Comments on: Cost of Opportunity (part 1 – framing effects) http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/ Tue, 23 Mar 2010 15:25:19 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Robert Simione http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-28 Robert Simione Wed, 26 Aug 2009 14:22:23 +0000 http://fs.pkheavy.com/?p=35#comment-28 Azmyth, When Zach and I were talking about this, I suggested there is even one more hidden cost with this: the time you take out and set aside to go to the show is being sacrificed in some sense too, along with the dissappointment of canceling your plans for the evening. Though I think you guys have already covered this in the abstract sense. Azmyth, When Zach and I were talking about this, I suggested there is even one more hidden cost with this: the time you take out and set aside to go to the show is being sacrificed in some sense too, along with the dissappointment of canceling your plans for the evening. Though I think you guys have already covered this in the abstract sense.

]]> By: Zachary Kurtz http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-27 Zachary Kurtz Tue, 25 Aug 2009 21:47:06 +0000 http://fs.pkheavy.com/?p=35#comment-27 I don't either (does anybody?). This is essentially what my post was (attempting) to complain about. It seems as I wasn't as clear as I was hoping to be. I don’t either (does anybody?). This is essentially what my post was (attempting) to complain about. It seems as I wasn’t as clear as I was hoping to be.

]]> By: azmyth http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-26 azmyth Tue, 25 Aug 2009 21:43:45 +0000 http://fs.pkheavy.com/?p=35#comment-26 Ok, I read Scott's post to mean opportunity cost and not total cost. I honestly don't know how I'd calculate total cost in this situation. The problem with including opportunity costs in total costs is that there is theoretically no limit to the alternative actions one could take. What if there were 10 other scalpers offering $49, $48, etc. Would all of these opportunities forgone be included? I'm not sure. Ok, I read Scott’s post to mean opportunity cost and not total cost. I honestly don’t know how I’d calculate total cost in this situation. The problem with including opportunity costs in total costs is that there is theoretically no limit to the alternative actions one could take. What if there were 10 other scalpers offering $49, $48, etc. Would all of these opportunities forgone be included? I’m not sure.

]]> By: Zachary Kurtz http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-25 Zachary Kurtz Tue, 25 Aug 2009 20:44:14 +0000 http://fs.pkheavy.com/?p=35#comment-25 Right (and this is a good summary) but is not the total costs at the time the scalper's offer was made (and refused) = sunk costs + opportunity costs? Keeping in mind the original question was asking about total costs of going to the show... Unless I misread the original question, I think this 'calculation' makes sense. I'll check out that post, thanks. Right (and this is a good summary) but is not the total costs at the time the scalper’s offer was made (and refused) = sunk costs + opportunity costs? Keeping in mind the original question was asking about total costs of going to the show… Unless I misread the original question, I think this ‘calculation’ makes sense.

I’ll check out that post, thanks.

]]> By: azmyth http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-24 azmyth Tue, 25 Aug 2009 18:36:44 +0000 http://fs.pkheavy.com/?p=35#comment-24 Opportunity cost is a very different idea from total cost and profit because it is tied to a single point in time, and the possible actions at that moment in time. Information is also important, because it affects what the agent's expected payoffs from various strategies are. When Scott first bought the ticket, he did not know the scalper would offer $50 or he would have bought several tickets, sold as many as the scalper would buy, and still gone to the concert for $10. As time goes by, the opportunity cost can change dramatically. At the time of the ticket purchase, the opportunity cost of buying the ticket was the possibility of a world where Scott had $10 more in his pocket. At the time of the concert, the opportunity cost of seeing the concert was a possibility of a world where Scott had $50 more in his pocket. I think a good way to calculate opportunity cost is to use a 2 step calculation. Calculate the net costs and benefits for each possible action, and then compare the results of each action. The net benefit of the second best action is the opportunity cost. It's rather strange to call a forgone benefit a cost, and I think the terminology has confused a lot of people, but we're stuck with it now. This blog has a good discussion of ways to look at opportunity cost, even though I disagree with the author's conclusion. http://divisionoflabour.com/archives/001666.php Opportunity cost is a very different idea from total cost and profit because it is tied to a single point in time, and the possible actions at that moment in time. Information is also important, because it affects what the agent’s expected payoffs from various strategies are. When Scott first bought the ticket, he did not know the scalper would offer $50 or he would have bought several tickets, sold as many as the scalper would buy, and still gone to the concert for $10.

