Best Month to Marry?

The last in my series on "Buy Ketchup in May and Fly at Noon":

WHICH IS THE BEST MONTH TO MARRY? June. Okay, this very well may be the fuzziest answer in this book. But for starters, the Roman goddess Juno—June’s namesake—was given domain over marriage and birth, and at one time, that meant something to families who wanted their daughters to have happy marriages and lots of kids. For more practical reasons, the weather is warm and pleasant in June in most of the Northern Hemisphere, and school may be out, allowing families with children a better chance to travel to out-of-town weddings.

(Read all of my posts on this book here.)

Of course, this topic has been on my mind a lot lately. A June marriage has a lot of advantages, as described above, but it also falls victim to the peak load pricing. During the summer, there is more competition for venues, photographers, caterers, and the rest. All of these things will cost more at that time. If you can bear slightly colder weather, or you want to avoid having school-aged children at the wedding, getting married in the winter can save you a considerable amount of money.

I hope my commentary on the book has illustrated some interesting economic perspectives; it should not be construed as harsh criticism. "Buy Ketchup" has a lot of good practical advice and is very amusing at parts.

When to Buy a House?

Another in my series on "Buy Ketchup in May and Fly at Noon":

WHEN IS THE BEST TIME TO STOP RENTING AND BUY A HOUSE? When it costs less to buy than to rent. And how do you figure that out? Find two similar houses—one for sale and one for rent—and divide the asking price by the annual rent. The answer is the rent ratio. During the 1970s, 1980s, and 1990s, the nationwide rent ratio stayed between 10 and 14, then rose to nearly 19 in 2006, when the housing market topped out. (The rent ratio neared 35 in San Francisco and San Jose in 2006, among the highest in the nation back then.) A rent ratio of 20 or more usually means that it costs considerably more to own than to rent, once you factor in the mortgage, taxes, insurance, repairs, and other expenses. Ideally, you’ll buy when the rent ratio is a lot closer to 10 than to 20.

(Read all of my posts on this book here.)

While the rent ratio may be a good rule of thumb, it is not the only factor a potential homebuyer should consider. Interest rates are also important, as a few percentage points can mean thousands of dollars over the course of a 30-year mortgage.

More importantly, although owning a home builds equity, it can also be a very dangerous investment, as evidenced by the recent housing debacle. Many homeowners are now underwater, owing more money on their homes than they can sell them for. They can't afford to leave, and they can't afford to stay; they wouldn't run this risk as renters.

Buying Horses With Gold?

Once again from "Buy Ketchup in May":

WHEN IS THE BEST TIME TO BUY GOLD? When the economy is stable. That’s when gold prices are lower. During a recession or a period of economic instability, the dollar decreases in value, and people tend to look to gold as an investment. The demand for gold drives up the price, and it’s not as good a deal then. Some gold investors point out that the value, or buying power, of gold hasn’t changed in more than 200 years. That means if you paid for a horse in the year 1809 with an ounce of gold, you could buy a horse in 2009 with an ounce of gold. (Gold price in 1808: $19 an ounce; in 2009: about $900 an ounce.)

(Read all of my posts on this book here.)

The best time to buy gold is not the focus of this post (though people often flock to gold during recessions because it is a "safe" asset, driving up the price). I was more interested in the comment about how much gold is required to buy a horse. Gold is indeed a stable asset. As a counterexample, if you held all of your money in dollars, you risk devaluation through inflation; if the government prints a lot more money, your dollars can't buy as much as they could before. Because we can't create more gold, there is no inflation risk. In fact, much of monetary history has revolved around the gold standard.

The nominal value of gold has risen about 4,600% in that 200-year span, according to the book. That sure sounds impressive, but the price level has also risen at a similar rate. So now your ounce of gold can get you $900 instead of $19, but that amount of money can still only buy one horse. It has the same "purchasing power."

Gold is indeed cheaper in a booming economy, but it is a poor bet for long-term economic growth, as it foregos any interest you could have made had you invested the money elsewhere. If you invest in other assets, such as stocks and bonds, you can expect a substantial real interest rate over such a long period. The average annual real interest rate from 1950 to 2008 was 6.8%. Assuming that this was about the same over the 200-year period, $19 invested in stocks in 1808 would be worth $9.8 million today, through the magic of compound interest. Now that could pay for quite a few horses.

Why Are Matinee Movies Cheaper?

More from "Buy Ketchup in May":

Movie tickets are cheaper early in the day—between late morning and late afternoon—because theaters want to attract people who haven’t eaten lunch or dinner and will fill up on popcorn, candy, and soda. The amount of money these theatergoers save on matinee tickets pales in comparison to what they spend on food and drinks.

(Read all of my posts on this book here.)

The amount of money a movie theater makes from concessions is irrelevant. A theater doesn't need to make the same amount of money from hungry matinee moviegoers as it does from full evening moviegoers. The matinee prices are lower because it's better to have butts in the seats than have the theater empty during the day. A slim profit is better than no profit.

