Opportunity Cost of a Casino Promotion

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This past week Harrah’s Casino in Chester, PA held a promotion where selected patrons could come to the casino and redeem a gift card of a random amount between 20 and 100 dollars. The casino received many more patrons than expected and began to give out free slot play once demand exceeded the supply of gift cards. In fact, there was a line of over two hours to reach the promotional table.

Was the over two hour wait worth the gift card promotion?  The most basic principle of economics- that if a  transaction takes place then both the buyer and seller agree on the price an good- tells us that people thought the gift card promotion was worth the wait. But what exactly was the good and what exactly was the price?

Determining the good is not difficult. The specific terms of the promotion are not available to this author, but a simple expected value equation would solve that problem. If the chance of “winning” the gift card game (receiving the $100) is even and uniformly distributed then the expected value of the game is $60.  I am sure that the odds were not even (this was at a casino none-the-less), so lets say that the expected value of the game was $50.  So the “good” was a chance of winning $50, with a guarantee of $20.

The price is significantly more difficult to figure out.  There was no explicit monetary risk for the patrons.  Instead, patrons had to give up their time, which in econ 101 you learn is the “opportunity cost.”  On a Saturday morning, what was their opportunity cost? 

After many patrons received a $20 gift card (implying that the expected value was probably on the lower end of the spectrum), there were some grumblings that their time could have been better spent.  But, doing what?  Two extra hours of overtime at work may have resulted in a payoff greater than $20 or even the expected value of $50, but the opportunity to work overtime is diminishing.  Production in the home is probably more valuable than a $20 gift card, but $50… thats a lot of groceries… or a nice dinner.

Ultimately, despite the grumblings that the promotion was not worth the wait- implying that the opportunity cost was too high- the ultimate economic principle proves the opposite.  People came to the venue (most likely an hour total commute), waited in line for two hours, and were paid by a lottery guaranteeing $20 with a slightly higher (no more than $50) expectation value.  Thus, the transaction took place so the value of the good was equal to the cost.

What is the value of a Post Season Appearance?

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With rumors about a possible second wild card swirling, it seems that the future of baseball’s post season will include more than eight teams.  If each league adopts a second wild card, then one-third of Major League Baseball teams would make the payoffs.

With the TBS and FOX television deals, the league clearly makes plenty of money off of the post season and distributes it among the teams involved.  I am sure that this data is easily available.  But, what I wonder is what is the value of a post season appearance beyond the “winner’s purse?”

This past summer, I posed the question, What is the (economic) value of the Most Valuable Player? and I want to ask a similar question here.  I know there is an explicit monetary award for post season appearances, but just as there is a trophy that goes to the MVP and ROY, what other benefits, both explicit and implicit, are awarded to these teams?

Specifically, free agents are more likely to sign with a contender, so a team like the Arizona Diamondbacks will benefit greatly from the playoff exposure.  Certainly next season’s season ticket sales will be higher in places like Milwaukee and Detroit based on their performances.  But how much more benefit does actually making the playoffs infer.

Consider a team such as the Cleveland Indians who garnered more respect around baseball and more support in Cleveland.  Certainly their season ticket sales will be higher in 2012, just as it will for the Brewers and Tigers as mentioned above.  There are econometric processes to tease that information out of the data.  I will file this idea away until next season’s attendance data is available; when it is, this could make a fascinating study.

Government Sponsored Innovation Can Improve our Economy

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Technology drives the economy.  Strictly speaking, technology is any improvement to the status quo.  Economic production functions display economic growth as driven by technology, or in more common terms, innovation.

Throughout the world and throughout time, innovation is not solely the responsibility of the private sector.  A common misconception is that privately owned corporations, through research and development, propel innovation.  Yes, Google (a private company) is touted as the leader in innovation and Facebook, Microsoft, and Apple are all private firms on the cutting edge of technology and innovation, but the government has and should continue to provide both protection and incentive for innovation.  In a time when the loudest voices are calling for smaller government as a solution to economic woes, government activism focused on innovation is the solution.

Governments drive innovation and technology, which subsequently drive economic growth in two major ways.  The first is to protect intellectual property and the subsequent profits through the patent system, which provides value to ideas.  If a patent is granted in The United States, the owner of the patent is granted a monopoly over the innovation for a set number of years (roughly 20 years).  Currently, many rival companies are purchasing patents and creating legal troubles for their competitors (mostly wasting resources: time and money). 

 The current patent law is dated and does not facilitate innovation growth as intended.  There is a distinct difference in ideas as inventions and ideas that are methods.  The former deserve protection; a patent on a new drug provides incentive for the development of the drug and new programs (Microsoft’s Windows or Office computer programs) will only be created if financial protection exists.  But methods and processes should be allowed to flourish and facilitate more growth, not be held back by court proceedings.  In the words of President Obama:

“Through patent reform, we can cut the red tape that stops too many inventors and entrepreneurs from quickly turning new ideas into thriving businesses — which holds our whole economy back.”

