Economics

[millionairemind]

Given the choice, how much choice would you like?
By Tim Harford

Published: November 13 2009 23:39 | Last updated: November 13 2009 23:39

Is more choice better? Ten years ago the answer seemed obvious: Yes. Now the conventional wisdom is the opposite: lots of choice makes people less likely to choose anything, and less happy when they do choose.

The most famous supporting evidence is an experiment conducted by two psychologists, Mark Lepper and Sheena Iyengar. They set up a jam-tasting stall in a posh supermarket in California. Sometimes they offered six varieties of jam, at other times 24; jam tasters were then offered a voucher to buy jam at a discount.

The bigger display attracted more customers but very few of them actually bought jam. The display that offered less choice made many more sales – in fact, only 3 per cent of jam tasters at the 24-flavour stand used their discount voucher, versus 30 per cent at the six-flavour stand. This is an astonishingly strong effect – and utterly counter to mainstream economic theory.

One practical response to such experiments is that choice can be a good thing overall even if it does discourage us. I may find the choice between Robertson’s jam and Wilkin and Sons’ jam irritating and of no practical consequence to me, but you can bet that it has consequences for the two companies. We are often offered an apparently pointless choice between two equally good products, not appreciating that they are only good because we have been offered the choice.

The counter-argument was once put in a sketch about TV deregulation by Stephen Fry and Hugh Laurie: a waiter whisks away silver cutlery from a politician responsible for the proliferation of channels before dumping a sackful of plastic coffee stirrers in his lap. “They may be complete crap, but you’ve got choice, haven’t you?” Funny, but Fry and Laurie had it backwards. Zero choice is the fastest route to low quality.

But a more fundamental objection to the “choice is bad” thesis is that the psychological effect may not actually exist at all. It is hard to find much evidence that retailers are ferociously simplifying their offerings in an effort to boost sales. Starbucks boasts about its “87,000 drink combinations”; supermarkets are packed with options. This suggests that “choice demotivates” is not a universal human truth, but an effect that emerges under special circumstances.

Benjamin Scheibehenne, a psychologist at the University of Basel, was thinking along these lines when he decided (with Peter Todd and, later, Rainer Greifeneder) to design a range of experiments to figure out when choice demotivates, and when it does not.

But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.

After designing 10 different experiments in which participants were asked to make a choice, and finding very little evidence that variety caused any problems, Scheibehenne and his colleagues tried to assemble all the studies, published and unpublished, of the effect.

The average of all these studies suggests that offering lots of extra choices seems to make no important difference either way. There seem to be circumstances where choice is counterproductive but, despite looking hard for them, we don’t yet know much about what they are. Overall, says Scheibehenne: “If you did one of these studies tomorrow, the most probable result would be no effect.” Perhaps choice is not as paradoxical as some psychologists have come to believe. One way or another, we seem to be able to cope with it.

[millionairemind]

Dear Economist: Should my useless but sexy PA stay?

By Tim Harford

Published: September 19 2009 00:22 | Last updated: September 19 2009 00:22

Samantha, my PA, is so very unreliable. For example, she failed to pass on your invitation to feature as a responding correspondent in your recent “Dear Undercover Economist” plug article. However, she does have a fantastic pair of, er … feet. Should I fire her?
Bob Casablanca

Dear Mr Casablanca,

Much depends on your line of business. In Mel Brooks’s masterpiece, The Producers, the crooked Broadway magnate Max Bialystock hires a blonde bombshell, Ulla, whose secretarial skills consist solely of the ability to pick up the telephone and intone, “Bialystock unt Bloom, Good tag por day.” She can, however, dance. Bialystock is happy enough, which is understandable given that the sole aim of his production is to go bankrupt.

It is unlikely that you share Bialystock’s aims, but if you work for a large organisation, you may share his contempt for his shareholders. Your PA’s incompetence largely disadvantages them, while her aesthetic appeal – which an economist might call a “non-pecuniary benefit” – is enjoyed by you alone.

Naturally you have to ensure that your PA’s failings are not so disastrous as to damage your own career, but that should be manageable, especially if you continue blaming her whenever something goes wrong.

If you own a large stake in the business, the trade-off is more painful. Samantha will be costing you money. I cannot advise you as to the right course of action, since I don’t know how much money you have, how much you want, and how “fantastic” she really is. I would simply note that you can always look for other options. You could hire a second PA to work in parallel with Samantha. Or you could seek out a PA who offers the best of everything. It cannot be impossible to find an assistant who is both effective and attractive.

