There is nothing like a free lunch (TANSTAAFL) Definition
What is no free lunch (TANSTAAFL)?
“There is no free meal” (TANSTAAFL), also called “there is no free meal” (TINSTAAFL), is a phrase that describes the cost of decision making and consumption. The expression expresses the idea that things that seem free always have a cost paid by someone, or that nothing in life is really free.
A free meal refers to a situation where there is no cost incurred by the person receiving the goods or services provided, but economists point out that even if something was truly free, there is an opportunity cost in it. which is not taken.
Key points to remember
- “There is no free meal” (TANSTAAFL) is a phrase that describes the cost of decision making and consumption.
- TANSTAAFL suggests that things that appear to be free will always have a hidden or implied cost to someone, even if not the person benefiting from them.
- In investing, buying treasury bills is an example of someone who thinks they are getting a good deal for very little. But the tradeoff in buying Treasuries is the opportunity cost of not being invested in higher risk, higher yielding securities over time.
How TANSTAAFL works
The TANSTAAFL concept is important to consider when making various types of decisions, whether financial or lifestyle. The concept can help consumers make smarter decisions taking into account all indirect and direct costs and externalities.
In economics, TANSTAAFL describes the concept of opportunity costs, which states that for every choice made, there is an unchosen alternative that would also have produced some utility. Decision making requires compromise and assumes that there are no real free offers in the company. For example, products and services offered (free) to individuals are paid for by the person giving the gift. Even when there is no one to bear the direct costs, society bears the burden, as in the case of negative externalities such as pollution.
Investors should be especially cautious of a seemingly free lunch when dealing with investments that promise a fairly high fixed payment stream over a period of several years with supposedly low risk. Many of these investments remain laden with hidden costs, some of which may not be fully understood by investors. In general, any investment that promises a guaranteed return is not a free meal because there is an implied cost somewhere, including the opportunity cost of not investing elsewhere.
There is also the implicit cost associated with invisible risks. Some brokerage firms heavily marketed Mortgage Backed Securities (MBS) as an apparent free meal in the early 2000s. These investments have been described as very safe, AAA rated investments backed by a diverse pool of loans. mortgage. However, the housing crisis in the United States exposed the real underlying risk of these investments, as well as a flawed rating system that ranked loan pools as AAA, even when many underlying loans carried risk. very significant faults.
Even the products and services offered free to individuals are not really free; a business, government or individual ultimately pays the cost.
History of the TANSTAAFL concept
It is believed that the concept of TANSTAAFL originated in 19th century American saloons where customers received free lunches with the purchase of drinks. From the basic structure of the offer, it is evident that there is an implicit cost associated with the free lunch: the purchase of a drink.
However, there are additional invisible costs resulting from consuming the free lunch. Because the breakfasts were high in salt, customers were encouraged to buy more drinks. So the saloons were deliberately offering free lunches in the hope of generating enough additional drink income to offset the cost of the lunch. Offering one good or service for free with the purchase of another good or service is an oxymoron tactic that many businesses still use to attract customers.
TANSTAAFL has been referenced many times historically in a variety of different contexts. For example, in 1933, former New York City Mayor Fiorello H. La Guardia used the Italian phrase “È finished the cuccagna! “ (which translates to “more free meals”) in his campaign against crime and corruption. Popular references to the phrase can also be found in “The Moon Is a Harsh Mistress” by Robert Heinlein as well as in Milton Friedman’s book “There Ain’t Nothing Like a Free Meal.”
Examples of TANSTAAFL
Across different disciplines (eg economics, finance, statistics, etc.), TANSTAAFL has different connotations. For example, in science it refers to the theory that the universe is a closed system. The idea is that a source of something (eg, matter) comes from a resource that will be depleted. The cost of material supply is the exhaustion of its source.
In sports, TANSTAAFL has been used to describe the health costs associated with being good at a sport, such as “no pain, no gain”. Despite the different meanings, the common factor is cost.
For investments, TANSTAAFL helps explain the risk. Treasury bills (T-bills), notes and bonds offer almost risk-free returns; however, the opportunity cost of investing in one of these instruments is the missed opportunity to invest in a riskier alternative investment. As an investor moves up the risk spectrum, the term TANSTAAFL becomes even more relevant as investors provide capital in the hope of achieving greater returns than less risky securities; however, this choice assumes the cost as growth prospects may not be achieved and the investment may be lost.