Part 1) On the Optimization of a Weight Weenie

Make no mistake I'm an Economist and I'm going to demonstrate it here.

Before I begin, think about the last time you bought a part for a bike. Why and how did you decide to go after it? Did you see it in a catalog and then thought to yourself, hey, thats some blingy bike porn I must have it? Did you test ride a bike with it and thought it works great on that bike I want it on mine? Were you trolling ebay for a specific part and bought it because it was cheapest? Whatever your decision process somewhere in there, your mental checklist decided on the pros and cons of the part and then you went after it. Maybe cost was no option, maybe it was. Maybe weight was a factor. Maybe strength was a factor. Maybe reputation is the main factor. Or maybe it was just the color. 

With this in mind I'm going demonstrate to you the basic logic behind a weight weenie economist.  Geek out commencing in 3....2....1...

(***WARNING***Economics Discussion Approaching not for the faint of heart turn away now)



Goal Seeking: Trying to find an alternative that
 has the larest different between benefits and costs

 As an Economist I deal daily with the various interelated topics of feasibility studies for civil engineering projects, mainly the varying approaches to benefit-cost analysis (BCA).  Put simply, BCAs involve the comparison of all benefits converted to monetary values to all of the costs incurred with a project over its lifetime. Essentially its a vary sophisticated way of looking at the pros and cons of an investment using one very common metric, $'s.

Sometimes though, whether because specific guidance prohibits monetizing benefits or because converting a benefit to a $ value is simply implausible, we cannot do a full blown BCA and instead turn to approaches like Cost Effectiveness and Incremental Cost Analysis (CEICA).  Again this is a very handy yet advanced approach to comparing the Pros and Cons of an investment.  Because benefits may not all exist on an equal playing, it is somewhat more subjective, the person(s) conducting the CEICA must instead choose which benefit factors to optimize.  Consider the following simple example: three alternatives exist for a project;

1. Do nothing, cost of zero, bird habitat = 0, fish habitat = 0;
2. Option A, cost of 100,000, bird habitat =2 acres, fish habitat = .5 acres,
3. Obtion B, cost of 120,000, bird habitat = 1 acre, fish habitat = 1 acre.

Which do you choose and why? Both alternatives are fairly close in cost, however depending on the solution you want to optimize to, fish or bird habitat, you would end up choosing different solutions.  If the goal is to restore fish habitat you would choose option B because you can get 1 acre at a cost of 120,000/acre versus the cost of $200,000/acre in option A. Now consider your optimizing bird habitat, the result would be the opposite.  The answer usually becomes somewhat difficult when you consider also that fish and birds don't reproduce at equal rates, or that bird and fish populations vary significantly.  So as the example demonstrates, metrics are important, you need to know what the goal is.  The result though, is a very refined solution taking into account the pros and cons of a project.

Taking this a step further one can choose between mulitple solutions offering different levels of habitat by comparing the incremental costs and incremental benefits. Put simply by looking at the additional cost to buy into the next level we can see if its more cost effective to go to the next higher level. Expanding the previous case consider that there are two additional options beyond A and B so now you have B1, B2, and B3:

• Do nothing, cost of zero, fish habitat = 0;
• B1, cost of 120,000, fish habitat = 1 acre;
• B2, cost of 170,000, fish habitat = 1.5 acre;
• B3, cost of 570,000, fish habitat = 2.5 acre;

B2 gives an addition 0.5 acre (1.5 acres total) of fish habitat and that extra acre of fish habitat only cost $50,000, meanwhile B3 gives another full acre over B1 and B2 (2.5 acres total) but at a cost of $400,000 for that acre.  The end result, you'd go with B2, why well consider that the do nothing gets us well nothing, B1 gets us 1 acre, but why stop there? We see that the next .5 acre actually costs less than the previous acre at option B2. We wouldn't go farther though because B3 costs $400,000 for that final acre.

What I've outlined above is one the most important rules in Microeconomic theory, rational decision making or rational choice.  That is to say, that people and society make decisions based on consideration of the cost and benefits between one choice and another and choose the option which maximizes the benefits given all alternatives.

For me being an economist never ceases when I leave the office. I pervades every iota of who I am right down to being a cyclist.  Certainly, the very process outlined above is used on a daily basis (there may even be spreadsheets locked away somewhere).  As you may recall from my last blog post, I've bought 3 bikes recently. I buy frames and parts on a seemingly regular schedule lately.  I  use the CEICA process to optimize my part purchases in order to minimize costs and achieve what I deem to be the optimum result.

Now since I've blown your mind already, I'll leave a description of the framework I use for another post...I make no excuses that if you read this and are now totally turned off its all your own fault, but thats another econ principle.

Cheers
J