Saturday, September 3, 2011

Things get old

In economic modeling, we typically assume that the first slice of pizza is the best, the next one a little less great, and by the third or forth slice we don't really want to eat any more. The concept is called diminishing marginal returns and it captures the fact that things get old.

But things don't just get old because we have too many of them now--we can't find a use for a second TV, or a use for an extra 10 GB on our iPod or don't enjoy a third piece of a cake--they get old because we get used to having them. The big screen that used to seem so great just doesn't get us excited. The iPod that plays video isn't good enough, we need the one with video capture. Boxed cake used be nice but now I crave Finale. The idea that we need more crap to stay happy isn't a standard assumption in economic modeling, where we tend to assume, rather, that I don't have much of a preference between the crap I have today and the same crap tomorrow (except that I'd rather have it now because I'm patient).

That strikes me as misguided. If you use a standard economic model to think about buying dinners for the week you get the good idea to diversity--pizza one day, hamburgers the next, maybe some chicken, and not Hamburger Helper every night (even if it is your favorite). But if you use a standard economic model to think about planning for retirement/consumption over your lifetime, you get the bad advice to smooth out consumption. Try to spend about the same amount every year so that you can maintain a set level of happiness. Except you won't. You'll need more and more every year to keep up.

Maybe we should plan to be poor while young and rich in our glory years. Maybe it makes the most sense to save a ton right now and just scrape by so I can live in the lap of luxury when I'm in my 80s. Maybe.

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