relatively easy. And they don't get much out of it. And I think that's a tragedy. You know, my classes, I never use calculus, when I taught undergraduates. It just, I think, misses what we are capable of delivering, which is how the world works. So, to go back to your question, I think my answer would be that a lot of students aren't paying for the knowledge. They are paying for the piece of paper. This is what Bryan Caplan's answer would be: Bryan, we've had Bryan on to talk about education as signaling. And he makes the very, to me, very telling point: that when class is canceled--the professor has an emergency, can't make the class--in college you just cancel it. They don't send a substitute. You just get one less class. Sometimes you make it up. But if you don't make it up, no one gets--often, people don't get mad. They don't say, like, 'Well, wait a minute.' Guest: They are going to get the same diploma in four years. Russ: Yeah. I paid for-- Guest: [?] than not-- Russ: The best situation would be you just cancel all the classes and you get nay. And a lot of people, given that choice if nobody knew that actually happened, might be happy about that. But that's--that's not proof that it's signaling. It's a suggestive. It's not--it's an interesting hypothesis. But that would be my answer in general for why college education is so poorly performed relative to the price. Which is: education is only part of what you are paying for. You are paying for the chance to mingle with other people. You are paying for a signal that you are smart; that you have proof of that; that you have a credible piece of paper to prove that. But you could argue that if you are going to get that, you could just learn something along the way. Couldn't you? Guest: Why not? You are there. Russ: So, part of it, I think, is your answer is correct: I don't think people know, either the parents or the students, what a great class in many disciplines might be. I used to say, when I taught economics, that it should change the way you look at the world. It should give you a lens. So that's what we want to try to do today. Any other preliminaries before we get started? Guest: No. Let's go.
Russ: Okay. So I want to start with a simple question. Again, some of these questions we may have talked about last time but I want to go a little bit deeper. And along the way we'll try to come up with some other examples that are analogous. So, I want to start with an easy one. A seemingly easy one. And just as one more piece of introduction to the listening audience: If you try to answer these, you might want to put the episode on pause and think about them as we mention them. And one piece of advice, for those who are out there trying to answer these problems: If your first thought is something you could have come up with without taking an economics class, it's probably not the answer we are looking for. It may be right. There may be some fact about the world that is central that you know and that you think is descriptive of the answer, helps find the answer. But usually there requires some knowledge of economics. So, my first question is: Why is old wine, wine that's been aged--it's an older vintage--why is it more expensive in the store than immature, new wine that hasn't been aged much? What is the answer to that, Bob? Guest: Yeah. I'd say that one in general is straightforward. Whether or not the magnitude of the difference is well-accounted for by this explanation would be another question to discuss. But, if you have an asset, namely a bottle of wine that you can sell now, then by selling it now, you could put the money in the bank and earn interest every year. If you wait 5 years before selling it, it's just sitting there in your cellar or wherever it's stored; and if it weren't for the increase in price during those 5 years that it was just sitting there, you'd be much better off selling it today. And so that's the clear prediction of economic theory: That if you have an asset and you can sell it now or you can hold it, the only way it would be rational to continue holding it for the time being is that its price is going up as least as rapidly as, say, interest you sold it now and put the money in the bank. So that's our theory. Now, sometimes, old wines just become scarce; they all get drunk, and so there's an additional factor to throw in, to come up with, the size of the price difference. But that's the basic explanation I'd offer. Russ: And I think that's right. And I want to try to give a few different applications of that. In fact, it might be our entire episode might be focused on that. That's a pretty simple idea, what you just said. But what I want you to think about there, as you think about these kind of problems, is: Your answer, when you first thought about it might have been, 'Old wine's better