Thursday, October 30, 2008

How About A Little Buy-ology

That is the name of a new book that was just reviewed in the Wall Street Journal. You can read that review by clicking on Science Comes to Selling. It seems that marketers are using neuroscience to probe our brains to discover what really excites us and then they design their products accordingly. As always, caveat emptor.

Here are some excerpts:

"Marketers treat commodities as if they were people, with personality traits, and consumers as objects, with attributes that can be technically engineered."

"when an image of a Mini Cooper passed before" the eyes of subjects being scanned, a "back area of the brain that responds to faces came alive." Turns out it wasn't the Mini Cooper's "ultra rigid body" or "1.6L 16-valve alloy engine" that attracted consumers; it was its irresistible face."

"Drinking Coke more significantly increases blood flow in the medial prefrontal cortex because its ad campaigns, over the years, have so effectively associated Coke with sensations of warmth, security and childhood innocence."

"By tracking brain response, it (neuromarketing ) treats consumers themselves as objects: bundles of nerve centers that respond to different kinds of stimulus and form triggerable pathways as a result."

"But when neuromarketers attach personal traits to products, they are not falsely claiming that, say, a Mini Cooper actually is a "gleaming little person." What they are doing is adding a personality of warmth and fuzziness to the car, in the same way that the factory might add ventilated front disc brakes or cruise control. When you drive it, you will genuinely experience the sense of endearment that you might feel when surrounded by adorable children. Sure, it doesn't always work. But the intent is not to deceive."

Tuesday, October 28, 2008

Professors Donate More Money To Obama 8.33 to 1

This is from an article in the Chronicle of Higher Education called
Donors From Academe Favor Obama by a Wide Margin
. You will probably need a subscription to read this but SAC students might be able to read it by going through our library page. Here are some excerpts:

"Through the end of last month, donors from academe had contributed just over $12.2-million to Mr. Obama, compared with just over $1.5-million to Mr. McCain..." (12.2/1.5 = 8.33)

"...studies and polls have shown that faculty members and college presidents are more likely to be registered Democrats."

"In 2000, donors from academe actually gave slightly more to George W. Bush, than they gave to Al Gore. That had changed by 2004, when educators contributed close to four times as much to John Kerry, the Democratic nominee, as to Mr. Bush. And the spread has continued to widen."

"Many donors and political scholars say Mr. Obama has become the heavy favorite among academe for two key reasons. First, many college employees are disenchanted with President Bush and the Republican administration's record on such issues as the war in Iraq, international relations, and government surveillance of private citizens. Their dissatisfaction contributes to a desire among many educators to put a new political party in the White House."

I had a similar post two years ago called Are College Professors Liberal?

Sunday, October 26, 2008

A Good Summary Of The Financial Crisis

It was an article in the San Antonio Express-News this past week by financial expert Scott Burns. The title was How History Is Likely To See Our Financial Crisis. Here are the main causes of the crisis which are elaborated on in the article:

1. The institutional reduction of lending standards forced by the Community Reinvestment Act.

2. The Taxpayer Relief Act of 1997, which made homeownership the best tax-free investment in America.

3. The 9/11 terrorist attack, which resulted in artificially low interest rates.

4. "Innovation" in mortgages to comply with the CRA -- innovation that also happened to be immensely profitable to everyone in the home finance food chain.

Friday, October 24, 2008

Study: Half of American Doctors Give Patients Placebos Without Telling Them

That is the name of an article which you can read by clicking here. This is the intro:

"About half of American doctors in a new study regularly give their patients placebo pills without telling them. That contradicts advice from the American Medical Association, which recommends doctors only use treatments to which patients have given their informed consent.

"It seems like doctors are doing things they shouldn't be doing," said Irving Kirsch, a professor of psychology at the University of Hull, who has studied the use of placebos. Kirsch was not linked to the research, published Friday in the British Medical Journal."

Another part of the article says "Studies have shown that patients given a fake treatment can often improve, despite the pill having no known impact on their condition."

This reminds me of some research an economist did on placebos that I blogged about last April. That post was called Placebos: The More You Think They Cost, The Better They Work .

This also reminds me of what economists call "asymmetric information." This is a situation in which the seller knows more about a product than the buyer (sometimes the buyer knows more about something important like how healthy or risky they are as it relates to insurance). These markets do not operate optimally. My student might recall I discussed this after we played the supply and demand game in class. A good example is the used car market. Sellers usually know alot more about the product than the buyers.

Wednesday, October 22, 2008

Hot, Flat, and Crowded

That is the name of a book by Thomas Friedman, a New York Times columnist. I will get to it below.

But first, if any students are interested, Clemson University has an Institute for the Study the of Capitalism. They have a seminar in the summer for students. For more information click here (Hat tip to Ann Zerkle from the Heroes of Capitalism blog.