Along with financial protection through patents, the government can directly sponsor innovation.  There would be no Google, Microsoft, Apple, or Facebook without the government’s Defense Advanced Research Projects Agency (DARPA)… they were responsible for the internet.  Check out what DARPA is currently working on.

Government intervention to create innovation is nothing new.  Never mind the advances of government agencies such as DARPA and NASA, consider the eighteenth century problem of determining a ship’s longitude at sea (the North Star took care of Latitude).  The problem had been around even before Columbus thought he landed in India, but in the mid 1700s, “the rulers of Spain, Holland, and Britain offered large monetary prizes for the solution.  [The  problem was solved] by a poorly educated but eminently skilled clockmaker.”  He used the chronometer (from a watch) to set two watches: one to Greenwich Time and one to noon on the ship when the sun was directly overhead. Nevertheless, government sponsored financial incentive was the means of innovation.  (Anecdote from Charles Jones’ “Economic Growth”) 

 This primitive version of “crowd sourcing” should be replicated today.  We have problems in this country… too many to name, but the government should provide a means for entrepreneurs and innovators to find solutions and reap financial rewards.

Teacher Value Added Ratings

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A year ago, the LA Times published a ranking of over 5 thousand third through fifth grade teachers based on their value added scores.  If you are not familiar with Value Added Ratings, they are a statistical technique that measures how much a teacher’s students improve on a standardized test over the year the teacher works with those students.  These ratings are very controversial, especially as a means to evaluate teachers.  To a parent reading these rankings in the LA Times, they seem like a say all end all evaluation of their child’s teacher, prompting calls to change classes and fire teachers.  In May the LA Times released value-added ratings for over eleven thousand more teachers without addressing the intricacies of the data.

Last winter, I analyzed Value-Added Ratings, specifically as a way of evaluating teachers.  Here is a link to my paper (see pages 3-6 for a literature review on the subject and p. 6-8 for a look at the economic model, while p. 9-17 are a critique of the method).

Here is a summary of that paper:

Economists and educational researchers studying student achievement return consistent results about teachers: they matter. While researchers agree that educational achievement depends on a quality teacher, disagreement among both economists and educational researchers occurs when considering what constitutes teacher quality.  Clearly, one of a teacher’s specific duties is to improve student performance and value added statistical methods do measure student progress, but the issue arises when that progress or lack of progress is considered completely the effect of the teacher.

This paper concludes that if school administrators only evaluate teachers on student progress, then they may not be measuring the teacher’s total value to students.  The review shows that many factors, both observed and unobserved, can affect student achievement and that teachers have the ability to impact their students in ways that standardized tests cannot measure.

In a 2008 New Yorker essay, Malcolm Gladwell compared hiring a new teacher to drafting an NFL quarterback.  In both professions observable characteristics do not translate to production, whether on the field or in the classroom.  In the NFL, coaches can examine statistics that their quarterback directly controls and that are easily observed: completions, yards, and touchdowns, but observations from college games do not translate to NFL success.  Meanwhile, school administrators only evaluate teachers on observable characteristics such as experience, highest degree, undergraduate university attended, and in a recent number of cases Value Added Ratings. 

Just as a quarterback’s college statistics do not directly indicate NFL performance, easily measured or observable characteristics of teachers are not always correlated with student success.  Value added scores vary significantly from year to year and only measure student improvement on standardized tests, not necessarily learning.  If, over a ten or fifteen year period a teacher’s Value added score was consistently higher or lower than average, then the scores can tell nus something about the teacher.  But looking at one score from one year and publishing that as an all encompassing value of a teacher is unfair.

Many factors, both observed and unobserved, can affect student achievement; teachers have the ability and responsibility to impact their students in ways that standardized tests cannot measure.  If school administrators only evaluate teachers on student progress on a standardized test, then they are not necessarily measuring the teacher’s total value added to their students.

A Conclusion to the Wrong Debate?

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While it seems that a deal is in place to raise the debt ceiling so that our country can pay its bills, we are missing the real problem facing our country: ECONOMIC GROWTH.  The debate and ultimate compromise only focuses on a symptom and ignores the real problem that our country is not growing and shows no significant indicators that it will change its course.

If the United States grew its GDP by 1% more over the next 3 years (than current projections), we would not have to worry about our spending on Social Security or other entitlement programs.  Significant economic growth combined with a decrease in our presence and subsequent funding for the wars in Iraq and Afghanistan would allow our country to pay for our commitments (social security, etc.) and a new stimulus (to improve our infrastructure, increase our human capital, and promote employment).

Stabilizing our economy for long-term growth should be our main concern.  The first step is always to acknowledge the problem and I have not heard our politicians in Washington or any of the 2012 candidates recognize that our main concern should be economic growth, not symptoms such as debt, health care, taxes, or entitlement programs.  Once our fiscal house is in order, solutions to our symptoms will fall into place.