[millionairemind]

I find great interest in this kind of study. Understanding human psychology helps me when I have to design rewards in the future

Designing rewards
Carrots dressed as sticks

Jan 14th 2010
From The Economist print edition
An experiment on economic incentives

PEOPLE are contrary creatures. A man may say he would not pay more than $5 for a coffee mug. But if he is told that the mug is his, and asked immediately afterwards how much he would be willing to sell it for, he typically holds out for more. Possession, it appears, lends things an added allure.

This makes little sense in the world of standard economic theory, where the value of something depends on what it is. But it can be explained by behavioural models in which the value people attach to objects is affected by what they already have, and people abhor losses more than they like equivalent gains.

In a new paper Tanjim Hossain of the University of Toronto and John List of the University of Chicago explore a real-world use of these insights. The economists worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective. Most might have recommended changes to the amounts of money on offer. But Mr Hossain and Mr List chose instead to concentrate on the wording of the letter informing workers of the details of the bonus scheme.

At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

Objectively these are two ways of describing the same scheme. But under a theory of loss aversion, the second way of presenting the bonus should work better. Workers would think of the provisional bonus as theirs, and work harder to prevent it from being taken away.

This is just what the economists found. The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system. Economists have always been advocates of using carrots and sticks. But they may not have emphasised appearances enough. Carrots, this research suggests, may work better if they can somehow be made to look like sticks.

[millionairemind]

Paralysis and other effects of distrust
by POP on JANUARY 28, 2010
Or, why sometimes, we shouldn’t follow our instincts.

“Fool me once, shame on you. Fool me twice, shame on me.” Heard that one before? That’s what I felt the second time I was told by a cell phone rep that my contract hadn’t been extended, when in fact it had been. I’m not falling for that, “Sure we can tweak your plan this way, no problem!” trick again. But thing is, that kind of kick in the head isn’t just something you reason through. Getting shafted by something more than once starts to build psychological barriers even when they aren’t healthy.

Take the stock market. This time last year, economists at the University of Chicago School of Business and Northwestern launched the Financial Trust Index, which purports to measure how much we trust various financial institutions. Basically, they survey 1,000 Americans and asked them questions like “How much do you trust brokers on a scale of 1 to 5?” A score of 5 meant you trusted them completely, where a score of 1 meant you don’t trust them at all. Both brokers and the stock market received scores near 2—the worst of any other institution.

Americans were also asked how likely they thought it was that the stock market would drop by more than 30% in the next 12 months. In December 08, 56% of Americans thought it was “likely”. By June, after the market had started a full-on recovery, only 40% thought it was likely.

Well, the stock market’s run up another 20% since the end of June. So by now, we’ve all got to be really confident in stocks again, right?

Nope. In December, the economists asked the question again, and 41% of Americans still think the market’s likely to drop 30% in the next year.

What’s going on?

It turns out, we’re treating the market like a customer service rep, who’s lied to us a couple times. Twice in the last decade—in 2002 and 2008—the market’s erased a huge percentage of our wealth. And as a result, we’re not getting back in, even as the market rises without us. In 2009, which saw the quickest stock market recovery in decades, investors actually put more money into bond funds than stock funds. We keep hearing that investors chase returns, right? Apparently not when there’s been a fundamental disruption of their trust in the market.

Sometimes, this can be healthy. I don’t get off the phone without getting an order or service number from customer service reps. But in this case, I think investors are doing themselves a huge disservice. There’s nothing to “trust” or to not trust in the stock market. It is what it is—a long-term bet on the future of global business.

If you find your stomach turning when you think about adding money to a stock fund, keep these points in mind.

1. Whether it went up or down, the market’s price history doesn’t matter.

The market’s up more than 50% from the bottom. That might be making you feel that you’ve already missed the biggest gains. You could be waiting for another dramatic fall, at which point you’ll jump in. But let’s take a look at that logic for a minute.

Pretend I was selling a Rolex watch for $30. You’re a watch expert. So you know it’s real and think it might really be worth $3,000. But before you got the cash out of your wallet, some other guy jumped in and took the deal. Now he’s re-selling it for $1,000. You’re thinking, “Damn. I really missed out on that one,” when you should really be saying “Wow, there’s still a great deal to be had here.” If you hadn’t seen the first deal, when the watch was an extreme bargain, you might not even be hesitating to buy the watch.

That’s kind of where we are right now. Yes, you missed out when the S&P 500 sat at 666 in March 2009. But that doesn’t really matter now. What does matter is the market’s current price.

2. If you’re buying for the long-run, the market’s always a deal.

I find valuing the market to be an exhausting process. There are lots of ways you can go about it—looking at normalized price-to-earnings ratios, price-to-book ratios, etc. And at the end of the day, you’re rarely left with a lot of confidence in your conclusion. That’s why market timers tend to underperform the market as a whole by more than two percentage points.