than new wine. Wine has been aged; wine of an older vintage is better. And so people are willing to pay more for it.' And that's true. That is also true. And we're going to be applying here are what Alfred Marshall called the two blades of the scissor--at least that's what we're often going to be applying--with supply and demand. Even in cases where perhaps there is not perfect competition--because there's no such thing, really. But one of the things I want to push as we talk about these examples is the role of cost. So, a lot of times when we see differences in prices like in wine, we tend to assume that we are being, you know, exploited, say. Because we like old wine, they can charge us more. But if the cost of old wine and new wine were the same--if the inventory effect that you were talking about, Bob, weren't there--the price of old wine and new wine would be identical. And if old wine tasted better-- Guest: Merchants would sell the wine when it came into their possession. Russ: And if they liked old wine better--if people liked old wine better than new wine, and the costs were the same there would be no new wine on the market. Nobody would buy it. There wouldn't be this differential. The fact that the differential is there is a combination of the fact that people prefer old wine to new wine--they are willing to pay more, because cost alone is not sufficient. Neither side of the cost/demand, supply/demand is sufficient. I used to give my students the following question. Guest: You need both. Russ: Yeah. I'm going to give this to you, Bob. Easy one, okay? It's a layup[?]. And you can challenge me any time along the way. We did not prepare this in great detail. So it makes it a little more fun. So, you come into my shoe store; I'm in the mall. And you come in to buy a pair of shoes, and they are $250. And you'd been in another store recently where they were $60. And you say--and they are really great shoes. They are fantastic. You'd pay $250. They are worth, say, $400 to you--they last long and they are really hip right now and they are really in vogue, really cool pair of some things. And you come into my store and you are a little shocked that they are $250. And I say, 'Well, they are $250 because I have higher costs this week. My daughter is getting married and it's a really nice wedding and I need to raise a little more money, so I'm just raising the price, just this week.' And what would your answer to me be? What would you say? Guest: Well, if I know I can get them somewhere else for $60, I would say your daughter's wedding is your problem, not my problem. Russ: Right. So, costs--or if I'd said, 'Oh, but we had a flood in the store this week and my insurance went up a lot, so I've got to charge more'; or, 'I've got this employee I really like and he's fantastic, and I'm paying him, one of my salesmen, $200,000 a year so I've got to make it back on the shoes. Can you blame me?' What would you do? Guest: It's not going to work. Yeah. I think the customer really wants to buy the product at the most favorable price he can find. And if it's on offer elsewhere for less, the fact that you need money is not really an issue.
Russ: So, the simple way to think about this, is--and I don't know if you think about it this way--is, competition tends to drive prices down towards costs. But it's the costs that are out there for lots of suppliers. Your own personal costs are irrelevant. And in some industries and some situations, you can really think about the cost of providing the item. In this case, old wine versus new wine, the cost is the foregone investment opportunity you can make. That number might be a high number because you could want to take more risk. But if you think about that as risk-adjusted, we all pretty much have the same opportunities to invest. And so you'd expect old wine to be more expensive than new wine because there's just no way for merchants to compete and drive the price down more than they already do. They try. They'd like to. Because they'd like to attract the business. They are going to make a profit above and beyond their cost. In this case, the key cost to pay attention to is the fact that you tie up your item, if it's an older item. Guest: Yep. That works [?]. Do you know the expression, 'The low-hanging fruit principle?' Russ: No. Guest: Always pick the low-hanging fruit first. Russ: Nope, it's the same idea, right? Guest: This is an embodiment of that same idea. Why should you pick the low-hanging fruit first? Well, it's easier to pick. That means you can pick more of it on Day 1. Pick it on Day 1, sell it. Put the proceeds in the bank and you'll earn interest for the duration of the season. If you wait to pick the low-hanging fruit last, then you'll have a smaller deposit on Day 1; you'll earn less interest. So it's the exact same principle.
