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When is a Dollar Not a Dollar?

by Dave Pratt

Dan Airely, a behavioral economist at Duke University conducted a silly experiment with serious implications. The experiment involved money, Coca Cola and college students. Dr. Airely stocked dorm room refrigerators with one of two things. He put a six pack of Coke in some. In others, he placed a paper plate with six crisp one dollar bills. Can you guess what he discovered when he looked in the refrigerators three days later?

As you probably guessed, the Cokes were all gone. But no one took the money from the refrigerators stocked with dollar bills. Economically there isn’t any difference between grabbing a can of Coke and taking a dollar bill and buying a Coke from the vending machine. (Vending machines in the Duke University dorms sold cans of Coke for a dollar.) Why is it easier to steal a dollar’s worth of Coke than it is a dollar?

The further we remove a transaction from cash, the less we feel the economic impact of the transaction. Taking cans of Coke from a dorm room refrigerator may seem trivial, but this disconnect shows that there are serious real world examples that impact all of us. (Anyone remember credit default swaps?) There are also examples that are a lot closer to home that impact us every day. Two come to mind right now, you may want to contribute your own examples in response to this column.

  1. Let’s feed some hay.
    Let’s say that hay is $100/ton and that we feed 30 pounds of hay a day to our 400 cows (a total of 4 ½ tons a day). Would we be as comfortable feeding the hay if every morning we had to walk into the barn, pull $600 out of our wallet to feed the vending machine so that we could feed our cows? That’d be one big vending machine to see those nine 1,000 pound bales roll down.
  2. Let’s go do it ourselves.
    We are so busy working in our business that we don’t have time to work on it. We don’t think we can afford to hire someone and, even if we did, they wouldn’t do the work as fast or as well as we can. We spent 4 hours this morning fixing a fence dividing two pastures. Had we spent that 4 hours in the office we could have devised a new strategy for managing replacements and cull cows that reduced depreciation from $300/cow/year (which is typical on most cow-calf operations) to $100/cow/year or less (like many RFP alumni have done). That would save us $60,000/year. Since we were too busy fixing fence to develop a plan to reduce depreciation, the fence repair actually cost us $60,000, didn’t it?

Most of us love the physical work of ranching, but doing it all ourselves and insisting it all be done our way may cost more than paying someone else to do the work.  After all, whether it’s a bale of hay, the depreciation of a cow, an hour of our time or a can of Coke, a dollar is a dollar.

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