Tag: risk

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.

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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!

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The Big Short — Risk vs Reward

In this scene from The Big Short, the traders illustrate the concept of risk/reward payoffs using Jenga blocks. When trying to determine which investments to approach, the safest returns (the blocks at the top) are the easiest to invest in, but they don’t offer much of a return because they are so safe. The investments that are a bit risker (the blocks at the bottom) are compensated with higher returns to compensate investors who take the risk.

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The Daily Show — Sig Hansen & Deadliest Catch

 

Captain Sig Hansen joins Jon Stewart’s Daily Show to discuss life on an Alaska fishing boat. Hailed as the deadliest job in America, Hansen and his crew can earn tens of thousands of dollars in a matter of days so long as the crew is willing to risk their lives. Jon discusses safety on the boats and the motivation for why an individual would risk their lives.

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Moby Dick — The Ship

Two potential sailors come aboard the Pequod to inquire about becoming joining the crew. Peleg asks why any man would want to become a sailor when the conditions are so rough. He works through the requirements of being a sailor to make sure the men are willing to undergo through strenuous conditions. The reason whalers were so well-paid at the time was because the risk of death aboard the ship.

Here’s a good interview from The Daily Show with Jon Stewart and the captain of a fishing boat on the show Deadliest Catch.

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Bleacher Report — The Coach That Never Punts

 

At Pulaski Academy in Arkansas, Kevin Kelley’s team never punts because he opts for high risk decisions because the probabilities are in his favor. He doesn’t believe in taking the risk averse method and he also believes in focuses on his team’s comparative advantage instead of just doing the traditional method.

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