David R. Henderson  

Top Economist's Headache

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In my tribute to the late Bill Breit of Trinity University, I promised to retell a story from my book, Making Great Decisions in Business and Life, co-authored with Charley Hooper. Here it is:

A Nobel prize-winning economist was to be guest of honor at a large dinner party at a Texas university. A professor from the university picked up the economist at his hotel. On the way out the door, the economist mentioned that he had a headache, so they stopped into the hotel store to buy some aspirin. "$4.95 a bottle!" the Nobel laureate complained, "I can get this for $2.50 in my town." "Let's go find a regular drug store," he demanded. Because they were already running late, the professor said, "It's your lucky day. I'll pay." This professor could see that the real cost of the elusive $2.50 bottle of aspirin was far higher than the cost of the $4.95 bottle in front of them because of the extra search time involved. The professor was happy to spend the extra money to ensure that he got what he valued more: a relaxed economist giving a good talk and some time to socialize beforehand. Does the irony in this story jump out at you? It is, of course, the Nobel prize-winning economist who should have offered such a solution. He should have seen that, given his situation, the $4.95 bottle, available then and there, was much more valuable than the $2.50 bottle across town.

The university was Trinity University. The professor from the university was Bill Breit. And the Nobel prize-winning economist with the headache? Paul Samuelson.


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CATEGORIES: Cost-benefit Analysis



COMMENTS (15 to date)
Gian writes:

"The professor was happy to spend the extra money to ensure that he got what he valued more:"

Given the above, your conclusion does not follow-

"He should have seen that, given his situation, the $4.95 bottle, available then and there, was much more valuable than the $2.50 bottle across town."

I suppose "He" is Samuelson but we can only infer his values from his action. After all, Samuelson does not speak.

Bob Murphy writes:

Let me throw out the obvious possibility: The genius Samuelson understood not just microeconomics but also game theory.

Pandaemoni writes:

My thought was the same as Bob Murphy's, Samuelson is gently chided for not thinking through the economics, but he got free aspirin out of the deal. He may have just been so clever that Breit missed it.

John Goodman writes:

Great story, David. Thanks for sharing it.

Brian Clendinen writes:

Or it could be when I am tired and have a headach I don't think clearly it could of been the same for Samuelson.

In addtion Samuelson was not paying for the Gas and might have had nothing pressing on this time. So from Samuelson point it could of been his time was worth the saving for the money. However, Bill Breit time and cost of gas and wear and tear on his car was worth $5 dollars.

Tom West writes:

Or it could be that he knew that the vexation caused by paying $2.45 more than necessary would be greater than the $2.45 + lost time + gas.

If you realize that you're going to be irrationally irritated by something, then it only makes sense to avoid it rather than be irritated *and* annoyed that you're irrational enough to be irritated.

One has to be able to deal rationally with one's irrationalities.

steve writes:

The proper analysis rests upon the final results. Samuelson paid nothing. Breit got what he wanted. Sounds like a win-win to me.

Steve

tom writes:

This sounds like something a Larry David character would do!

In any case, Samuelson gave the less-powerful professor something worth far more than the cost of the aspirin: the anecdote.

Justin writes:

"The proper analysis rests upon the final results. Samuelson paid nothing. Breit got what he wanted. Sounds like a win-win to me."

If you are going to go that route, I wonder if Samuelson would have paid the extra $2.45 to avoid being ridiculed for his decision in published print. That too is part of the "final result".

I think the obvious analysis is more likely: Samuelson didn't think it through but was lucky that Breit did.

PrometheeFeu writes:

I think the lesson is you should trust an economist to make business decisions just as much as you should trust a microbiologist to make medical decisions. I'm sure Samuelson could write great theoretical models for this situation and those models would include the trade-off for time, reputation effects, the brinkmanship between him and Breit, the effects of imperfect information, the cost of locating a store at the bottom of a hotel, the monopolistic competition etc... But ultimately, setting up the model, figuring out the right numbers to assign to the different variables and then cranking through the math takes a very long time. So for all of his sophistication as an economist, Samuelson is not a much smarter consumer.

What is the real opportunity cost of shopping with Bill Breit?

Maybe Samuelson preferred spending 10 more minutes socializing with his host while shopping rather than spending those minutes making cocktail party conversation with others.

Jeff writes:

This is just another illustration of the fact that many economists, just like non-economists, don't actually believe what economic analysis tells them. It's just a game they play that affords them a pleasant lifestyle.

Pierre writes:

Nobody thinks well with a headache.

Pierre

Desolation Jones writes:

"Was much more valuable than the $2.50 bottle across town."

Why would he have to go across town to get find a a drug store? He said they were cheaper in his town, not that he wanted to go back to his town. Drugs store are found everywhere. What if he also wanted to buy a bag chips or something else?

stickman writes:

Maybe Samuelson was on minimum wage: http://xkcd.com/951/

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