But one thing I am confident in, is that over very long periods of time, you earn more money by owning American businesses than by keeping your money in cash. And that’s basically what you’re doing by investing in the stock market. You’re buying a small piece of the earnings power of the American economy. Unless you think there’s been some permanent disruption that will continue to exist until you retire, which for me is more than 30 years, you’re asking for trouble by not buying now.

I’m not the only guy who thinks this. Even one of the greatest value managers of all time, Warren Buffett, says so. His company is buying railroad Burlington Northern, and Buffett’s made a point of saying that he doesn’t think he’s getting a bargain on the company. He just thinks that Burlington is going to be a great company long-term and is willing to pay a premium to get a piece of it.

3. You weren’t “fooled” anyway.

Even though it felt like the market screwed you twice in the last decade, if you were simply dollar-cost averaging in a 401k or IRA, and re-balancing, you made money in the last 10 years. Money Magazine has a graphic on this in their current issue, which isn’t online. Starting with a 60/40 stock/bond portfolio, someone who began with $100,000 invested, added $1,000 per month, and rebalanced annually finished the decade with $290,000–for a 3.8% annualized return. (A lump sum in the S&P 500 would have lost you 1.1% per year.)

So the somewhat anticlimactic bottom line? You weren’t tricked. Even if you were, it doesn’t matter. And even if it mattered, it doesn’t matter so much that you should stop investing. However, if you are making a change to your cell phone plan, make sure you get the rep’s name.
http://www.popeconomics.com/2010/01/28/ ... -distrust/

[winston]

The Essential Eight: The Only Economic Indicators Investors Need to Know
By Larry D. Spears, Money Morning

Housing starts. PPI. Same-store sales. Weekly jobless claims. Philly Fed. Lagging indicators. Core CPI. Industrial production.

There are dozens of individual economic indicators. But each of them generally has three primary attributes:-
1) Its Relationship to the Business Cycle
2) Its Frequency
3) Its Timing Relative to Overall Economic Activity

The eight essential indicators are:
1. Long-Term Growth in National Productivity
2. The Inflation Rate Compared to Short-Term Interest Rates
3. Trends in the Balance-of-Payment and International-Debt Levels
4. Trends in the Domestic Budget Balance and Levels of Public Debt
5. Government Spending as a Percentage of Gross Domestic Product (GDP)
6. Actual GDP Growth
7. Consumer Sentiment
8. The Savings Rate

http://moneymorning.com/2010/02/23/economic-indicators/

[kennynah]

The eight essential indicators are:
1. Long-Term Growth in National Productivity
2. The Inflation Rate Compared to Short-Term Interest Rates
3. Trends in the Balance-of-Payment and International-Debt Levels
4. Trends in the Domestic Budget Balance and Levels of Public Debt
5. Government Spending as a Percentage of Gross Domestic Product (GDP)
6. Actual GDP Growth
7. Consumer Sentiment
8. The Savings Rate

maybe more useful to an economic advisor than to a trader...these are very high impact indicator with lasting impact on market direction...which can be over 1-3 years...

except for 7), all else are lagging indicators...

[millionairemind]

Why Does Movie Popcorn Cost So Much?
The high price of popcorn at most movie theater concession stands actually benefits moviegoers, say researchers, including the business school’s Wesley Hartmann. It helps hold down the price of the movie ticket.
December 2009

STANFORD GRADUATE SCHOOL OF BUSINESS—Movie theaters are notorious for charging consumers top dollar for concession items such as popcorn, soda, and candy. Are moviegoers just being gouged?

Research from Stanford Graduate School of Business and the University of California, Santa Cruz suggests that there is a method to theaters’ madness—and one that in fact benefits the viewing public. By charging high prices on concessions, exhibition houses are able to keep ticket prices lower, which allows more people to enjoy the silver-screen experience.

The findings empirically answer the age-old question of whether it’s better to charge more for a primary product (in this case, the movie ticket) or a secondary product (the popcorn). Putting the premium on the “frill” items, it turns out, indeed opens up the possibility for price-sensitive people to see films. That means more customers coming to theaters in general, and a nice profit from those who are willing to fork it over for the Gummy Bears.

Indeed, movie exhibition houses rely on concession sales to keep their businesses viable. Although concessions account for only about 20 percent of gross revenues, they represent some 40 percent of theaters’ profits. That’s because while ticket revenues must be shared with movie distributors, 100 percent of concessions go straight into an exhibitor’s coffers.

