David R. Henderson  

A Game of Margins

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When I teach my Ten Pillars of Economic Wisdom, I spend a lot of time on the pillar "Economic thinking is thinking on the margin." I go into how so many issues are issues of margins. I apply it all over the place.

I do so with friends also. I was talking to a friend recently who has a reasonably-well-paying job and gets the respect of many of the people she deals with but doesn't get the respect of her employer. She needs a well-paying job for the foreseeable future, both to raise her daughter and to put away savings for her retirement. I suggested that she "think on the margin." Specifically, think through ways that she could make the job, say, 10% better. And then, if she gets there, make it another 10% better.

I was thinking this morning about my beloved Golden State Warriors' loss last night to the Memphis Grizzlies. The Warriors, who were favored, lost by a score of 97-90.

There was a lot of discussion on NBA TV last night and on ESPN this morning about what went wrong. It is true that the Warriors could have been a little more careful and not turned the ball over so much. They turned it over 20 times, which is a lot in the NBA.

But it's also true that it was an issue of margins. What if, instead of hitting 2 out of 13 on three-pointers, Steph Curry had hit 3 out of 13? That's still well below his average. There are another 3 points.

What if, when Steph threw a somewhat careless pass, Tony Allen of the Memphis Grizzlies had not anticipated it, grabbed it, and gone in to score? There are 2 points less for Memphis.

What if Mike Conley of the Grizzlies hadn't had such a hot shooting night and had missed on three-pointer?

We would have a score of 93 for the Warriors and 92 for the Grizzlies. Of course, the end of the game would have been different too, with such a tight score.

This was truly a game of margins.


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CATEGORIES: Economic Education




COMMENTS (10 to date)
Kevin Erdmann writes:

I think a root of this problem in how people think about markets is that we are frequently not on the margin, but markets can behave predictably even if a very small portion of buyers and sellers is. I think this is the case in the housing market. Home prices have followed pretty predictable patterns, relative to other assets, for a long time - including during the supposed bubble. But most people think home prices are somehow pushed around and manipulated by banks, or by demand created with ill advised mortgages. I think that's because we tend to interact with the housing market in regime shifts. When we are students or single and socially and geographically mobile, owning a home would come with large added costs. But, at some point, most of us settle down, get a stable job, etc., and then home ownership becomes beneficial to us. So we jump right over the margin to a regime where homes at the current price level are valuable to us.

That price level is regulated by other potential home buyers who are operating on the margin. But, unless we are landlords or some other sort of real estate investors, we never experience the margin. For most people, the margin is part of the unseen. If they aren't educated about markets or they enter the issue with a set of biases against financial institutions, they don't believe it exists.

Jon Murphy writes:

Being the sports fan I am, I agree with your post very much.

For my beloved Patriots, if Malcolm Butler wasn't at just the right spot, if he were just a few inches left or right, the Patriots likely would have lost the Super Bowl.

Or baseball. One thing that frustrates me is when a commentator calls a game "unimportant." At the end of September, teams are chosen for the playoffs based on their records. Many times, the difference between playing baseball in October or playing golf in October is a game or two (or, sometimes, a half game).

Actually, interesting story (but you'll have to forgive my fuzziness on details as I can't look it up right now): in 2013, the Boston Red Sox won an inordinate amount of games by one run and/or in extra innings. That year, they were World Series Champions. Last year, with the same team, they lost many games by one run and/or in extra innings. They finished 20 games below .500.

Foobarista writes:

I had the same thought. As bad as the Dubs played last night, if they'd hit one more three, made a couple of free throws, or avoided the awful minute at the end of the first half (especially), they would have been close enough to not mail it in at the end and could well have won.

There's definitely a "game of margins" there.

Adrian Meli writes:

Agreed-not going to see Steph miss that many very often but plenty of changes would have turned that game around. Hopefully, it will swing the other way next game!

Shane L writes:

I didn't study economics so terms like "thinking on the margin" were new to me when I started reading economics blogs and the like, even though the principle was something that had occurred to me before. A simple example I was pondering just this morning was the minimum wage. I've encountered people scoffing at the idea that the minimum wage might reduce employment by increasing the costs to employers. I suspect people have difficulty thinking that an extra dollar or euro is going to make much of a difference, especially when the boss usually makes much more than the minimum wage staff. Hence it feels difficult for some to imagine that increasing minimum wage might lead to unemployment.

The mental exercise that challenges this is to imagine that the minimum wage were increased to $1 million per hour. Obviously then many businesses would be bankrupted, forced to automate their entire staff, or forced out of the country. I think few people would disagree with the idea that a $1 million minimum wage would have such an effect. Therefore somewhere between $0 and $1 million, the minimum wage has a harmful effect on employment. Once we get people to accept that, we get them to accept the basic principle that minimum wage can reduce employment. Then we need only debate about where that point actually is. It might seem like a small thing, but I think getting them to acknowledge the logic of it is an important step. If some businesses are barely surviving in the current economic climate, nudging the costs of labour a little higher could be the straw the breaks the camel's back.

Jon Murphy writes:

@Shane

I've encountered people scoffing at the idea that the minimum wage might reduce employment by increasing the costs to employers. I suspect people have difficulty thinking that an extra dollar or euro is going to make much of a difference, especially when the boss usually makes much more than the minimum wage staff.

I suspect you are right, but that is also because they understand just part of the story. For many firms who employ people at minimum wage, their profit margin isn't that much. For example, Wal-Mart has a profit margin of about 3% (in other words, for every dollar spent at Wal-Mart, the company only keeps $0.03 as profit). Other firms, such as restaurants or hotel,s that margin is around 0.5-1%. Even if they are making a profit before the wage hike, and the hike is relatively small, it can still mean the difference between a business that is open and one that is closed.

David R. Henderson writes:

@All,
Good comments. Thanks.
@Jon Murphy,
Fascinating story about the Boston Red Sox and nice illustration of my point. One correction: the Red Sox weren’t 20 games below 0.500, although I know that’s the way it’s usually reported. They lost 20 more games than they won, which put them at 10 games below 0.500.

Jon Murphy writes:

I told you I was a little fuzzy on the details :-)

Jon Murphy writes:

But you're right. Baseball is exceedingly bad at describing statistics, even though it's obsessed with them.

For example, a ballplayer who gets on base via a hit 3/10 times has a .300 average, but he's described as "a three hundred hitter," or "he has a three hundred average."

Shane L writes:

Good point, Jon.

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