Russ: Okay, so here's a hard one. You ready? Guest: Go for it. Russ: This is a really hard one. Okay? And for those of you listening at home, your first answer is wrong. And that's my warning to you, Bob, too. Okay? Guest: All right. I'm on guard. Russ: And what's beautiful about this is it's an application of this principle. So, what happens to the price of pork when the price of corn goes up? What happens to the price of pork of when the price of corn goes up? And we will assume--a student raises his hand, 'Do pigs eat corn?'--Yes, they do. We are going to assume that's true even if it's not. Otherwise, it's a very tough question. So, what happens to the price of pork when one of its inputs gets more expensive? Guest: Yeah. I think you could probably find or construct an example where the answer could go in either direction. The price of pork could go up or down. But I'm going to say that when the price of corn goes up, that means the cost of bringing hogs to market goes up, and with it the price of pork goes up. Russ: That's correct. And the--again the logic is just what you've said, and it's just what we've been applying, which is: If costs are higher for everybody, the price of pork, which uses corn, is going to have to go up. Otherwise people will leave that industry, and the price would readjust, and that would pull people back in, etc. But actually, that's only true in the long run. So, in the short run--and this is why it's such an interesting question--in the short run, you would you expect the price of pork to go down, not up. And the reason--so, Bob, the answer you gave is, for those of you drawing this at home: the supply curve shifts up and to the left; you get a new higher price; and that's the end of the story. But in the short run you could argue that the supply of pork shifts down and to the right. And the reason is, is that, to produce a pig takes corn; but the other thing it takes--it takes space and other nutritional elements, medicine and who knows what else--but it also takes time. So, there is some optimal amount of time that I'm going to let pass before I harvest my pig. And--here's a side note, just a wonderful application of economics: When should I harvest my pig? What's the key economic variable that I need to look at when I am trying to decide whether to let my pig live for another year versus slaughter it and take the money now? And the answer is? Guest: This is the same as the old wine question. Russ: Yep. Guest: If the pig is growing in that value faster than the investment yield would be if you sold him now, then you should keep him at the trough for a little while longer. Otherwise, now is the time to sell it. Russ: So, in general, I am going to slaughter a pig, chop down a tree, drain my oil reserve--this is a very general problem--when its net return is roughly equal to the rate of interest. The rate of interest I can earn on a relatively similar investment. So I'm going to cheat and call it the rate of interest--as if there were one. The reason being that if the rate is growing faster than the rate of interest, I should the pig in the ground--I should leave it alive. If it's growing slower than the rate of interest, I should chop it down. I should slaughter it, take the money and put it in the bank where it grows faster than it's been growing as a pig. So, when the price of corn goes up, there are going to be pigs that are too big at the current rate of the price of corn to make it economically worthwhile for them to be left alone for another period of time. It's too late. I can't chop them down yesterday, slaughter them yesterday. But I should slaughter them now. And of course, as farmers try to do that, they will find that the price of pork goes down. I want to thank my old friend, Dan, for that. I think Dan understood that better than I did when we studied that in graduate school. Guest: That's a nice example, and very well articulated. Students are sometimes are surprised when they hear this reasoning and realize that the best time to chop down a lumber tree, a tree that's not valued for any other reason than they are going to make pulp out of it or cheap wood products: the best time to chop that tree down is not when it's reached its maximum size, but when its rate of growth slows to the real rate of interest. Russ: And that presumes that--which I think is biologically true--trees grow at a decreasing rate after a while. They start of growing a lot in their first years, but then as they start to slow down there comes a point where you should chop it down rather than get a little more growth out of it, at its current rate. Yeah, so that's a great point. You don't want it to grow to the maximum. And a tree is a great example--because I don't think there's much maintenance of a tree. It's unlike a pig. Guest: Right. Russ: So, there I think you really want to look at the growth rate relative to the rate of interest, of the tree. With the pig you want to look at the net profit relative to the rate of interest. It's a little trickier. It's not just the weight that it adds. Guest: Right. The net return.
