Friday, 2 May 2014

Real cost

Every night The Girl and I light a candle and go over another lesson, something she might not learn in school. For tonight’s lesson, I said, let’s say I wanted to give you a Euro.

“Yay!” The Girl said. “Oh wait – what’s the catch?”

You know me well, I said. It will cost you one cent.

“Oh no,” The Girl said. “You’re trying to get me with exponential growth, and I hate exponential growth. That pence is cursed with black magic!”

I laughed. You’re right that exponential growth is something to watch out for, I said – that’s why interest gets you when you borrow money. If it cost you one per cent more per day, for example, that would be exponential growth. But this is just a flat amount – one cent.

“Whew,” The Girl said. “So what’s the catch?”

Well, I want to know how much money I’m really giving you.

“You’re giving me 99 cents,” she said.

Good, I said. What if I charge you 70 cents for every Euro?

She worked it out in her head. “I’d really be getting 30 cents,” she said.

Very good – what if I offered to give you a Euro but charged 99 cents?

“I’d only get a pence,” she said forlornly. “That’s not even worth it.”

Okay, I said – what if I gave you 100 Euros but charged you 99 Euros.

“I’d only get a blasted Euro!” she said, smiling.

And if I’m charging you more than a Euro for a Euro?

“You’re not actually giving me anything,” she said, rolling her eyes.  

Excellent, I said. What I’m demonstrating here is a principle called Energy-In-Over-Energy-Returned, or EIOER. You can remember it by thinking of Scooby-Doo asking a question, in his doggie voice – eioer?

“Do you even watch Scooby Doo?” she said sceptically. “He doesn’t sound like that.”

Of course – I’ve watched it with you. Okay then, make up your own mnemonic.

“I’ll do the nursery rhyme,” she said, and sang, “Old MacDonald didn’t-really-get-a-Euro, E-I-O-E-R.”

Excellent, I said – that’s the spirit. So where this comes in handy is this: let’s say you want to get some source of energy, like an oil field, and for every Euro it costs them to drill, they get 100 Euros out. They’ve made 99 Euros, right?

“Well, they’ll have a good life while it lasts,” The Girl said. “But it might be short.”

Um – why? I asked.

“Because they could poison the place where they live, and change the weather, and do all kinds of bad things that might make them not live as long,” she said.

Well, that’s a good point, I said, and that can happen in the long term. For the moment, though, just focus on more immediate effects. As you get more oil out of an oil field, though, you get less and less back, because it takes more and more effort to get it out. At first they could invest a Euro and get a hundred out, but soon they are only getting 90 Euros out, then 80, then 50, then 10.

“And then they don’t get anything,” The Girl said.

When they hit the break-even point – about one-to-one – it’s not worth it to get oil out no matter how much is there. It’s like when we pick sloes in the autumn – at first we pick the closest sloes that are the least effort, but the longer we pick the harder they get to pick, until it’s not worth it anymore, and we give up. That’s what happens with oil or anything else.

“And then they would be on the side of the roads begging for money,” she said.

Possibly, I said. So if someone tells you they have a new plan to get lots of money, or a new source of energy, or anything else, what should you say?

“Get lost, weirdo!” she said.

I laughed. Maybe, I said, but what I’m looking for is a more logical response, like: How much will it cost?

“Because if it costs me two Euros for every Euro, making a million Euros isn’t worth it,” she said. Right, I said – it would be even worse than if you had gone for some smaller amount, or made no money at all.

“If I could get just a bit of money, I wouldn’t keep going until everything was gone,” The Girl said. “I’d just take my bit of money and walk away.”

That’s the right attitude, I said – good for you. Problem is, everyone starts off wanting just a bit, and walking away is never easy.

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