Back to Friedman's book. A few weeks ago a student mentioned that she saw him on TV. His new book seems like some sort of sequel to his earlier book The World is Flat. He is concerned about global warming, energy and population and how to keep a disaster from happening. It was well reviewed in the New York Times but it god a bad review in the Wall Street Journal. That is not surprising. So you can click on the links to see the reviews.

Here are the first and last paragraphs from the Times review followed by the last 3 paragraphs from the WSJ review:

"The environmental movement reserves a hallowed place for those books or films that have stirred people from their slumber and awoken them to the fragility of the planet: Rachel Carson’s “Silent Spring,” Bill McKibben’s “End of Nature” and, most recently, Al Gore’s Oscar-winning documentary, “An Inconvenient Truth.” Thomas L. Friedman’s new book, “Hot, Flat, and Crowded” may lack the soaring, elegiac qualities of those others. But it conceivably just might goad America’s wealthiest to face the threat of climate change and do something about it.

But these are minor infelicities when set against a book that will be accessible outside the eco-converted, is grounded in detailed research and repeatedly hits its target. It contains some killer facts — the American pet food industry spends more on research and development than the country’s power companies; Ronald Reagan stripped from the White House the solar panels that Jimmy Carter had installed as a symbolic step toward energy independence. Above all, it is fundamentally right on the biggest question of our age. If Friedman’s profile and verve take his message where it needs to be heard, into the boardrooms of America and beyond, that can only be good — for all our sakes."
Now from the WSJ:

"Toward the end of "Hot, Flat, and Crowded," Mr. Friedman wonders why we can't just implement the sort of policies he prefers. "What is our problem? If the right things to do are so obvious to the people who know the most about the energy business, why can't we put them in place?" Maybe the reason is that most people recognize a bad deal when they see one.

He cynically seems to suggest that it would help "if a few more Hurricane Katrinas hit a few more cities." Incredibly, he even flirts with the need for a dictatorship: "If only America could be China for a day," where we could cut through special interests, bureaucratic obstacles and worries of a voter backlash and simply "order top-down, the sweeping changes" needed.

I'm sure that such longing is testimony to his deep frustration with the debate. But, more important, it points to the failure of his book to make a well-reasoned case for his proposals. While occasionally interesting, "Hot, Flat, and Crowded" remains a one-sided plea for an incorrect analysis."

Sunday, October 19, 2008

Want A Car That Gets 64 Miles Per Gallon?

The price of gas is coming down, but it would be foolish to think it will stay low for very long. So who makes this car and when can you get it?

"Next month in Britain, Ford Motor Co. will begin selling a diesel hatchback that gets 64 miles per gallon. Across the channel, Parisians can buy a new gas-powered compact made by General Motors Corp. that gets a nifty 47 mpg.

On these shores, neither carmaker sells anything that thrifty. Yet with Americans clamoring for fuel-efficient cars and Detroit automakers on the ropes thanks to crashing sales of gas-guzzling trucks, the question is, why aren't these vehicles here now?"

To find out why go to U.S. carmakers' renewal means vast retooling.

Friday, October 17, 2008

Japan Has A Banana Shortage And Guess What Happened?

You can read all about it here Japan Goes Bananas For New Diet. It seems that there is a new fad diet where you eat bananas in the morning. Something about increasing your metabolism. So banana imports are up 25%. It is hard to buy bananas after 12 noon since they sell out so fast. But this increase in demand (caused by an increase in tastes) has also lead to a 20% increase in the price (maybe that means that the price elasticity of supply is 25/20 = 1.25, so supply is somewhat flat and then quantity supplied is fairly responsive to changes in price). But why don't the sellers raise the price even more if they are running out so fast? It seems like price might still have room to increase and end up at a higher equilibrium. Maybe the sellers are just always playing catch up and this fad caught them by surpise.

Tuesday, October 14, 2008

Why Simple Models Work, According To Nobel Prize Winner Paul Krugman

This entry is basically a repeat of one from about 2 years ago but with one excerpt added in. For any of my students, here is a link that talks about why Krugman won the Nobel prize: Krugman. One of his great skills is to take complex issues and break them down to their essence with simple models that add alot to our understanding.

So here is the original post followed by an additional excerpt. Keep in mind that even supply and demand is a model. It is simple, but it can tells us alot about what happens in markets.

"I was at a symposium about a month ago and one thing we talked about was how the abstract thinking in economics can be hard for our students. Then some teachers said they tell stories. I think that a good abstraction will be a good story and vice-versa (maybe not a perfect correlation there but pretty strong). As Steven Landsburg put it one of his books, "there never was a hare and an tortoise who raced, but the story tells an important lesson that slow and steady wins the race." A great example of this is an article Paul Krugman wrote in Slate. I think he presents an abstract idea very well by telling a good story. He shows how increased productivity can reduce employment in one sector of the economy but increase it elsewhere while everyone gains. As Krugman says "A simple story is not the same as a simplistic one." (from 10-29-2006)

Now an additional quote from the Slate article. I think it summarizes how good economic analysis can be done:

"Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings."

