ISSAC M. MOOREHOUSE, THE FREEMAN
The year was 2010. I missed the live draft in my fantasy football league, so the computer’s auto-draft function took over and drafted the best player remaining whenever my turn came, regardless of position.
I ended up with a decent roster, yet there were a few obvious weaknesses. I had an abundance of excellent wide receivers but only one quarterback, who was mediocre at best. Just a few weeks into the season my quarterback was injured with no indication of when he’d return. Scrambling to cobble together a competitive team, I proposed a trade to another league member. I offered an excellent wide receiver (projected to average 25 points per week) for his backup quarterback (projected to average 15 points per week). He accepted the trade. But right before I excitedly adjusted my lineup for the week, I got some news: The league commissioner used his veto power to cancel the trade. I was furious.
I emailed to ask why he had cancelled our mutually agreed-upon trade. He said he did so because the trade was “absurd” and “unfair.” I was trading a great player expected to generate 25 points every week for a poor player expected to generate 15. Obviously I was getting ripped off.
If you care about individual rights you might be outraged by the condescension, the idea that the almighty commissioner knows my interest better than I do. I certainly was outraged. But let’s set aside the violation of my “right” to peacefully trade (I did choose to join a league with commissioner veto power) and apply some clear-headed economic analysis to examine the commissioner’s claim.
My roster had a certain number of players who started every week, plus a few spots on the bench for players I might want to start in another week. After the draft I ended up with six wide receivers. The top four were expected to average between 15 and 25 points per week. In any given week, I could only start three of them, so I was willing to part with 25 points from one in exchange for 15 from the other player’s backup quarterback. The commissioner saw a net loss of ten points and cried foul. But he missed something important: opportunity cost.
Opportunity cost is not just a boring economic concept. It’s an incredibly powerful tool for helping us understand the world and make better decisions. Every action has an opportunity cost. This is why economists say things like, “There’s no such thing as a free lunch.” If I leave my office to get an advertised “free” lunch, there is an opportunity cost: the value of what I am giving up to spend my time chasing the free food. There are a number of other things I could be doing with the time it takes me to get the lunch. I could work for 30 minutes or spend time with my wife or look for the newest YouTube video of a cat wearing an absurd outfit. Since I can only be in one place at a time, the choice to engage in one activity means I give up the others. But since I couldn’t pursue all the other choices at one time either, my opportunity cost is only the value of the next best alternative, as determined by my own subjective preferences.
Let’s say I value a free sandwich very highly and think it the best use of 30 minutes of my afternoon. Absent the sandwich, my next most valued activity for those 30 minutes is watching cat videos on YouTube. The opportunity cost of getting the free lunch is the pleasure I would have gotten from watching the cats.
Back to fantasy football. Remember not everyone on my roster can start—and therefore earn points—every week. Every player I put in my starting roster has an opportunity cost. That cost is the value of the next best player I am not putting in that spot. If I start a wide receiver worth 25 points, the opportunity cost is the receiver worth 15 points who now can’t take his spot. In this case the value of the starter is greater than his opportunity cost by ten points, so it makes sense to put him in the roster. He is expected to create ten points of value above the next best option.
When my quarterback went down I had no backups. Since the rules dictate that you must put players in the correct position on your roster, I couldn’t substitute my next most valuable player for my downed QB—I couldn’t put a wide receiver there. The next best option for my QB was an empty roster spot worth zero points. Meanwhile, I had four receivers worth 25, 22, 20, and 15 points, yet I could only play three at a time.
I offered my best receiver in trade because I feared my trading partner wouldn’t part with his backup QB for anything less. What was the cost to me of giving up my 25-point wideout? It meant my three best players left in that position were worth 22, 20, and 15 points. The fourth receiver would not have started; now he took the spot of the 25-point receiver, leaving a net loss of ten points. But what did I get in return? A QB worth 15 points. So my team as a whole gained five points in the deal.
My new QB was worth ten points less than my discarded receiver, but my opportunity cost for keeping the receiver over the QB was higher than if I traded. Without the QB I’d have had to forgo 15 points. Without the receiver I’d only have had to forgo ten points because I had a 15-point backup on the bench. The move for a new QB put my team at an absolute disadvantage; I had fewer total points on my roster. But it gave me a comparative advantage over my pretrade roster because my starting players were generating more points. I gave up more points in a position with a lower opportunity cost (more alternatives) for fewer points in a position with a higher opportunity cost (fewer alternatives).
In my example, this advantage exists because of specialization. Receivers and quarterbacks specialize in their trades, and the skill sets cannot be substituted for one another. This is exactly what happens in the economy at large. If you’re the best lawn mower and the best spinal surgeon in the world, it would make economic sense for you to specialize in the latter and pay someone else to clip the grass. The opportunity cost of your time spent on the lawn is the money you leave on the operating table. Even for the best lawn mower in the world, that’s probably no small amount.
Economist David Ricardo famously used the concept of comparative advantage to explain why countries benefit from trade, even if one country is less productive at everything than another country. I found the concept more empowering when used as ammunition against a tyrannical fantasy football commissioner who failed to understand why a 15-point player could be more valuable to a team than a 25-point player.
Who says economic concepts aren’t useful in everyday life?
Copyright © 2012 Foundation for Economic Education. All rights reserved. Used with the permission