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Why Tiger Woods is NOT a Sex Addict - The Economist's View

Economics is often thought of as a boring subject, and we'll grant you that it's not as exciting as tabloids covering stories like that of Tiger Woods.  But with the U.S. Open underway at Pebble Beach, we thought we'd throw a little spice on consumer preference theory by giving you the economist's view on claims that Eldrick is a sex addict.  Using some simple tools, we'll show that the greatest golfer of our generation is not a flesh addict, just another individual guilty of infidelity.

Consumer Preference Theory

In a nutshell, within the broad subject of economics is something known as consumer preference theory that is used to explain how consumers go about making choices among competing alternatives.  Each of us has limited means and unlimited wants, and economists seek to understand how we allocate our scarce resources in maximizing our happiness.  Of course, economists could never use such a simple word as 'happiness', they instead use the word 'utility' to describe how much satisfaction we receive from a particular course of action.

Diminishing Marginal Utility

One of the core principles of consumer preference theory is that of diminishing marginal utility.  The easiest way to understand this is through a basic example.  We all need to eat, and let's say that our food of choice today is pizza.  When we're hungry, the first slice of pizza makes us feel less hungry.  The second, a little less, and so on until our hunger is satiated.  However, with each successive slice that we eat, our satisfaction gained from each slice of pizza is reduced until at some point we are worse off by eating the next slice.

This is the principle of diminishing marginal utility.  While we may be hungry and in the mood for pizza, there is a limit to how much we can eat and still feel better after doing so.  Eating too much pizza makes us miserable, but eating just the right amount (the optimal choice) is very satisfying.  Graphically, we can show diminishing marginal utility as follows:

Real Addicts

The example above is for someone that isn't addicted to pizza.  But what about a meth addict?  In their world, there simply is never a point at which more meth is a bad thing.  The meth addict that is jones-ing for the next high will be initially relieved to get that first hit.  However, this is just the beginning, as the addict continues to get higher and higher.  There is no stopping point; there is no diminishing marginal utility.  For comparison purposes, an addicts utility increases with each successive fix as shown here:

Wrapping Up

In looking at Tiger's situation, would it appear that he is an addict or not?  We would contend that it is less likely that he is an addict and more likely that he is just a man that made some mistakes.  Had he been a true to life addict, he would never be satisfied and likely would have hundreds, if not thousands of people coming out of the woodwork instead of the dozen or two that have surfaced thus far.  While economics can be boring, it's principles, theories, and laws can be applied in many ways - even to claims of sex addiction.

NOTE:  We make no judgments on Tiger Woods' choices, and are merely exploring the subject of economics through the headlines from the last several months.  Any diagnosis of addiction is better left to those in the field of psychology.

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What is an Economic Externality? BP's Massive Gaffe in the Gulf

The British Petroleum (NYSE:BP) oil spill is shaping up to be one of the largest environmental disasters in human history as millions of gallons of crude are spewed into the Gulf of Mexico, threatening to spread into the Atlantic and wash up on coastal areas that treasure their beaches.  While this is an environmental tragedy to be sure, it is also beginning to take a very real economic toll on the fishing and tourism industries.  As such, now is a good time to better understand economic externalities and how to prevent problems of this sort in the future.

What is an Economic Externality?

To answer this question, let's take a quick step back to understand the economy and how market participants interact.  In the case of oil, we all need it for our vehicles - oil to lubricate the engine and gasoline to make it run.  We purchase these products at service stations and pay a few dollars per gallon.  The parties involved in this business include us (consumers) and all of the people, land, and equipment that produce the gasoline (factors of production).  Anyone or anything not directly involved in the production or purchase are considered 'external' to the transaction.

The previous sentence is a layman's version of the definition, but to really answer the initial question, let's expand this into terms used by economists.  From Baumol and Blinder's Economics Principles and Policy, 11th Edition:

    "An activity is said to generate a beneficial or detrimental externality if that activity causes incidental benefits or damages to others not directly involved in the activity, and no corresponding compensation is provided to or paid by those who generate the externality."

This expands our previous definition by recognizing that no compensation is provided to or paid by the party that generates the externality.  This is an important distinction, as external parties may either receive beneficial externalities (a neighbor improves her house, increasing property values for all in the neighborhood) or detrimental externalities (a neighbor abandons his house that is later vandalized, lowering neighboring property values).

Example:  BP's Massive Gaffe in the Gulf

While smaller externalities exist and play out each and every day, the Gulf oil disaster is a very large scale look at the downside of externalities.  Not only is BP losing money from the loss of oil, but the company will also be required to pay for much of the cleanup.  However, it remains to be seen if BP will also be held responsible for losses in the fishing industry or the decline in summer tourism along the Gulf Coast.  We suspect that over the next several months or even the next few years, the external costs of this gaffe will be uncovered and be the subject of many academic papers, news articles, and books.

Wrapping Up

As Congress and the Obama Administration continue to struggle with how to handle BP's abysmal efforts, they will no doubt have a long line of injured parties seeking damages from the company.  Whether or not these parties receive any compensation will be a matter of law, but it is likely that no one will be made whole.  The problem with externalities is they exist outside of the pricing of the markets.  Until financial incentives and disincentives are put in place, we will continue to see problems like those in the Gulf occur time and again.