Sawing the Giraffe – The Art and Craft of Economic Problem Solving

A Problem Solving Odesseyby Richard Gosselin

Houston Community College

Strategies and Tactics

• Getting Your Hands Dirty• Wishful Thinking• Scaling Up and Scaling Down• Reasoning by Analogy (The Good, the Bad and

the Ugly)• Wisdom of Crowds Versus Groupthink• Getting Incentives Right

Learning Like an Explorer

• What is an explorer?• He is the one who is lost.• Why?• Otherwise, if he knew where he was going he

would have a map and that would make him a tourist.

• An explorer isn’t sure exactly where he is going but is enjoying the trip nonetheless.

Sticking Your Butt OutCounterintuitive Moves

Richard Feyman’s Interview

Manhole Question

The Telephone Number

Google Interview Question

You need to check that your friend, Bob, has your correct phone number, but you cannot ask him directly. You must write the question on a card and give it to Eve who will take the card to Bob and return the answer to you. What must you write on the card, besides the question, to ensure Bob can encode the message so that Eve cannot read your phone number?

The Census Taker ProblemUsing Wishful Thinking

What are Their Ages?

A census taker approaches a house and asks the woman who answers the door "How many children do you have, and what are their ages?"The woman replies "I have three children, the product of their ages are 36.” The census taker asks “can you at least tell me what the sum of their ages is?”The woman replies “I can’t tell you but even if I did it wouldn’t help.”The census taker walks next door, comes back and says "I need more information."The woman replies ”My oldest daughter loves dogs."Census taker then says "Thank you, I now have everything I need."

Connecting BoxesUsing Wishful Thinking

Solve a Simpler Problem

Push the Boxes Back to Where They Belong

Triumph!

Use of Analogy

• Richard Neustadt and Ernest May – the Munich analogy. The reference to Chamberlain’s appeasement of Hitler

• Truman and Korea• Tom Stemberg and Todd Krasnow at Staples

and Zoots (a dry cleaning business)• Pete’s Wicked Ale – from beer to chocolate• Enron – natural gas, electricity and broaband

The Challenger Disaster

Making Sense of Confusing Situations

• Man Gulch Fire in 1949 in Montana• Karl Weick, Sensemaking Organizations• Smoke jumpers• Wag Dodge• When they landed on the ground Dodge

began to each lunch.• An hour later though his calm turned to panic.

The Value of Intuition

The kitchen fire example.Fire was “isolated” in the kitchen. The firemen put it out.But immediately after the captain ordered everyone out of the house without explanation.What happened?

Wisdom of Crowds and Groupthink

• Who Wants to be a Millionaire• The Bay of Pigs• The Cuban Missile Crisis• Challenger Disaster• Columbia Disaster

The Monty Hall ProblemUsing Scaling Up and Scaling Down

Bay of Pigs

Context Rich Problems

• Traditional Chug and Plug ProblemA discount bond matures in five years. It has a face value of $10,000, If interest rates are 2% what is the present discounted value of this bond.This is not a problem. This is an exercise. Why? Because students know how to solve it and know what the formula is to solve it.

Context Rich Problems Continued

• Here is an alternative to “chug and plug”You an your sister just inherited a discount bond. The bond has a face value of $10,000 and matures in five years. You would like to hold onto the bond until maturity, but your sister wants her money now. She offers to sell you her half of the bond, but only if you give her a fair price. What is a fair price to offer her? How can you convince your sister it is a fair price?

Principal/Agent Problem

• The Publisher and Author DilemmaSuppose an author receives a fixed percentage of the total revenue from the sales of a a textbook. Supposed that the publisher’s goal is to maximize profits as any company would do. Imagine that the same professor apologizes about the high price of the textbook to his students. Is the author really sorry or is something else going on here?

The Shut Down Rule

Due to cost overuns, a factory has so, so far, $4 million to build. It will be useless (not even having a scrap value) unless completed, but this will take another $2 million. If completed, the factory will produce future revenues whose present value is worth $3 million to the firm. Should the factory be completed?

Expected Utility and the SAT Test

Assume that the SAT awards 9 points for very questions answered correctly on the test but deducts 5 points for every incorrect response. Assume that all questions have four possible answers (“a” through “d”). Why would the College Board do this? Is it trying to eliminate all guessing? Provide a proof for your answer.

More Economic Problems

• The Black Box• The Grocery Store Contest• Baby Sitting Co-Op• Who wants to be a Millionaire• Auctioning off a $100 bill• The Ultimatum Game• Murray Rothbard’s Grain Co-Op• The 10-Cent Pill• 1950s Health Care• Flying Standby• Car Rentals