Walt’s Credible Threat

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To end the series, Walter needs to find a way to get his money to his son, but he knows that the federal government would confiscate the money if he does it himself. Instead, he seeks help from his former business associations, Elliot and Gretchen Schwartz. He asks them to launder the money through their business so that it appears to be a charitable donation. The Schwartz’s agree, but because he’ll die soon, Walter has no guarantee that they will actually go through with the donation.

Walter tells the Schwartz’s that he’s hired “the best hitmen” that he could find and that if the money is not donated to his son shortly after his son’s 18th birthday then Elliot and Gretchen will be assassinated. In order for such a threat to be credible, Walter hires Pete and Badger to stand outside the house and point laser pointers at the two of them to have them believe they were actually snipers. Walter’s persona leads to his credibility as well.

See more: asymmetric information, credible threat, game theory, imperfect information, incentives, insurance, opportunity cost, risk averse, strategic behavior, ultimatum game

House Hunting

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Walter and Skyler are in the market for a new house. Walter is attempting to maximize his utility by proposing to Skyler a larger house instead. In other words, Walter is trying to move onto a higher indifference curve. However, their limited budget represents a constraint to Walter’s utility maximization problem.

See more: budget constraint, indifference curve, interdependent utility functions, preferences, tradeoffs, utility, utility maximization

Behavioral & Game Theory · Gus · Hank

Who Was Gus Fring?

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Gus Fring confuses the DEA chief, George Merkert, because when he invited him over to his house and Fring seemed like a good person. However, it turns out that people can hide who they really are and appear to be what others want them to be. Fring knew the entire time that he was manufacturing large quantities of methamphetamine and yet he was having dinner with his potential captor. This clip represents a starting point for a discussion about asymmetric information, which occurs when one party holds relatively more information about an exchanged good.

See more: asymmetric information, incomplete information

Behavioral & Game Theory

Tea Options

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Lydia comes to see Mike and is less than impressed with the diner’s tea selections. She goes through a variety of different drink options and then settles on just having hot water and lemon, which she values over Lipton (black) tea. Consumer theory requires that consumers should be able to rank their preferences, which Lydia clearly does in this scene.

See more: consumer choice, preferences, ranking, subjective preferences, transitivity

Behavioral & Game Theory · Foundations

How Big Does it Have to Be?

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Skyler takes Walter to a storage area she has rented and shows him the giant pile of money he has made from his meth business. She then asks him “How much is enough? How big does the pile have to be?” Walter appears to have the same determination to earning revenue, but Skyler recognizes that her utility has diminished. The first thousands that Walter brought in may have excited her, but at this point it has become a hassle and it doesn’t seem like another dollar will really change her happiness level.

See more: diminishing returns, income effect, leisure, opportunity cost, scarcity, tradeoffs, utility

Behavioral & Game Theory · Jesse · Walter

Inertia

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Walter stops by to see Jesse. Reminiscing about the start of their partnership, they cannot help but wonder about sticking with the old recreational vehicle (RV) even when there was enough to replace it. While the RV served them well in their first attempts to cook methamphetamine, the two did not upgrade until they started working for Gus Fring. The ownership/endowment effect underlines the scenario in which some people are unwilling to exchange something that they possess for the same amount of money that they would pay for it (if not owning it). Walter and Jesse loved the RV even though it had, and brought them, many problems. From a rationality standpoint, they may have been too concerned with the sunk costs that they have incurred.

See more: cost benefit analysis, opportunity cost, rationality, status quo bias, sunk cost

Behavioral & Game Theory

Who’s Responsible

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Jesse beats Saul and forces him to confess at gunpoint about helping Walter to poison the son of his (Jesse’s) former girlfriend. In the moment, Saul needs to make a decision. He can lie to Jesse and play dumb, but he risks getting shot because of Jesse’s anger. On the other hand, he could tell Jesse the truth, confess to aiding Walter, and Jesse could still shoot him because he’s so angry. Either way, Saul must weigh the probability of being shot from telling the truth or from lying.

See more: cost benefit analysis, probabilities, rationality

Behavioral & Game Theory · Labor · Walter

What About the Money?