Looking at detailed revenue data for a chain of movie theaters in Spain, Wesley Hartmann, associate professor of marketing at the Graduate School of Business, and Ricard Gil, assistant professor in economics at University of California, Santa Cruz, proved that pricing concessions on the high side in relation to admission tickets makes sense.

They compared concession purchases in weeks with low and high movie attendance.

The fact that concession sales were proportionately higher during low-attendance periods suggested the presence of “die-hard” moviegoers willing to see any kind of film, good or bad––and willing to purchase high-priced popcorn to boot. “The logic is that if they’re willing to pay, say, $10 for a bad movie, they would be willing to pay even more for a good movie,” said Hartmann. “This is underscored by the fact that they do pay more, even for a bad movie, as is seen in their concession buying. So for the times they’re in the theater seeing good or popular movies, they’re actually getting more quality than they would have needed to show up. That means that, essentially, you could have charged them a higher price for the ticket.”

Should theaters flirt with raising their ticket prices then? No, says Hartmann. The die-hard group does not represent the average movie viewer. While the film-o-philes might be willing to pay, say, $15 for a movie ticket, a theater that tried such a pricing tactic would soon find itself closing its doors.

“The fact that the people who show up only for good or popular movies consume a lot less popcorn means that the total they pay is substantially less than that of people who will come to see anything. If you want to bring more consumers into the market, you need to keep ticket prices lower to attract them.” Theaters wisely make up the margin, he says, by transferring it to the person willing to buy the $5 popcorn bucket.

The work of Hartmann and Gil substantiates what movie exhibitors have intuited all along. “The argument that pricing secondary goods higher than primary goods can benefit consumers has been circulating for decades, but until now, no one has looked at hard data to see whether it’s true or not,” says Hartmann.

In another study examining Spanish theaters, the researchers discovered: Moviegoers who purchase their tickets over the internet also tend to buy more concession items than those who purchase them at the door, by phone, at kiosks, or at ATMs (the latter option has not yet hit the United States). More research is needed to figure out why, but for now this suggests that theaters may want to be sure to partner with an internet service to make such ticketing available––or even take the function in-house.

People who come to the movies in groups also tend to buy more popcorn, soda, and candy, Hartmann and Gil found. While this, too, merits more investigation, it may be that such groups comprise families or teenagers. “If that turns out to be the case, it may be that theaters will want to run more family- or adolescent-oriented movies to attract a more concession-buying crowd,” Hartmann says.

Analyzing data along the lines suggested by Hartmann and Gil can also support other pricing schemes for businesses that sell concessions, such as baseball parks. Taking the kids to a ball game can be a pricey proposition for many families, once you take into account all the hotdogs and memorabilia. “If we found the current pricing scheme turns away such a group, theory suggests that the firm might want to throw in a free baseball cap or bat,” Hartmann says. “That raises the quality of the experience and provides an incentive for families to show up.”

[mrEngineer]

Hi all,

I decided to start a post to discuss about economic concepts which I don't really grasp well.

Let me start first with a question on keynasian & inflation. Using this scenerio, imagine there are 5 persons sitting around a table representing the economy.

Person A owes Person B $5 and Person B owes Person C $5 and goes on until Person E owes Person A $5. This means that the economy is in a net debt of $25 and defintely gloomy scenerio. Now the govt decides to do something about it and gives lends Person A $2. Person receiving $2 naturally use it to return to Person B and so on the multiplier effect carries on.

At first round, the economy net debt becomes $15 and 2nd round $5. At this point, every person only has a debt of $1. Naturally Person E returns the remaining $1 to Person A and decided to offer to Person A another $1 for his massage service. Now the multiplier effect is repeated. The economy has turned into net asset and growing at each round. So let say the cycle repeats until Person A has $5 worth of asset. He returns to the govt $5 but the economy is still net asset of $20 (5x5-5).

Based on this illustration, I still don't see how inflation will come about if everyone choose to charge his/her services at $1 only. Is it because of greed that one guy decide to increase his service fee and caused the inflation to come about?

This is a simple example with many assumptions. What are the other mechanisms that might trigger the inflation? Interest rates? Savings rate? And what is the govt going to do to cut down the inflation? By forcing one person to become into debt again? Or encourage reduce in the service fees?

[kennynah]

mrEngineer...

appears no one is responding to your post...

i cant say for the rest...but i was hesitant to post becos...i duno how to answer your chim question... tao tngia, need panadol, just reading the A owes B, who owes C....and E owes A... after that, i'm lost...hahahaha...

hope some economics professor will enlighten you and me, eventually....

[iam802]

I have the same feeling as K.

Read already, my head big big.

I think there is too many variables and assumptions.