Would you pick up a 100-franc note off the street? An economist who holds the position that people are rational agents would not. They would assume that there must be a catch – wouldn’t someone have long since picked it up otherwise? A behavioural economist, meanwhile, would pick up the money. They would maintain that people sometimes act irrationally and could – for whatever reason – simply leave the money lying on the street.

But what does this have to do with economic education? The following examples illustrate how these two theories can apply to everyday situations. There are times when you should pick up the money off the street and there are times when it’s best to leave it be. In these two situations, an understanding of economics would be an asset.

Example 1: Researchers at Harvard and Yale carried out a survey among employees whose pension fund contributions were being supplemented by their company up to certain amount by between 25% and 100%[1]. To benefit from this offer, employees just need to invest an hour or so of their time. Staff members over the age of 60 can withdraw the money as soon as they have claimed their company’s contribution. For them, it is a win-win situation if they have paid in up to the limit. Nevertheless, depending on the company, 20–60% of employees do not make use of the offer and miss out on up to 6% of their annual salary every year.

This is astonishing. A person with an annual salary of USD 50,000 who does not complete the form in order to receive an additional USD 3,000 is presumably making a big mistake. According to the study, those who missed out on this opportunity were mostly people with insufficient financial knowledge.

Example 2: Imagine you want to buy a digital camera online. Take for instance a Canon EOS 50D (this is an example, not a recommendation!). According to comparis.ch, the price currently ranges from CHF 1,150 to CHF 1,450. What is even more astounding is that, some months ago, one particular supplier in the United States was offering the camera for USD 429 as opposed to the recommended retail price of USD 1,299. How can that be possible? Differences in price are not unknown when consumers are unfamiliar with the market or pay more for established suppliers. But when an offer like this appears in a competitive market, your economic instinct should tell you that something can’t be right.

As it happens, this particular supplier no longer exists. And it goes without saying of course that you would have never received the camera for USD 429. Instead, you would have probably also had to buy overpriced batteries, unnecessary guarantees, and so on, until the difference in price had been made up, otherwise the camera would have simply been ‘out of stock’. This well-known strategy is referred to as bait and switch and is evidently very worthwhile for the supplier.[2]

The bottom line is this: if you are in a position to make a decision, you could also make the wrong decision, such as missing out on profitable offers or falling for unprofitable ones. Being economically literate is therefore quite useful in everyday life. But there are alternatives. More on that coming soon.

On behalf of the iconomix team

Michael Manz

[1] Choi, J., D. Laibson and B. Madrian (2007), $100 Bills on the Sidewalk: Suboptimal Investment in 401(K) Plans, NBER Working Paper 11554.

[2] The supplier, cameragiants, is apparently already back in operation under a number of different names (here).