Russ: So now let's move on to a problem that you raised, that I think is related, in your book. We talked about it last time but now I think we have maybe some more artillery to tackle it. Which is--it's a beautiful problem: Why is it that wedding dresses are typically bought rather than rented, relative to tuxedoes, which are typically rented rather than bought? The puzzle being that a wedding dress is usually worn once--that's [?] the modal number. There are probably wedding dresses that are worn more than once. But in general, the woman who buys the dress wears it once. The man who buys the tuxedo--if you bought a tuxedo you could probably wear it many times, in theory. You could wear it to the next wedding even though it's not his; whereas the bride can't wear the dress to the next wedding. So, you'd think, on the surface, that people would rent wedding dresses but buy tuxedos. But that isn't what we see. So, what explains that? Guest: Yeah. That question was submitted by a former student. I tell them to pose and then try to answer an interesting question, one based on something you've either experienced personally observed at close hand. And this one came from a young woman named Jennifer Dulski. And she had gotten married 6 months before she enrolled in my course, so this was very much on her mind. She had bought a wedding dress for several thousand dollars. She knew already that it would sit in her closet for the next 20 or 30 years. Maybe she was hoping to have a daughter who might wear it; but that almost never happens. And then here's her husband, who rents a cheap tuxedo, even though for sure he'll have 20 occasions in the next 2 decades to wear a tuxedo. So, why didn't we do it in reverse, was her question? Why didn't I rent the gown and he buy the tuxedo? And her answer-- Russ: I want to give the wrong answer first. Can I give the wrong answer first? Guest: All right. Go. Yeah, sure. Russ: So, the wrong answer, I think--again, I want to alert listeners to try to fight this impulse. I think a lot of people think, well, women care a lot about their wedding dress so they get taken advantage of. They just get sold this thing for $5000 or $3000 dollars, whatever it is. And they pay it anyway because it's so important to them. Whenever you make an answer like that, you want to ask, 'Well, why isn't there somebody out there who is going to try to make a profit selling it for less, or renting it?' And if that's not happening, maybe there's a huge profit opportunity out there; but it's often the case that there's a cost there you haven't thought of. So, take it away. Guest: Right. I tell students who offer explanations like that to hear alarm bells going off in their head when they realize that they've just offered a cash-on-the-table explanation. By which I mean one that assumes that merchants are out there sitting idly by even though they could, with a very simple offer, increase their profits substantially. So if somebody is paying $5000 for a wedding down that costs the merchant only $1000 dollars, why doesn't some other merchant offer that wedding gown for $4000 and then make a quick $3000 extra profit by taking the business away from the one who was charging her $5000? Russ: Or rent it at a low, at a relatively low price but still enough to make a lot of money and then rent it again? Make more money? Guest: So, Jennifer's explanation did start with a pretty strong assumption, but it's not one that too many people seem inclined to quarrel with: and that was that it's more important for women than it is for men to make a fashion statement on big social occasions. Now, why that is, would be an interesting discussion that we could have in addition to this one. But, set that to one side. No one seems to quarrel with that assumption. Russ: No, they don't. Guest: I've described this example in lots of different countries and it seems to be pretty much that way everywhere. If you take that assumption as given then it has very clear implications for the economics of trying to organize a rental market in gowns. So, you want to make a fashion statement. That means that for a rental company to serve your needs it would have to have, what, 30, 40 gowns in each size, or else you'd risk--different styles of gowns in each size--or you'd risk showing up at your wedding in a gown just like someone else had worn at a wedding weeks earlier. Russ: Or worse--one that wasn't flattering to your particular body. Which is also another aspect to this; we don't have to go into the details, but it's easier to tailor, I think, a tuxedo to a man's-- Guest: Yes, the second factor is the tailoring issue-- Russ: Or less complicated. But say we're less complicated physically. It's relevant. Guest: Yeah. There's a lot more custom tailoring involved in a wedding dress than in a tuxedo fitting. But if you are trying to make a statement, then the huge inventory that a rental company would have to carry, those gowns, most of them, would get rented out only once or twice a year. Maybe once every two or three years. The carrying costs of that inventory would be so large that you'd have to charge a rental fee so high to cover those costs that it would be maybe 110% of the purchase price of the gown. And who would pay more than the purchase price of the gown to rent the gown when you could buy the gown for just the straight purchase price? So, that was her explanation. The groom, he doesn't care, apparently. And this seems like a fairly reasonable assumption, too: Men don't seem to