If you play this strategy [i.e. mispricing risk], you can expect…a bunch of years of multi-million returns, followed by an eventual unceremonious firing (if that) and life in the Hamptons. If you follow an efficient markets strategy, you can expect the going rate of return on the diversified market [portfolio]. Which sounds better?
— Tyler Cowen (George Mason University)
If the alternative to getting rich and then going bust was to never get rich in the first place, then the alternative looks bad even without bailouts.
— Matthew Yglesias (Center for American Progress)
(I unintentionally buried the lede on this one, so before you read anything, buy this book as a Christmas present for the economics buffs in your life.)
Economists have nightmares about deadweight loss. To anyone else, it sounds like something FedEx screwed up or maybe an unfortunate bridge construction, but in the world of supply and demand, it means a loss of economic efficiency.
Let’s not get into how to define efficiency.* All you need to know is when the market is providing anything less than the optimal output at the optimal price, there is deadweight loss, and somewhere an economist is weeping.
You can see how an economist might want to measure deadweight loss when taxes are imposed on a market or when a monopolist charges sky-high prices. Yawn.
In 1993, Wharton economist Joel Waldfogel published a paper in the American Economic Review titled “The Deadweight Loss of Christmas.” I mention the journal because AER is in the top tier of economic research. This was no silly academic exercise. Waldfogel calculated just how bad we are at gift-giving, and how much it costs the economy. Are you ready for this? The final bill in 1992 came to $4 to $13 billion. That’s not how much we spend. That’s how much we waste. Continue reading “39 Days To Go: The Economics of Christmas”