The phrase assume a can opener comes from an old joke almost all economists can relate to. Here is one of the most common versions:
” A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, “Let’s smash the can open with a rock.” The chemist says, “Let’s build a fire and heat the can first.” The economist says, “Let’s assume that we have a can-opener…”
I have been thinking about some of my own core assumptions recently and how they have been painfully wrong. I am not talking about “Black Swan” type of events but I have been alarmed at my own bias and the possible ramifications.
Allow me to explain….
When gasoline hovered around $4 per gallon right before the economic crash of 2008, I believed the cost would never go down again. I mean gasoline is a finite resource, growing world economies were putting a drain on production, and suburban sprawl continued to expand. Although a true black swan event did occur in 2008 and the price of fuel plummeted due to decreased global demand, it eventually recovered in 2011 when the price of a gallon of gasoline returned to approximately $4 per gallon. I was right!
Since the recent highs in 2011, gasoline has dropped to prices not seen since the Great Recession of 2008. I have recently seen prices near $2.10.
I did not assume such volatility in a commodity of gasoline when considering a new car purchase. I expected high gas prices to remain high. Even when I consider the increased fuel economy of modern cars I didn’t expect gas to remain affordable to drive a giant SUV compared to my fuel sipping Volkswagen. The assumptions that I made in 2011 were stunningly wrong. I don’t normally regret buying the smaller car, but parts of me yearn for a big truck like everyone else around me.
The chart reflects @RBOB regular unleaded gas future prices prior to taxes and deliveries to the consumer..
In another instance of incorrect prognostication I considered purchasing solar panels for my house. I ended up not making the deal, but part of my data in consideration was the assumption that electric prices would always rise. Well, I just got a notice from my local provider that they are dropping rates for the summer during the time of peak usage! How could I be so wrong again?
I think it is high time I start to re-evaluate some of my core beliefs. On one hand, the cost of energy come may down due to increased efficiency, but it may also be offset by increased delivery costs as aging infrastructure. Gasoline cost may continue to drop as US natural gas production rises and we import less oil. Governments may take advantage of low cost gasoline to raise fuel taxes to support roads and bridges projects.
We all know the joke about when we ass-u-me things. It is up to us to be more thoughtful about evaluating them to make sure our core beliefs still align with reality.
One assumption we may all agree on is that taxes will always rise…or will they?
Do you have any assumptions that were incorrect? Tell us about them here!