mind that they are wearing a suit just like the suits some other guy wore to big occasions a few weeks earlier. If you don't mind that, then a rental company can satisfy your needs by having 2 or 3 suits in every size; and those suits are going to rent out probably 7 or 8 or 10 times during the year. And that means you can rent them for a quarter or a third of the purchase price. And if you try to save a few bucks at a time when money is tight, that's the route to go. Russ: It's not only just like the tuxedo somebody wore recently: it is the tuxedo. Which is another part of it. It's fascinating to me, because it's not that pleasant. Guest: And we just don't care. Russ: No. I think it gets cleaned in between. Pretty sure. And to make it more interesting, of course, typically, I suspect--not for every tuxedo, but often, people might buy parts of the tuxedo outfit-combo and rent other parts. So they might buy a tuxedo shirt. They might buy a pair of shoes that could go with a tuxedo even though they might not be the super-shiny kind. You can get away with--I found--with a pair of black shoes that have been shined a great deal. You don't have to rent the tux shoes, also. Same with the cufflinks--you might have--or bowtie. You might have some of those items or chose to buy them because you may be able to wear them in other parts of your life. But the tux itself--it's a few times a year, maybe once a year; and when you are younger maybe it's zero after a year or two, for a while, and that's why it's not a very good idea to buy one when you are younger to buy one unless you get invited to a lot of galas. Which most of us don't when we are in our 20s. Guest: Do you own a tux, Russ, can I ask? Russ: I do. Yeah. I rented one for my wedding. And then at some point when I realized I was getting invited to other weddings and to dinners where I had to dress in a tux, I bought one. And I'm ashamed to say, it may not fit me right now, which is [?]. How about you? Guest: I own one also. In fact, it's the one I wore on my wedding. And I'm embarrassed to report to you that I have on at least 2 occasions I can think of accepted invitations to go to a formal event simply because I owned a tux. These are events I would have chosen not to attend if I could have gone in a business suit. I wanted to get my money's worth out of that tux that was sitting in my closet now. Russ: Slightly irrational. Guest: [?] and mine know that that's completely irrational. It's a sunk cost. We should wear it to an event only if we want to go to the event. If the pleasure we'll get from the event is greater than the costs that we'll actually incur going to the event. But somehow humans seem to have built into them a hardwired desire to save money; and if you think you are saving money by wearing a tux that you own, that's [?] an extra push to attend an event like that.
Russ: I'm going to give you the benefit of the doubt. Despite your self-assessment. I'm going to try the following, okay? Maybe, it's not that you want to get your money's worth out of the tux. It's not that you want to bring down the per-unit cost--which is the same mistake people make when they order business cards: 'Let's see: If I order 100 they are a dime. But if I order 5000, they are 7 cents. Well, that's cheaper. I'll get 5000.' If you don't need 5000, it doesn't matter that they are 7 cents. You are actually losing money. So, you do need to take that into account. But here's my explanation. I'm going to argue that you didn't think sunk costs were sunk; you didn't think, 'Well, I can lower the per-use cost of my tux if I go out and have a miserable time.' Maybe you wanted the thrill of preening and prancing around and being the object of great admiration in your tux. So, it's true that if it had been a business suit you wouldn't have gone because it wouldn't have been that interesting an event. And of course all listeners who know Bob out there are thinking, 'I wonder, was that my wedding?' No. But maybe you just liked the way you looked in the tux and it just gave you a lift. Guest: I think I'm going to be more eager to cop to being irrational than I am to embrace that alternative explanation. Russ: Creative, nevertheless. Guest: Yeah. It's very good. But I'm not going to own that one. Russ: Okay. So, the other question I have for the listeners out there, and I'll ask it of you, too, but I think I know the answer: Does anybody own more than one tux? How many suits do you own? Guest: Me personally? I own about 3 suits, I think, currently. I've owned many over the years. But I think I've still got three in my closet. Russ: And I have two. I have a charcoal gray and a navy blue. I have a lot of sport coats, many of which I don't wear any more, I'm ashamed to say. That's another separate issue. But I think a lot of men--I think we are on the low end: we are academics. I assume we have lots of listeners out there who have--lots of different men--male listeners who have lots of suits. But I wonder if any of them have multiple tuxedos. And I mean tuxedos that they wear with any regularity. If they like to mix it up, sometimes they'll like the one with this lapel and that lapel. There's powder blue ones that might not be appropriate you bought for some special occasion that might be different. But I think most men who own a tux, own one. I'd be surprised--anyone out there wants to let us know, we'd love to hear. Okay, so any other comments on the wedding dress or the tux? I'm going to move on to a different application. Guest: Go.