Update: Article I’m Reading

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Last week, the New York Times Online published a few pieces providing information on the Debt Crisis in America.  My favorite was Charting the American Debt Crisis.  The third panel (reproduced below) breaks down our debt by who holds the debt (the left side) and how we acquired the debt (the right side).

Does it pay to go to College?

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This weekend, the New York Times included a section called “Education Life,” which featured some discussion of the purpose, role, and value of grad school.  One of their “Most Emailed” articles is titled “Master’s as the New Bachelor’s” by Laura Pappano. I wanted to share a few comments given some research I had done on the subject and I also thought this was appropriate given the article I shared at the right in the “Article I’m Reading” section of my blog: Louis Menand’s New Yorker Piece Debating the Value of College.

These articles consist almost entirely of anecdotal evidence.  I am unaware of an empirical analysis, but last year, I presented a paper by Dominic Brewer, et al. titled “Does it Pay to Attend an Elite Private College.”  The paper considered the different economic returns of different types of colleges (private, public, small, and big).  The punch line is:Yes, an Elite Private College has significantly more economic return than other colleges.  BUT, the paper considered data from the seventies and eighties.  This study needs to be reproduced given the vastly different college environment almost thirty years after the data was collected (the paper is from 1998).

Specifically, with the explosion of tuition, is an elite private undergraduate education worth the money.  Also, with such a high proportion of high school graduates going on to college, is the elite undergraduate degree worth the same, or more depending on graduate school experiences?  Also, thirty years ago students chose their college, while over the past few decades, colleges have much more control over who is admitted.  Finally, since the recession and (hopefully?) post-recession, are labor market returns any different given workers’ educational background?

So, is an undergraduate degree “worth” the skyrocketing cost?  I would agree with the paper I cited earlier by Brewer, et al. that only elite private colleges garner a return worth the significant tuition differences to large public universities.  That being said, according to Ms. Pappano’s NYT article and Menand’s “First Theory” , maybe undergraduate degrees will not provide the signal that we prescribe to them.  Is acquiring a Master’s or other graduate degree just the new sorting mechanism for potential employers?

NBA draft viability

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This spring I began researching a paper analyzing the effectiveness of the NBA draft.  The paper is still in the process, but I want to share some of my findings and hopefully garner some responses/comments.

My thesis is that the NBA’s amateur draft is intended to allocate new talent to teams that need it most.  If it is effective, then there would be some fluctuation of teams transforming from bad to good.  Essentially, a cycle would turn bad teams into good teams by allowing them first crack at young talent.  My first data analysis consisted of determine if there is a lag to each team’s success.  I thought that if the draft was effective, teams that were bad in the past would be better 5 or so years later- once their prospects had developed.  That is, the question I asked was: Were the teams that are winning now losers 5 years ago. Here is a table of winning percentages for the top four teams in each conference:

For the 2009-2010, there was a significant negative relationship between wins in 2006 and wins in 2010 (the 2010-2011 year had not finished when I last worked with the data).  But, there was no correlation between wins in 2009 and a year 5 or so year in the past.  Using a time-series analysis on team’s wins over the past 25 NBA seasons, I found that the only significant predictor of a team’s current number of wins was the previous year’s number of wins.  That is, teams that are winning now were not statistically significantly worse 5 (or so) years in the past.  My conclusion was that the NBA’s amateur draft does not turn losing teams into winning teams.

One additional conclusion I came to was that certain draft classes do matter.  Specifically, I found that the draft classes of 1987, 1998, and 2003 turned losing teams into winners 7 years later.  Each draft class turned some losing teams into significant winners.  While only serving as anecdotal evidence, Lebron James turned the Cleveland Cavaliers from a 17 game winner in 2003 to 61 game winners in 2010 and from the draft class of 1998 both Dirk Nowitzki and Paul Pierce turned struggling teams into winners in the early 200s.

My next thought is to account for draft pick number rather than losses, since the lottery does not ensure a reverse order.  There are some interesting studies on the NBA draft including “Losing to Win” by Beck Taylor, which analyzed if teams intentionally lose games in a “race-to-the-bottom” in order to arrive at the top pick.

Most analyses assumes that the NBA draft works, but my research points to an ineffective process of allocating rookie talent to the teams that need it most.

Brief comment on the Debt Ceiling

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So for anyone who is not sure what to make of the national debate surrounding Raising the Debt Ceiling, consider this analogy:

Parents give their child a credit card.  The child asks how much they can spend.  The parents and child debate what the allowance should be, how much the child should pay, how much the parents should pay, etc.  Nowhere does anybody even consider not paying the credit card company.

The United States government is two weeks away from defaulting on its credit.  A default would stymie the economy in the US and the world and shake up confidence in financial markets for a long time.