As time goes by, the opportunity cost can change dramatically. At the time of the ticket purchase, the opportunity cost of buying the ticket was the possibility of a world where Scott had $10 more in his pocket. At the time of the concert, the opportunity cost of seeing the concert was a possibility of a world where Scott had $50 more in his pocket.

I think a good way to calculate opportunity cost is to use a 2 step calculation. Calculate the net costs and benefits for each possible action, and then compare the results of each action. The net benefit of the second best action is the opportunity cost. It’s rather strange to call a forgone benefit a cost, and I think the terminology has confused a lot of people, but we’re stuck with it now. This blog has a good discussion of ways to look at opportunity cost, even though I disagree with the author’s conclusion. http://divisionoflabour.com/archives/001666.php

]]> By: stuff – false symmetry http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-23 stuff – false symmetry Tue, 25 Aug 2009 16:59:54 +0000 http://fs.pkheavy.com/?p=35#comment-23 [...] This a continuation of Monday’s post. [...] [...] This a continuation of Monday’s post. [...]

]]> By: Zachary Kurtz http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-22 Zachary Kurtz Tue, 25 Aug 2009 16:20:38 +0000 http://fs.pkheavy.com/?p=35#comment-22 thanks for the detailed explanation. No, I don't think we're disagreeing. The point I was trying to make was that the total costs are the sunk costs + opportunity costs (in this case, monetary profit given up). But the framing effects are important here. If I'm considering the day of the concert, the opportunity cost is indeed $50 (price of ticket scalping only). But, if I'm thinking intertemporally, including both the time of the ticket purchase and the concert, then the sunk costs are $10 and the profit opportunity given up is $40... bringing the total costs up to $50. Is there something wrong with this line of thinking? thanks for the detailed explanation. No, I don’t think we’re disagreeing. The point I was trying to make was that the total costs are the sunk costs + opportunity costs (in this case, monetary profit given up).

But the framing effects are important here. If I’m considering the day of the concert, the opportunity cost is indeed $50 (price of ticket scalping only). But, if I’m thinking intertemporally, including both the time of the ticket purchase and the concert, then the sunk costs are $10 and the profit opportunity given up is $40… bringing the total costs up to $50.

Is there something wrong with this line of thinking?

]]> By: azmyth http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-21 azmyth Tue, 25 Aug 2009 15:32:53 +0000 http://fs.pkheavy.com/?p=35#comment-21 The opportunity cost is calculated by comparing the value of possible actions. In this example, you have one possible action of going to the concert. The other possible action is selling the ticket and getting $50. At the moment when you are at the concert, these are your two options. Mankiw's definition of opportunity cost is "what you give up to get that item." Since you must give up having $50 to go into the concert, that is your opportunity cost. The opportunity cost would not change if you got the ticket for free or if you originally paid $500 for the ticket. The original price of the ticket is sunk and must be ignored. I don't think I'm disagreeing with anything you say, I just found your explanation a little confusing and thought perhaps your readers would appreciate a restatement. The opportunity cost is calculated by comparing the value of possible actions. In this example, you have one possible action of going to the concert. The other possible action is selling the ticket and getting $50. At the moment when you are at the concert, these are your two options.

Mankiw’s definition of opportunity cost is “what you give up to get that item.” Since you must give up having $50 to go into the concert, that is your opportunity cost. The opportunity cost would not change if you got the ticket for free or if you originally paid $500 for the ticket. The original price of the ticket is sunk and must be ignored.

I don’t think I’m disagreeing with anything you say, I just found your explanation a little confusing and thought perhaps your readers would appreciate a restatement.

]]> By: Robert http://fs.pkheavy.com/2009/08/cost-of-opportunity-part-1-framing-effects/comment-page-1/#comment-20 Robert Tue, 25 Aug 2009 13:38:07 +0000 http://fs.pkheavy.com/?p=35#comment-20 FIRST! FIRST!

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