Russ: So, I raised this question I think in my blog some time in the past. It's, to me, a fascinating application of this; and there's another variation related to tuxedos, but we'll start with this one first. If I go on vacation, and I rent a car at the airport, if on vacationing in Miami or California that gets a lot of tourist traffic, where a lot of people there are going to be on vacation for a week or two and going to be renting a car, first thing is, is that the rental rate is often lower in those places than it is in a place like Duluth, Minnesota that doesn't get as much tourist traffic. And you might think, well, it should go the other way: the more visited places, the bigger tourist destinations, have a higher demand and therefore that should push up the price of the rental car. But again, you might want to think about what the cost side of that is before you come to that conclusion. And then the second point, though, is that if I'm on a vacation and I want to rent a bicycle--I'm in California and I want to rent a bike to ride along the ocean or I'm in a beautiful city and I want to cruise around on a bike, it's often more expensive to rent a bicycle than it is to rent a car on a per-day basis. And that's surprising. So what are your thoughts on those two puzzles? Guest: Yeah, that's a great question. The price of renting a car--I don't know if you've had experience in that market, going back over decades, they've gotten enormously more efficient at renting cars to people, over the time spent, I've had a chance to witness. It used to be much, much more expensive. And until recently in Europe and elsewhere it was much, much more expensive to rent a car than it is now. And I think the reason car rental prices have come down so much is they've just really honed their act to a fine edge in every stage of the supply chain. They buy cars at an incredible discount. When they liquidate their fleet after a year--they auction off the rental cars they've got 15- or 20,000 miles on them--they fetch prices at an auction that are not all that different from the prices they paid for the cars when new. Ford gives huge discounts to rental car companies like Avis and Hertz because they use those sales to say, 'We sold more sedans than any other company,' blah, blah, blah. Russ: And they buy in bulk, which helps a little bit. Guest: They buy in bulk. They make a lot of extra money by selling you insurance; you should know that if you already have insurance on your car, which most car renters do, you are getting charged an exorbitant fee for the insurance, so if you take out the insurance premiums that they charge, and the money they charge you for gasoline--if you don't put gas in the car yourself when you return it--that's the whole source of the rental car industry's profits. They make all their money off insurance and gasoline. Everything else is more or less barely covering the direct cost of operation. Now, it's the scale that makes those efficiencies possible--the volume discounts: when they have the cars turned in there's a whole queue of people, they can be transported to the airport on a bus; you don't have to do custom rides for the people. They hustle them through a car wash. It's all very mechanized. Bike rentals is a much more custom thing. The scale is much, much smaller. They rent many fewer bikes per day than a car rental place would in a day. And they've got to tune the bike; they've got to adjust the seat and the handlebars to fit users. It takes about 30 minutes worth of custom adjustment to get the forms filled out. Contrast that with a rental car operation: you're out of there in literally 7 minutes. So I think it's the fact that they've really learned how to do this efficiently that's the main reason for the surprising price comparison. Russ: So, I want to raise two parts to that and see what your thoughts are. One is, I know this seems hard to believe, but when we rent bikes as a family, inevitably one of them breaks--often more than one, while we're out riding around. And I'm hesitant to suggest that the reliability of the bike is a big part of the cost relative to a car. Because cars break in really expensive ways. But the fact is that in the first year of a car's life, they don't break very much. So, part of the decline in the--and they are under warranty, of course. But I am wondering how often a car rental at a major American airport from a major brand has to be repaired. They don't have a mechanic. Guest: That's of course one reason that they liquidate their fleet after two years at the outside. Yeah. They just don't want to be in the business of attending to motorists broken down on the highway. Russ: But in a bike shop, there's always somebody tinkering--as you say, trying to get the chain back on, reinflate the tire, patch the tire. I just suspect that the frequency of repair is higher for a bike. Having said that, you'd think that the time cost of the person repairing it would be a lot lower than the time costs of the person repairing a car. So you'd think that that would be a relatively