Transaction Costs

December 16, 2009

Difficult to Tell if T.J. Maxx hit hard by Recession

-Headline, The Onion

Here’s  a straight-up econ post, which I haven’t done in a while.

Know this: Time and attention, not money, are almost always the most important resources to consider when thinking about the economics of daily life. Comprehension of this fact is the key to understanding how I got cheated out of 900 Czech crowns (~50 USD) on my trip to Prague.

Here’s how it happened: I went into a shop and bought a coffee, for which I handed the cashier a 1000-crown note. She gave me the change, and I left, only to discover some forty minutes later that I had much less cash on me than I had previously thought. I hadn’t been anywhere else since, and money is very unlikely to just fall out of one’s pocket. Conclusion: the cashier gave me change for a 100, and kept the 900-crown difference.

It’s easy to see how I could have avoided this: I could simply have paid close attention to the amount of money I was handing over, then stopped to count my change and make sure it was all there before I left. Easy. I just saved myself 900 crowns. But then one has to think, what is involved in implementing such a rule in all cases in which it might be relevant. In other words, how much time and effort would it take to closely monitor all of your cash transactions? The answer to that, after thinking about it for just a short time, is “a lot.”

We hardly take any care at all in our daily lives to make sure we’re not being cheated by the people we do business with. In fact, if I were to speak to an American living in the US who does count his change after every single transaction, I would say that he is very likely wasting his time (assuming he doesn’t just enjoy counting change for the fun). The way I see it, 900 crowns is a low price to pay for never having to count my change, even if it made this transaction particularly expensive. Of course, if I go back to Prague again, I’ll likely be more vigilant.

The point sounds rather banal and obvious, but sometimes it’s difficult to keep straight. A while back, Tom said that Japanese department stores have more employees than would be efficient. But you have to keep in mind that the monetary price is not the only cost of making a purchase at a department store. It may be cheaper, as weighted sum of time, effort, and money, to go to a store with knowledgeable employees who understand what you want and where to find it, rather than to T.J. Maxx, where they don’t hire anyone to sort the merchandise, and so customers do it themselves.

On this topic, Marginal Revolution links an interesting write-up on popular scams.

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