Ever tried applying MBA to your daily life? I tried to apply theory of Economic Order Quantity on the amount of cash I should withdraw and I am inclined to not follow its results.
- D: monthly consumption of cash = 15,000/- (to cover for maid salary, newspaper/milk/grocery bills, fuel/auto/transport costs, cafeteria & petty cash)
- K: cost to order: 50/- to cover bank fees, fuel (to drive to ATM), cost of time (it takes me 15-20 to retrieve cash)
- H: holding cost = foregone interest “4%/12”
When I tie all this together I get a value of Q = INR 21,213/-
However I have rarely seen anybody carrying that kind of cash around in their wallets. Most people tend to withdraw cash between 1-5k during the middle of the middle and 5-10k immediately after salary is credited. (but that is spend immediately to pay monthly bills)
Also a lot of ATMs limit the cash dispensed of 10,000/- forcing me to withdraw a sub-optimal amount. Is it because I have under-estimated the inventory holding cost (increased propensity to spend when you have cash in hand & risk of theft/mugging)
Please share other examples where popular wisdom over-rides the well researched theory.