small difference. So, I don't know. But the other point I want to mention which you just mentioned in passing, that I want to hammer on, is what we think of as the turnover. So, any one bike, I don't think it's rented out very much. You walk into the bike shop and there's--it's interesting. It's more like a tuxedo shop than a wedding dress shop. Most of them. There's variation, right? Some bike shops there's lots of choices; there's different kinds, styles: you can get a racing bike or a mountain bike or a tandem bike, etc. But a lot of times it's just--they only have really a few kinds. Typically for example [?] it's a cruiser--it's a bike with a large seat and wide handlebars. And I don't know how often it gets rented. I don't know how large the variation is in demand, so that, is one day radically different from another? Because I suspect-- Guest: Well, the other thing is that those demand variations, I think, are much easier to address by moving the fleet of cars around than by moving the fleet of bikes around. People are driving cars from one city to the next all the time. If there's a peak demand in Miami in January, then people who drive to Miami, well, those cars stay there and they rent them out in Miami. If they came from a place where demand is low, they don't send more cars back there; they don't need them. I don't think there are national bike rental chains. At least I'm not aware of any. And given that you would have to transport the bikes yourself by putting them on a truck and paying for it rather than have your customer just drive it there for you is part of the rental arrangement. It wouldn't really make sense to try to even out supply and demand across different geographic regions in a bike rental business. Whereas that's a big part of the trade with car rental. Russ: But I suspect, again, there's a predictability aspect of it. If you are Avis or Hertz in Miami, or Enterprise, and it's a Wednesday in January, you have a pretty good idea that you are going to be renting a lot of cars. And I just wonder how much erratic is the demand for bike rental at a particular shop. Because if that is the case, you are going to have to carry--often, you want to carry a lot more bikes than you'd prefer just to make sure that you don't send a customer without a bike. Because then they are not very likely to come back. Of course for tourists it's not so important. Separate issue. That's another part of this that we didn't mention.
Russ: But on the surface, given that a bike might rent for $30-$40 or $50 a day, which is similar to what a car rents for even if--as you are in my case, I never get the insurance--it would imply that the bike person is making a ton of money. And that there's an enormous profit opportunity in bike rental, in running a bike shop. And I don't think that's the case. Guest: No. That would again be a cash-on-the-table explanation. And we just know enough by now to be skeptical of those. Russ: Yeah. So, there may be some costs there that we're not aware of. There's one other one that's important, by the way, that we didn't talk about--and what I love about these kinds of problems is you think about them. I've talked about this problem with--I don't know. I've talked about it with my family. I've talked about it with other economists. But I just realized the other aspect, which is the real estate where these places are located are very different. So, the bike rental shop is usually in a very high-rent area that's a nice part of town where the tourists like to go. Whereas the car rental place by the airport is usually very low land costs. Of course it takes up a lot more space, though. So that would go the other direction. It's--I don't know. It's a bit of a puzzle. Somebody out there I know has worked in a bike shop and knows more than I do about the maintenance costs and the profitability. So I encourage them to write in. Any other comments on this, Bob? Guest: No. My wife and I rented bikes in Boulder [Colorado] in the Fall. They were at least 30 minutes attending one thing or another before we were out of the shop with our bikes. So there's a lot of custom attention you get. Maybe there's some way to cut down on that. They could have bigger scale, but the scale is just not there to allow it. Russ: And I guess part of it is also--actually, you usually don't rent the bike for a day. You rent it for a couple of hours. And a good chunk of that is often just getting the seat right. Getting the height of the seat adjusted. Right? If it took that long to get you into your car--like you say. You walk around the car to look for damage. That takes about a minute and half. There usually isn't any. I don't know if I've ever seen much of any significance in a rental car. You throw your bag in the back; you jump in; you back out; and you're out of there. The bike shop takes a lot longer. So that's got to be part--that exposure to the staff and the fact that the bike can't be rented for that half hour, either on the out or the return, the exit or the return, has got to be part of the cost, too.
