Tag Archives: utility

The best and the brightest: Private vs public sector

Business, Economics, ,

The Portfolio article that I linked in my last piece made reference several times how people involved in both regulatory affairs and investment banking weren’t “smart enough” to understand the toxic investments they were buying, selling, and (supposed to be) rating. That got me wondering whether there is a correlation between employee intelligence in the private sector vs the public sector for finance types and economists. Theoretically, the private sector should attract the best and the brightest because it pays the most.

The highest paid government official in the United States is the President himself, who makes a salary of $400,000 a year, not counting ancillary benefits.

While it’s never been easy to make this kind of money in the private sector, it’s certainly possible. Ben Bernanke’s salary as chairman of the Fed is just over $191,000. Henry Paulson as CEO of Goldman Sachs made $16.4 million according to Forbes. There’s two orders of magnitude difference there. Obviously there are other benefits associated with being a highly-ranked government official, but those benefits are generally in the future when one leaves the public sector for the private. I won’t get into discount rates and net present values, but generally this road can be profitable, though probably not profit-maximizing.

Another common trend is for an individual to make his or her fortune in the private sector and then move to the public sector. Henry Paulson is probably the epitome is this type of individual. I think this road is probably the more profit-maximizing of the two possible pathways thanks to compound interest.

But there are many people who don’t migrate from one to the other, and is there a correlation with relative intelligence of one sector over the other? Firms are profit maximizing, and people are theoretically utility-maximizing, with money being the most fungible obvious resource for maximizing that utility. That suggests that the private sector should, on the whole, be able to “outwit” the public sector much of the time because they’re able to cherry-pick the best and the brightest with the leftovers going into the public sector, all other things being equal.

Finding public sector work more rewarding than private sector profit maximization will always play a role in determining which jobs people take. If a person gets greater utility from the fulfillment doing work in the name of public service or teaching than they would get from a greater salary in the private sector, they won’t migrate. On the other hand, I find it very hard to believe that compensation plays no role whatsoever in an individual’s choice of employment.

Thoughts?

Economics, perceived value, and the framing problem

Economics, ,

At least once a day at the pharmacy, there is a complaint about the price of a medication. Sometimes these complaints are reasonable, most of the time they’re not. The reason these complaints are flawed is because people have a problem with perspective. Today’s particular complaint stemmed from the fact that this individual didn’t want to have to pay the full $7 copayment for one capsule. (She had previously been getting 4 capsules for $7 with a higher dosage.)

I realize that copayments cut both ways. You pay one copayment based on days’ supply, not on number of tabs or capsules, so in her case, it can seem like you’re getting screwed. Where before something was dosed weekly, and afterwards is dosed monthly, it’s frustrating. After all, how expensive could it be to make one capsule? How much should one capsule cost? Certainly less than $7.

Or so you would think.

But if you work the problem the other way, you ask a different question and probably end up at a different conclusion.

Is avoiding vitamin deficiency worth $7 a month to you?

Most rational human beings would answer this questions in the affirmative. But it’s a problem that does not lend itself to rational consideration in the form that the average consumer experiences it. “My price is the same, but I’m getting less!”

It’s a framing problem. To frame the question in economic terms:

Do you receive $____ utility from this good or service?

I’ve applied this thinking to some things that have been rubbing me the wrong way for a little while.

Movies

Going to movies is another easy activity to think about in this way. Personally, my old way of thinking about movie attendance was “I want to see this movie right away, so I will go to the movies to see it.”

Not necessarily a bad way of doing things, but probably not the best way to approach something that adds up quickly if you go often, as I cyclically do. So I’ve begun approaching the problem differently: price, enjoyment (utility), and irritation (disutility).

Am I getting $8.50-10.50 in enjoyment from my 2 hours+ sitting in a padded chair?

Utility:

  • Large screen, great picture
  • High-quality, surround sound
  • Movie previews
  • Seeing the movie now, without having to wait for DVD/Blu-ray

Disutility:

  • Feeling like I’m getting screwed to see a moving picture on a white screen at $9.50
  • Pre-pre-movie commercials (Didn’t I pay for the movie once already?)
  • Previews for horror movies
  • Commercials with higher production values once the movie “begins” (More commercials? I thought I paid to see this film…)
  • Young people making noise and playing on cell phones if it’s early in the evening; even more disutility if its a Pixar or Dreamworks movie before 8pm

Does the total utility I receive outweigh the disutility I experience at a $9.50 price point?

Framing the question in this way has helped me discover that no, I do not. Not at $9.50. Not at any price greater than ~$6. You, of course, may come up with a different figure. (My utility:disutility ratio changes if it’s opening night for a highly-anticipated movie where fans feed off each others’ energy, or if the movie is a date. Et cetera.) I don’t think that this figure will change as my income increases, either. I think it would if the things that annoy me about movie-going were minimized in a meaningful way.

Fortunately for me, there is a theater that does some price discrimination every Tuesday: $4.75 movies all day, regardless of time or rating. So I’ve begun going to the movies almost exclusively on Tuesdays. I feel like I am getting a good value at this price.

Note to theater operator: you can capture more consumer surplus if you make the experience of going to the theater more worthwhile. I know many other savvy consumers who feel the same way. Mark Cuban understand this.

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By re-framing common consumer questions in this way, you can more adequately come up with a subjectively appropriate value for any consumer decision you make. Speaking for myself, it has caused me to re-evaluate several activities that I used to readily partake in: drinking, going on vacations, visiting people, spending time watching television, etc.

  • Is it worth 23 cents a day to avoid vitamin deficiency?
  • Are the memories you will make visiting family or going on vacation someplace new or doing something different worth the $_____ that it will cost?
  • Is it worth $10 to see an average movie in an average movie theater?
  • Etc.

This isn’t just a way to eliminate things from your life; it’s also a good way to think about things that you should do more of. In my particular case, I’ve discovered that I should probably read more; watch less television; and go on vacation more often. I also drink less in most situations, but drink more in some others.