Will Taylor

Law and Order: An Economics (sunk cost) Perspective

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A raging debate is going on over at Colin Espiner’s blog on National’s new law and order policy. Given that people are making lots of arguments on both sides, I thought it might be worthwhile laying out an analytical framework for how an Economist might view the justice system. I’m not going to go into whether or not I think National’s policy is good or bad, that’s for you to decide.

Before we go any further we need to understand the concept of a sunk cost, as this will be crucial to my discussion. I’ll let you read the wikipedia definition, but put simply a sunk cost is one which cannot be recovered after it has been incurred. Therefore economic theory states that ex ante you should take into account the sunk portion of the cost of an action but that ex post the sunk portion should be ignored.

I’m going to use the term cost quite loosely here, it can refer to someone being impaired financially as the result of a robbery or suffering emotional harm as the result of a crime. This is not a discussion about the financial cost of running a prison system or anything like that (although I acknowledge that is an important issue).

Now, Let’s talk Justice

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Matt Nolan

Price asymmetry and my bus ticket

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A large debate in economics stems from the idea that there is a price asymmetry in the economy. What this implies is that prices are more flexible in one direction (up or down) then they are in the other direction.

The commonly provided example is petrol prices. People feel that when crude oil rises in price it is passed on immediately, but when it falls in price it takes time for the firm to react and lower petrol prices. This implies that prices are “stickier” downwards, and so the adjustment to two shocks opposite shocks is asymmetric.

Another example is housing. People find it psychologically difficult to accept that the nominal value of their house has fallen, so it tends to be harder for the nominal price to fall than for it to rise.

Now there are a large number of economists that don’t believe these asymmetries exist (I’m in the camp that I think the downward asymmetries are exaggerated). Overall studies have been inconclusive.

Now I think sticky prices exist, but I think we’ve also got an inherent bias to look at cases where they appear to be sticky downwards compared to stick upwards. I was reminded of this when I brought my Gold Pass for the bus in September.

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goonix

Putting your money where your mouth is

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ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.

Goonix

Matt Nolan

Precommitment – the dressing down edition

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When I drink on Friday I suffer from a commitment problem (likely stemming from my own time inconsistency *). Fundamentally, before drinking I don’t want to go into town and drink too much (as I have work to do on Saturday), the next day I would prefer it if I hadn’t drunk a lot, but once I start drinking I find it hard to stop 😉

One way to pre-commit to not drinking too much is to not drink. However, I don’t like this solution at all. I want to have a few drinks with my work mates, and with my friends later on – but I would like to avoid drinking too much. Now, the “too much” bit actually occurs when I go out into town after work drinks – as a result if there was some way I could commit to not going out, I would be able to pre-commit to not drinking too much!

That is what I have done today – by taking casual Friday to the extreme I have ensured that most bars in Wellington will not let me in, removing the temptation to go into town by taking away my ability to. However, I will still be able to have a couple of beers at work and then head around to my friends house for a few beverages – thereby ensuring that I reach a superior outcome to the “don’t drink” scenario.

goonix

$onny Bill Williams and the salary cap

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The recent Sonny Bill Williams saga has brought into light the issue of salary caps in competitive sport. After fleeing the Australian NRL for French Rugby Union, SBW made the claim, among many other bizarre excuses, that the NRL’s salary cap was anti-competitive, in that it prevented players from earning their full-potential.

Does SBW have a valid point?

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Matt Nolan

Trade-ins: What’s the point

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Yesterday I was talking to my partner about the lack of videos available for her iPod. I was prattling on about how there probably isn’t many videos because the penetration of the video iPod is probably quite low. The reason I believed that the penetration was quite low, was because I couldn’t see lots of people forking out for a new iPod with video – when the old iPod would still do the main bit of playing music.

My partner then said they should do trade-ins for the old iPod, so you can get the new one more cheaply. At first I was dismissive of this idea, stating that, unless you could get money back for the parts what was the point. However, I soon realised that I was completely wrong – there are a large number of circumstances where my partner was right and a trade-in deal made sense.

Now, I haven’t actually seen any trade-in deals for iPods, but I certainly have for the xbox and playstation. As a result, I’m going to discuss why firms that sell durable goods may want to have trade-in deals.

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