Russ: So, let's close with a really fun one from not in this frame of costs and competition, but it's just such a fun one: The Nigerian Scam. The email scam. What's the question? Guest: Yeah. The former student who wrote about this said that she lived in Nigeria long ago, and there were the Nigerian Prince scams being run, two-, three decades ago. But now back in the States she gets the very same emails. There's a prince who has got hundreds of millions of dollars, and if you'll just pay a fee of a thousand dollars you can be certified as the transfer-recipient of this money, and you'll get a ten million dollar commission for helping us get the money from Nigeria to wherever the prince is coming in the United States. And it's such a preposterous story. Her question is: Why on earth can't they come up with a bit better cover story after all these years? Russ: Right. So, even if you are naturally suspicious of a free lunch, right--you've probably seen an article about this somewhere. Right? So even if you thought 'Maybe it's true,' you see an article that says it's a scam. And so, why don't they try something different? Guest: Her answer was that the scammers actually have an interest in the floating and implausible cover story. That's not a bug; it's a feature from their point of view. They don't want people like you and me responding to their overtures. We're skeptical. We're going to critically stumble onto the fact that it's a scam and bail out in a hurry. What they want is the most gullible 1% of the population. And anybody who would respond to a clumsy cover story like the one they offer is almost for sure in that slice of the population. It's a feature of their pitch. Russ: And they don't read that article, that I mentioned that talks about it being a scam. They don't see it. Right? Guest: Right. Russ: I will say, two things come to mind. There's a remarkable Siri ad right now, where--let me just see if I got this right--yeah, it's Bill Hader--the actor is eating lunch and Siri asks him on his iPhone if he wants to respond to his email; and Siri reads him the email, which is that he has a chance to make a huge amount of money from some--I don't think it's Nigerian, but it's some similar type of scam. And Siri says, 'Shall I respond?' And he says, 'Yeeeah.' It's a very strange ad. That's the way it ends. Because the humor of it is that we all know it's a fake and that he's been somehow fooled into--he's missed it, somehow. He's missed that this is always a fake. The other thing I want to mention is that, while it's true that this there oldie-but-goodie out there, I don't get it much any more. I used to get those. In the early days of email, I would get them. I don't get them any more. They probably--maybe they do still try them with some people who they think might be more [less?--Econlib Ed.] skeptical. Guest: Oh, I definitely get them. Russ: You still get them. Guest: Yeah. I get them with about the same frequency as ever. Russ: But there is innovation in this field. I just want to make it clear. I'm laughing, but it's tragic. Or at least potentially tragic. My parents, who are in their 80s, were almost scammed by someone who called them. And represented themselves as a friend of my oldest son, saying that my son had--they had gone on a vacation or on a trip; they had gone into Mexico; they had gotten arrested falsely; and they needed money to get out of jail. And my father-- Guest: That's a good one. Russ: My father heard my son crying on the phone. And was told--of course--don't call the parents because it's so embarrassing. He doesn't want the parents--he doesn't want me to know. But if you could just help him out as a grandparent? And my Dad was suspicious. But not terribly suspicious. Because he was pretty sure he'd talked to my son who was sobbing. [more to come, 55:07]