As a professor last semester discussed, it's helpful to think about whether fixed costs (what the firm has to pay regardless of how much is sold) or marginal costs (what the firm pays every time it sells something) are more relevant to a particular industry. For movie theaters in the afternoon, the vast majority of the costs are fixed; whether or not you show up, the theater will still have to pay the salaries of the ticket takers and concessions staff, the rent for the building, the electric bill, and everything else. Because theaters are almost never sold out during the daytime, it's in their interest to accept money from you and show the 11:15 a.m. screening to six people instead of five.

The only marginal cost of consequence (it also technically costs money to print your ticket, etc.) is the fee that the theater must pay the movie distributors. But once that cost is covered, anything else can help pay for the fixed costs or be reflected in the year-end profit. In other words, it's a win for the theater. For example, if a theater had to pay the distributor $3.75 every time someone saw a movie (I have no idea what the actual number is), then anything $3.76 or above is a profit, on the margin. Theaters can typically charge more than this because the market will bear it, especially in the evenings (also, it would take an awful lot of 1-cent ticket profits to pay for all the fixed costs).

A journal article titled "Spatial competition in retail markets: movie theaters" (JSTOR) gives a good overview of how movie theaters have to split ticket profits with distributors, while keeping concession profits for themselves. A similar mainstream discussion is here.

As for why snacks and food cost so much, it doesn't matter if the theater is already making a killing after you buy your ticket or if it's just scrapping by. Anytime there is only one place to buy food, you should expect monopoly pricing.

Incidentally, I saw a neat example of marginal analysis in the same spirit just a few days ago.

Disclaimer: The above analysis could be completely flawed, if matinee tickets are indeed a loss leader, meaning that the theaters have to pay the distributors more per ticket than they receive from customers, hoping to make up the difference and then some through pricey concessions. From my research, there doesn't seem to be any indication that this is the case.

The Rationale, and Should You Really Fly at Noon?

"Well I can't pass up a much needed refresher in Greg's application of econ to everyday life. Let's talk about the game theory of gift giving this time."

So wrote a friend in a reply to a recent evite.

It's no secret that I like to make economics analogies in casual conversations. I'm working on my master's degree at George Mason University, so I often have econ on the brain. In an effort to spare my friends, I'm now attempting to channel some of this ranting into the wild abyss that is the Internet.

I am a disciple of the "Freakonomics" movement. I tell people it's the most expensive book I've ever read, as it partially inspired me to get into an out-of-state graduate program (approximate tuition cost=$30k, not including the time required). Hopefully something will come of it, besides arming me with annoying conversation topics and teaching me the inner workings of exchange rates.

This blog, like "Freakonomics," will focus on the economics of everyday life. You won't find analyses of credit default swaps or the dynamic stochastic general equilibrium model.

I'm going to begin with a series of comments on a pretty entertaining book called "Buy Ketchup in May and Fly at Noon," by Mark Di Vincenzo. Some of the book's themes are:

(1) Buy stuff when other people aren't. This is the classic "buy a winter coat in June" philosophy, or buying seasonal products right after their appropriate seasons.

(2) Do stuff when other people don't want to. The titular example of flying at noon is a case in point. People want to fly either early to get to their destinations as soon as possible or after they get off work.

(3) Think like a retailer. By exploiting supply-side effects, you can get a cheap piece of furniture right before the new models come, for example. The author also says to get to garage sales and swap meets at the end of the day, when the vendors likely will want to get rid of merchandise instead of packing it around for another day.

The advice is amusing, but it's important to remember the old economist adage: "There's no such thing as a free lunch." While a lot of these tips will save you money, you may be "paying" more on other margins. For instance, it's a huge pain to buy Christmas decorations the day after Christmas and then store them for a year. It's a drag to waste half your morning waiting for your flight when you could have gotten to your destination sooner. It's a risk to get to the swap meet at the end of the day, as many items might no longer be available, and food items won't be as fresh. The book duly notes many of these concerns.

This reminds me of the ongoing debate at my apartment. I like the instant access and convenience of Kindle books (I can read a few pages on my phone while riding the subway, even) and don't mind paying the $8 or whatever per book. My fiancee, in contrast, will always try to get books from the library, even if it means adding half an hour to her commute, having to walk in the cold, checking with the library several times over the phone to make sure that the books she requested are really there (the e-mail notices have lied to her more than once), and making a note on the calendar to renew the books on a certain date. So, while the books are "free" in terms of money, they are more expensive in the aggregate (at least to me) when you factor in the time and the hassle required to get them.

As a side note: I've been on a bit of a blog kick the past few weeks. I have recently been exposed to Google Reader, a product I highly recommend. It's like a custom newspaper, based on RSS feeds, of items you're interested in from various sources. I've also started a blog of a very different nature with my fiancee.