how tanstaafl works
the tanstaafl concept is important to consider when making various types of decisions whether they be financial or lifestyle the concept can help consumers make wiser decisions by considering 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 alternative not chosen which would also have produced some utility decision making requires trade offs and assumes that there are no real free offerings in society for example products and services gifted free to individuals are paid for by the person giving the gift even when there is no one to assume the direct costs society bears the burden as in the case of negative externalities like pollution investors must remain particularly wary of a seemingly free lunch when dealing with investments that promise a stream of fairly high fixed payments over a period of multiple years with supposedly low risk many of these investments remain laden with hidden fees some of which may not be fully understood by investors in general any investment that promises a guaranteed return is not a free lunch because there is some implicit cost somewhere including the opportunity cost of not investing elsewhere there is also the implicit cost related to unseen risks some brokerages heavily marketed mortgage backed securities mbs as an apparent free lunch in the early 2000s these investments were described as being very safe aaa rated investments backed by a diversified pool of mortgages however the housing crisis in the u s exposed the true underlying risk of these investments as well as a faulty ratings system that classified pools of loans as aaa even when many of the underlying loans carried very substantial default risks even products and services given to individuals for free are not truly free a company government or individual ultimately pays the cost history of the tanstaafl conceptthe concept of tanstaafl is thought to have originated in 19th century american saloons where customers were given 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 unseen costs resulting from the consumption of the free lunch because the lunches were high in salt customers were enticed to purchase more drinks so the saloons purposely offered free lunches with the expectation that they would generate enough revenue in additional drinks to offset the cost of the lunch the proposal of a free good or service with the purchase of another good or service is an oxymoronic tactic many businesses still use to entice 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 finita la cuccagna translating to no more free lunch in his campaign against crime and corruption popular references to the phrase can also be found in robert heinlein s the moon is a harsh mistress as well as in milton friedman s book there ain t no such thing as a free lunch examples of tanstaaflacross different disciplines e g 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 e g matter comes from a resource that will be exhausted the cost of the supply of matter is the exhaustion of its source in sports tanstaafl was used to describe the health costs associated with being great at a sport like no pain no gain despite the different meanings the common factor is cost for investments tanstaafl helps to explain risk treasury bills t bill notes and bonds offer a nearly risk free return however the opportunity cost of investing in one of these instruments is the foregone opportunity to invest in an alternative riskier investment as an investor moves higher on the risk spectrum the phrase tanstaafl becomes even more relevant as investors provide capital with hopes of achieving larger gains than what less riskier securities yield however this choice assumes the cost that growth prospects may not be achieved and the investment could be lost 