Economics of Spongeworthiness: An Option Value Problem
A Princeton economist has devised a formula for a classic sitcom paradox.
Princeton economist Avinash Dixit has, after years of postponing doing so for fear of being dubbed “politically incorrect,” has published [PDF] an econometric formula to calculate “spongeworthiness.”
Suppose Elaine believes herself to be infinitely lived; this is a good approximation in relation to the number of sponges she has and her time-discount factor or impatience. She meets a new man every day. Define the quality Q of each man as Elaine’s utility from having sex with him. This is independently and identically distributed, and drawn each day from a distribution which I assume to be uniform over [0,1]. Each day she observes the Q of that day’s date. Actually this is only her estimate formed from observing and closely questioning the man (which is what she does in the episode), not the ex post facto outcome. But I assume that she has sufficient experience and expertise to make a very accurate estimate. Having observed Q, she makes her yes/no decision. Elaine’s per-day discount factor is β. All these assumptions are to simplify the calculations; the method is perfectly general and many bells and whistles can be added to the analysis.
The formula he comes up with takes up several pages.
This demonstrates at least three things.
First, this Dixit fellow really has too much time on his hands.
Second, there really is economics in everything.
Third, human decisionmaking is enormously complex yet often seems quite simple. The Elaine character isn’t particularly bright, yet she intuitively understands marginal utility and weighs numerous variables almost instantaneously.
via Tyler Cowen