Basic Tenets Part 5 — Information is Costly

As you know, I’m writing brief blog posts on these 8 guideposts for economic thinking.

1. The use of scarce resources is costly; trade-offs must always be made.
2. Individuals choose purposefully —
 they try to get the most from their limited resources.
3. Incentives matter — choice is influenced in a predictable way by changes in incentives.
4. Individuals make decisions at the margin.
5. Although information can help us make better choices, its acquisition is costly.
6. Beware of secondary effects: economic actions often generate indirect as well as direct effects.
7. The value of a good or service is subjective.
8. The test of a theory is its ability to predict.

Source: Economics: Private and Public Choice, | Gwartney, Stroup, Sobel, Macpherson

In the spirit of this post, since your time is valuable (meaning wasting it has costs) I’ll be brief.

Information, or knowledge, helps us make better decisions. Few dispute this. You may remember the humorous post “proof that girls are evil” in that it posited the old adage that “time = money.” This is true, since your time is a scarce good.

All people economize their time, but some do it differently than others, and it varies based on the circumstances. If you were buying a keg of beer for a house party, you would call around the various stores and compare prices. Since you know what all of the beers taste like, you don’t need to go store to store to do the comparisons. But, at some point (maybe the 8th store) you’ve compared enough prices and will probably conclude that calling 8 more will not likely save you that much money, since the time needed to find that deal is worth more to you.

If it were something else, like suits (that you have to see in person) and try on, things are a bit different. You may not go to 8 suit stores because that would be very costly in terms of your time. Or if you’re Barney Stinson, you might think 16 stores is the bare minimum needed to “suit up.”

Typically, people who have to bear the costs of education think this way, which is why many people opt to go to community colleges for two years and finish up at a 4 year school. People who do not bear the cost of education (like kids whose parents pay for it, and kids who get Pell Grants that will cover most tuition at State colleges) are less likely to do so. However, this is a bit more complicated example.

Interestingly, since there has been sort of an institutionalized bias that compels people to attend college without seriously considering the trade-offs, a counter-culture has begun to emerge. Internet mogul Peter Thiel gives a bunch of kids each year $100,000 to not go to college. Clearly, this decision is not for everyone, just as college isn’t for everyone.

It kind of reminds me of that scene from Good Will Hunting:

“See, the sad thing about a guy like you is in 50 years you’re gonna start doing some thinking on your own and you’re gonna come up with the fact that there are two certainties in life. One, don’t do that. And Two, you dropped a hundred and fifty grand on a fuckin education you coulda got for a dollar fifty in late charges at the public library.”

In the end though, knowledge and information takes time to acquire. It can also take money, if we’re talking about education. While it’s true you can acquire the same knowledge and information as those who have college degrees without actually going to college, it’s the degree that employers often look for, and that’s what prompt many people to pursue college, even if they are just as wicked smart as Will was.

 

 

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