Pay Inequity - Doesn't exist!

Last night, I posted about the "high" pay of financial analysts, and someone posted a comment about how "the priorities of our country" seems a bit askew.

That post bothered me because it implied somehow that the pay for i-bankers was in line with what they did, because the starting pay for teachers is a lot less.

I hate these comparisons because it ignores basic economic principles of supply and demand.

The classic economic question that is relevant here is:
What's worth more? A bucket of gold or a bucket of water?

Most would jump and say gold, follow by a incredulous look and a snide comment about how dumb the questioner is.

But let's consider the context. You've been wandering the desert for 3 days, and you're thirsty. Do you want a bucket of gold or a bucket of water now?

The fact is, as you get more of something, each additional item, referred to as the marginal value, diminishes. Water in general is worth very little, since there is so much of it, while gold is scarce, and therefore valuable. But the cost of water does not suggest that water is not a necessity to life.

The same applies to teachers and i-bankers. Given no teachers and no i-bankers, no one would question the need for teachers before i-bankers. Teachers provide an important service. But, as the number of teachers increase, each additional teacher begins to lose value compared to the value of one more i-banker.

Additionally, the difference between a teacher and i-banker is significant in terms of training, hours worked, and job security.

Training-wise, teachers are given large amounts of scholarships and other educational incentives, while i-bankers spend much of their own capital and borrow to learn their trade.

While teachers definitely work hard, typically teachers would work no more 10 hours a day, and rarely on weekends or during the summer time. I-bankers on the other hand work at least 12 hours a day, and routinely work on weekends and during the summer time.

Finally, an average teacher can hold onto their position for life. For an i-banker, average performance allows for about 2-3 years of work, before they are forced out.

Please understand, I am not saying teachers should be living in poverty. Rather, I am suggesting that the market is efficient, and that teachers are being paid what the market will bear. And while it is easy heart-wrenching to report the low $20K salaries of first-year teachers, my MBA professors are being paid at least $150-$200K for teaching 4 classes a year, while having summer-time off to do other things.

Lotto Tickets - Are they worth it?

There is of course, a quick and easy common sense answer: No. But on my blog posts, I never like the common sense answer, since it rarely takes into account any economic or financial reasoning.

Take for instance New York State Lottery Instant Win (Scratch-Off) tickets. According to New York State's Revenue Estimating Methodology Rules, instant wins have a 65 percent payout ratio (page 128). So now let's run a typical cost benefit analysis.

Consider for this argument that I had driven to the gas station to fill up my tank, and I walked inside to pay when I noticed the tickets. There are no outside costs of arriving at the ticket other than the time I spent tapping my foot waiting for the cashier to hand me the ticket and to scratch off the silver stuff. Although this is probably about 2 minutes of my life, you'll have to bear with me when I say I'm going to consider that a sunk cost, and not worth considering at this point.

Consider then a $1 scratch-off ticket. At 65% payout, the net is -35 cents, which is clearly not worth playing.

But, consider that for every ticket, I gain a 25 cent benefit from feeling like I'm living on the edge. Sometimes, you need a little risk in your life, and this helps fulfill it. Now the net is -10 cents.

Next, consider that I feel an extra bit of good knowing I'm helping out New York education, and this good feeling is worth another 25 cents to me. Now the net is +15 cents!.

Suddenly, it becomes no skin off my nose to go out and buy a ticket. Heck, I'm getting 15 cents of value out of it! I'm essentially buying some good feelings when I buy a ticket, just as if I were to donate some money to charity.

Now with this in mind, you would think I'd be going around willy nilly buying tickets, and feeling extremely good about myself. But let's throw in that sunk cost, and make it actually affect me. Those two minutes do become a drain on my time, and I think it comes out to a 15 cent hit. Now, the net is 0 cents, which means I feel indifferent about buying one or not.

And that is exactly what happens. When I'm feeling lucky, I buy one, since my utility from feeling good is a bit higher that day. If I'm not, the net could be negative for me, so I don't.