Thursday, July 22, 2010

The Economics of ‘Seinfeld’

Wall Street Journal
July 21, 2010

“This is a paper about nothing.”

So begins Princeton economics professor Avinash Dixit’s academic paper “ An Option Value Problem from Seinfeld.”

The paper uses option pricing theory to deconstruct Elaine’s decisions in the “Seinfeld” episode number 119 “ The Sponge.” In it, Elaine’s preferred contraceptive sponge goes off the market, sparking an ultimately fruitless hunt for a greater supply. Her limited supply of contraceptive sponges forces her to reassess their usage, and decide whether a potential partner is “sponge-worthy” or not.

“You are deciding whether or not to make an investment decision,” Prof. Dixit says. “The mathematical techniques are exactly the same as financial options.”

The purpose of the paper is “to quantify this concept of spongeworthiness,” where the investment is the partner. If sponges were unlimited in supply at a constant price, then Elaine’s decision about whether a partner would be sponge-worthy or not would be yes for any quality greater than zero.

But when stock becomes limited, a “spongeworthiness threshold” is required, dependent on the number of sponges she has left. The fewer the sponges, the higher the threshold for using one.


You can find the paper here

Read more about "The Sponge" episode

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