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Wednesday, December 21, 2005

Kahneman Twersky and My 7th grade class trip

For some reason I was recalling my 7th grade class trip. The bureaucracy was informal as the finances were handled in the form of checks made out to my 7th grade teacher Dale Allen. One student who will remain nameless and is a wonderful person and a friend of mine objected. Dale (progressive education you know) asked the one who shall not be named "can you find someone who is willing to take 25 teenagers on a week end trip for room and board?:"

So I thought what is my reservation wage for such a task. First question do I have liability insurance (except for really gross negligence say). If so $5,000 if not $10,00. Now the difference really is very large even given the extraordinary ability of teenagers to harm themselves (of which I personally have no experience). This however is not the reason I bring up K and T.

The reason is that if I were in a position where I had to do this monster task or pay someone to do it, I wouldn't pay someone $5,000. I am happy to note that we are not at the moment liquidity constrained and $5,000 is not huge compared to our financial wealth (but note we don't own a house and are trying to buy).

Turning down a chance to make $5000 is OK to me. I would feel like an idiot to pay someone $5000 for a week end of work no matter how horrible. This is irrational. There is an asymmetry between gains and losses even with liability insurance. The irrationality strongly reminds me of loss aversion. Down one trip with teenagers, I am willing to gamble that the horrors of managing them will turn out to be less painful than the loss of $5000 something like double or nothing. With the oportunity to deal with kids for kash I decline to stay safe.

Oh and thanks Dale for giving us what I now consider to be $5000 of extra service for nothing.

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