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Ed visits and cares for Walter. As Ed prepares to leave, Walter offers him $10,000 to stick around for two more hours. Ed takes the offer but only for one hour and the two start playing cards. Based on the earlier exchange, Ed’s reservation price for each hour is above $5,000 but below $10,000.

See more: opportunity cost, labor, supply, moral hazard, willingness to sell, reservation price

Behavioral & Game Theory · Foundations · Walter

Crush the RV

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Walter rushes to the junkyard in order to make sure that recreational vehicle (RV), which he used for cooking methamphetamine and it is stored there, is destroyed. When he arrives, the junkyard owner, Old Joe, asks Walter why is he there. In doing so, Old Joe finds out that the DEA agents, who are interested in the RV, are coming there too. Further, he realizes that, as long as the RV is on his property, he could get in trouble, even if he does not actually own it. Property rights and the incentives to care for his business push Old Joe to demand Walter the RV removal. In addition to showing how property rights induce economic agents care for something they own, this video clip shows that people update their information sets and weigh costs and benefits when making decisions.

See more: cost benefit analysis, incentives, property rights

Behavioral & Game Theory · Foundations · Jesse

Not My Decision

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Jesse fills up the RV’s tank and asks for a pack of cigarettes. However, he does not have the money to pay for these. He asks if he can come in a pay later but the cashier tells him that the gas station belongs to her dad, who is very careful when it comes to money. The gas station belongs to the father and he has the incentive to care for it, but the same can be said about his daughter. According to her, Jesse could leave and come back later.

See more: barter, incentives, ownership, principle agent problem, private property, property rights

Behavioral & Game Theory · Market Structures · Saul

Meth Lab in the Basement

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Controversial lawyer Saul Goodman is trying to buy back Jesse’s house. Negotiations start and seem to unfold well until the parties disagree about the sale price. The couple ask for $875,000 but Saul’s client offers only $400,000. The couple and their counselor feel offended by such an offer and, while mentioning that the meeting was a complete waste of their time, start walking out of the room. They stop once Saul mentions the methamphetamine laboratory that used to be in the basement. This unpleasant, but key attribute is purposefully hidden from the buyer to keep up the value of the house. However, in this case, the prospective buyer seems to have done his homework. Unfortunately, in many of today’s transactions, the information held by sellers is not available to buyers and vice versa. In cases where such information gaps persist and are systematic, markets unravel and ultimately fail.

Also, note that upon introducing himself, one of the sellers immediately recognizes Saul as “the lawyer on late-night television.” This is because of his catch-phrase “Better Call Saul”, which is present in all ads involving his business. Differentiation is a key feature of markets in which many of today’s sellers and buyers interact. Together, these traits outline some characteristics of monopolistically competitive markets.

Finally, it is worth mentioning that Mr. Gardiner, the couple’s counselor, is ardent to get right to business. This leads Saul to remark, “I get it. Flat-fee clients, am I right?” This arrangement incentivizes Mr. Gardiner to service his clients as fast as possible and therefore maximize his hourly pay. The more time he spends with his clients, the lower his hourly pay (since it is a flat charge), and the higher his opportunity cost.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)

See more: asymmetric information, incentives, incomplete information, information, monopolistic competition, negotiation, opportunity cost, product characteristics, product differentiation, profit maximization

Behavioral & Game Theory · Foundations · Growth · Macroeconomics · Skyler

Faulty Accounting

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Skyler speaks to Ted Beneke (her boss) about some underreported income, which she found while analyzing the company’s accounting records. Initially, Ted labels this as an accounting error, but soon admits to underreporting income in an attempt to avoid paying more in income taxes. From this conversation, it’s clear that Ted purposefully engages in this illegal activity by taking into account the costs and benefits of his decisions. The scene is also useful for discussing the decline in tax receipts during a recession as well as its potential causes. Skyler also has to weigh the costs and benefits of reporting her boss (and friend) to the IRS.

See more: accounting, business cycle, cost benefit analysis, Gary Becker, rational model of crime, recessions, tax avoidance, tax receipts