The Office – $100 now or $5,000 a year from now?

Pam and Jim are getting married, but some of their coworkers aren’t ready to give them money directly. Ryan approaches Pam and offers her the choice of $100 now or the opportunity to get $5,000 a year from now. Pam is skeptical and initially states she wants the $100. Ryan is able to eventually talk her into investing in his friend’s company.

This is a great opportunity to talk about the tradeoffs of risk and reward as well as introduce the concept of present value. If Pam accepted the $100, she may be able to turn that into $110 next year if she found an opportunity to invest at 10% interest. Ryan is offering an incredibly risky alternative that would pay off much higher. In order for people to accept that much risk, the payoff must be really large. Safer investments tend to have lower interest rates.

Thanks to Allison Anthony for the clip recommendation. You can find more economics-inspired clips from The Office on The Economics of The Office website.

The G Word with Adam Conover – Misaligned Medical Incentives

While doctors are likely to be focused only on saving lives, medical insurance companies may be focused on increasing the quantity of healthcare a person receives. In this brief scene, we consider whether it’s appropriate for insurance companies to charge without consent and whether doctors may be incentivized to do more than necessary to increase earnings.

The G Word with Adam Conover – Unintended Consequences of Drones

While drones provide a level of safety for US military members, they also create an incentive problem for the military. Now that it is easier (and safer) to strike foreign targets, the US uses drones to attach more targets than they would if they hadn’t been invented. This unintended consequence has resulted in thousands of civilian deaths and an increased reliance on deadly technology. This is also another example of a moral hazard in which economic agents take increasingly risky actions because they have been safeguarded against the risk.

The G Word with Adam Conover – Overwhelmed by Choices

Have you ever stepped foot in a grocery store and been immediately overwhelmed by all the choices you have about everything from chips to sodas? The paradox of choice is that we often believe having multiple options makes it easier to find the product we really want, but it turns out that having a lot of options makes it harder to figure out exactly which one we want and often leaves us unhappy with our choice.

Braveheart — We Didn’t Get Dressed Up for Nothing

In this scene, the Scottish army is waiting to fight the English army. William Wallace (Mel Gibson) is going to “pick a fight” and make sure that the nobles from each army don’t negotiate a peace. His fellow leaders are in charge of passing out weapons. When asked what to do they remark, “we didn’t get dressed up for nothing.” 

They are falling prey to the sunk cost fallacy. Just because they’re all dressed and ready to fight doesn’t mean that is the logical thing to do. The soldiers are not using effective marginal analysis to determine whether fighting is the next best course of action.

Thanks to Luke Starkey for the clip and summary!

A Series of Unfortunate Events – Aunt Josephine’s Risk Tolerance

The Baudelaire orphans have been sent away to live with their Aunt Josephine. They’ve been told how formidable and fierce she is, but it turns out that Aunt Josephine is incredibly risk averse. She has disconnect the doorbell and the telephone because someone may be electrocuted if they have a faulty pacemaker, even if no one in the house has a faulty pacemakers. Risk averse individuals are willing to give up some benefits (in this case, doorbells and phone calls) in exchange for avoiding possible negative consequences (electrocution).

Family Guy — Volcano Insurance

A traveling salesman sells Peter an insurance policy to protect his home against a volcano eruption. He convinces Peter “a volcano is coming this way” despite the fact that Peter lives in Rhode Island, far away from any active volcanoes. He convinces Peter to purchase the policy by using the gambler’s fallacy and convincing Peter that Rhode is “due for one.”

If this were actually true, the premiums associated with this policy would be extremely high and likely be the same as the cost that an actual volcano would inflict on the town. Insurance markets function on the interaction between uncertainty, risk aversion in consumers, and risk neutrality for firms. If some horrible event were guaranteed to occur imminently, there would be little incentive to sell insurance.

Thanks to Alex Marsella for the clip submission and most of the summary!

Frozen: Let It Go

Frozen is the story of two princesses, Anna and Elsa. Elsa has magical powers that she is forced to hide her entire life until her coronation ceremony. Elsa flees to the cold, remote mountains and sings “Let it Go” after finally accepting her magical powers and letting go of the pressure to hold back her true self. When she sings “the past is in the past”, it’s a reminder of the role of sunk costs in the decision-making process. Sunk costs should be ignored because that time/energy/money cannot be recovered in the present.

Thanks to Matt Rousu for the clip.

Volkswagen — Buying a Used Car

Asymmetric information is a condition in which one party to a transaction has information that isn’t known to the other side of the party. This can disrupt the market for used goods because the buyer may not know the full extent of what they’re purchasing. In this Volkswagen ad, the father and son duo are unaware of the older lady’s past experiences with the cars. This is a great segue to Akerlof’s Market for Lemons, which is based on the the used car market.

Have Gun – Will Travel — Bitter Wine

 

Paladin is hired to settle an issue between a vineyard owner and a neighboring oilman. The smoke and runoff from the oil well are damaging the grapes of the award-winning vintner. This is a classic case of externalities and the Coase Theorem would suggest the two could meet and solve the problem on their own (if there were low transaction costs), but the Coase Theorem wasn’t written about until two years AFTER this episode aired.

Check out this Econlib post for more discussion. This clip, and a forthcoming working paper, was presented at the 2019 Southern Economics Association Annual Meetings by Jon Murphy and John Schuler.

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