Economic Literacy

Here is a question Mike Munger of Duke asked his undergraduate intro to econ students on an exam. The majority of students failed to answer the question correctly which indicates either (1) Dr. Munger is a poor teacher or (2) even the brightest Americans have difficulty grasping basic economic principles and applying rationality.

Suppose your favorite artist is performing a concert at a small local venue. You and your best friend are so excited that you go to the box office to buy tickets the night before they go on sale for $40. You wait in line through the night only to realize the next morning that the line is much longer than you expected. Just before you reach the counter the entire concert sells out. You hang your head in disappointment and walk away ticketless. But wait! At the corner scalpers are already reselling tickets. The going rate is $300. In an instant you and your friend list all of the other things that you could buy with $300 and decide it just isn’t worth it. You duck in to Starbucks instead. After getting coffee and sitting down you notice an envelope on ground. Inside the envelope are two concert tickets. Sweet! You wait around for a couple hours and nobody shows up to claim them. You are now in possession of two concert tickets!

What should you do?

The right answer is pretty obvious, but I think people fail to see it at an astounding rate. The more interesting question becomes: What would you do and why? Or, what would you expect most people to do and why?

I tried the question on several family members over Thanksgiving. Most understood the correct answer, but still insisted on defending an irrational decision. My sister (who I don’t think has ever taken an econ class) gave an especially compelling argument in favor of the “wrong” answer.

Listen here for Munger’s discussion.