Manny puts up a fiber optic Christmas Tree, because it is better for the environment, but Jay thinks it is ugly and does not want it in his house. This clip highlights both positive externalities of the fiber optic tree (environmental benefits) and negative externalities of the tree (Jay’s psychic costs). Jay and Manny have been trying to cut down their own Christmas tree for hours, but it is not budging and keeps ruining their tools. Jay has finally had enough and says Pritchetts know when to give up. All their previous effort is a sunk cost, and it would take too much effort relative to the reward of a half burned tree to keep going.
See more: behavioral, negative externalities, positive externalities, private benefits, private costs, social benefits, sunk cost, technological change
Phil finds gift certificates to a spa that he and Claire had won in a charity auction in a drawer, but they expire today. He wants Claire to use them because otherwise their money just goes to charity, but Claire doesn’t know how she will. Phil is falling victim to the sunk cost fallacy, while Claire is thinking in terms of the additional costs and benefits of using the certificates.
See more: irrationality, opportunity cost, rationality, sunk cost, tradeoffs
Gloria and Jay are looking to sell her family’s sauce to a larger company. They each use a different tactic to make the product more appealing. In doing this, they’re trying to increase the demand for the sauce. Unfortunately, they don’t coordinate their strategies in advance and Jay blows the deal. In fact, there’s a lot of information that Gloria has hidden from Jay. She has long had a surplus of sauce that she has been keeping in storage lockers across town. Gloria has likely paid a lot of money for all of the storage. What do sellers usually do when they have a surplus? Are Gloria’s past actions consistent with traditional economic principles of rationality? Consider sunk cost and marginal costs.
(Note: this scene is an example of adverse selection. Gloria knows that her product is no good but they are trying to signal not only that it’s good but also that it’s special, almost magic.)
See more: adverse selection, advertising, asymmetric information, demand, information economics, marketing, preferences, product differentiation, profit, rationality, sunk cost, supply, tastes and preferences
Haley, Phil and Luke are participating in a psychology study. Luke has convinced Phil that they should push the big red button that says “DO NOT PUSH” but Haley stops them. She says one in a million college drop outs go on to become Steve Jobs. The other 99 thousand don’t (her math is a little off). She recently dropped out of college and is having a crisis. This demonstrates several economic concepts including the importance of human capital and time inconsistency. Human capital comes from going to college but Phil reminds her that there are other sources of human capital. Time inconsistency occurs when you regret a decision in the past.
See more: behavioral, counterfactual, education, entrepreneurism, human capital, sunk cost, time inconsistency