Life is full of choices. Economists speak of scarcity. What they mean is that there are always more things to do than there is time to do them; more things to buy than we have money to spend. So we need to choose. Every choice has both advantages and disadvantages. The advantages are typically happiness or extra money; the disadvantages are all the other opportunities we passed up to take this one – all the things we might have done but didn’t because we made a decision. The financial term used for these forsaken opportunities is “opportunity cost”.
Given that life is full of choices, I asked the class today how they would know if one investment choice is better than another: If it makes you happier! If you profit! Ok, what is profit? The class defined that profit is what is left after you pay all expenses. They turned it into a math equation: Profit = revenue – expenses.
“All right,” I posed: I invest $100 and get back $105. My aunt invests $50 and gets back $55. Both have the same $5 profit. Who is doing better? Who has the higher return on investment? “Your aunt!” “How do you know? Can you develop an equation that measures how good the choice is?” Thirty minutes of students writing math on the whiteboard and debating equations ensued. Two groups had viable, but different equations. This difference in definition caused difficulty during class discussion, so the class voted to standardize on the business definition of ROI:
Return on investment = profit divided by investment.
Tomorrow we return again to “The time value of money.”
-Brad Houston, Rich Kids Economics Teacher
grandcanyonschools