Sunday, October 12, 2008

How Did The Financial Bailout Bill Pass? Votes Were Bought

Shocking? Maybe not. Maybe it was appropriate since the bill was all about money to begin with. You can read all about in Tax breaks big and small sweeten financial bailout. The basic idea is that some representatives who voted against the bill since they were taking heat from their constituents were convinced to vote for it the second time if tax breaks were attached to the bill. In many cases, tax breaks or deductions that were set to expire soon were extended. Texans can keep deducting their sales taxes on their federal tax returns (people from states with income taxes can deduct those taxes). Here are the first two paragraphs:

"Millions of taxpayers, thousands of businesses and groups as diverse as solar power developers and natural disaster victims will see tax relief with the House vote Friday to approve and send to the president a $700 billion financial rescue plan.

The tax relief package attached to the rescue bill promotes renewable energy development and extends dozens of tax breaks from the critical research and development tax credit to breaks for such narrowly focused groups as motor sports racetrack owners, film producers and bicycle commuters."

My students might recall something like this that I talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumpton Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from a book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote.

Thursday, October 09, 2008

There's No Such Thing As A Free Lunch (Or A Free Concert)

A couple of weeks ago jazz legend Dave Brubeck and his quartet were the headline act for "Jazz Alive" here in San Antonio. It took place in Travis Park. But it was free. So was it worth it to go? My wife and I went and since it was free it was very crowded. So we were not able to sit to close to the stage. Then the speakers were not on very loud, either. So we had to walk around to the side and we did get a good look at Dave Brubeck playing the piano and could hear the speakers better. But lots of people were talking and moving around. For them, the jazz fest was just an excuse to hang out downtown and party. They may not even have been that interested in jazz. So the bottom line is that we did not hear the music that well and the noise and the congestion from the crowd raised the cost of the "free" concert. The benefit of going to the concert was marginal at best.

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

Going to the concert was no more desirable than staying at home (for most people). I am glad I went since I am a Brubeck fan, so my tastes are unusual. But even so, we did not stay very long. So what sounds like a great deal, a free Brubeck concert, really wasn't.

Tuesday, October 07, 2008

There Is A Great New Blog Called "Heroes of capitalism"

Here is the link:

Heroes of capitalism

Here is their description of the blog:

"The Heroes: What is a hero of capitalism? Someone who used private property to produce wealth. Everyday there will be a featured hero. Though many of the heroes had far more than one accomplishment, only one will be highlighted at a time. Private property includes the tangible (like land) and intangible (like ideas).

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned."

I have done some research on entrepreneurs as heroes. Here is one of the interesting thing I came across while writing a paper called "Who Says Entrepreneurs Are Heroes?". (It was presented at the first HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL, March 31st, 2007 at Pepperdine University).

One thing I mention is work by Candace Allen and Dwight Lee. Their 1996 Journal of Private Enterprise article called “The Entrepreneur as Hero” won the best paper award. Perhaps the main point of their article was: “Just as the society that doesn't venerate winners of races will produce fewer champion runners than the society that does, the society that does not honor entrepreneurial accomplishment will find fewer people of ability engaged in wealth creation than the society that does.” Ms. Allen was also invited to give a speech on this at the Federal Reserve Bank in Dallas. Her speech was published in Economic Insights (from the Dallas FED). It was then reprinted in both the Independent Review and The Freeman.

Sunday, October 05, 2008

Can A Product Work Just Because It's Expensive?

"brands can not only reflect who we are but also affect how we behave." That comes from today's "consumed" column in the New York Times titled Subconscious Warm-Up. It discusses whether or not wearing an expensive warmup parka like the one Michael Phelps wears will make you swim faster.

This reminds me of research done by economist Dan Ariely. He recently won an "Ig Nobel" prize for "demonstrating that expensive fake medicine is more effective than cheap fake medicine." That is from 2008 Ig Nobel Prizes honor research on stripper fertility and Coca-Cola as spermicide. Here is more on Ariely's research from "Solved: scientific riddles of flea hops, armadillo digs and lap dancers' tips:

"The Ig Nobel prize for medicine was awarded to Dan Ariely at Duke University in North Carolina for a landmark study proving that costly placebos are more effective than cheap ones. Ariely's team told volunteers they were being given a new kind of painkiller, with some receiving an expensive one and others a much cheaper version.

Even though all of them received the same sugar pills, those who thought their pills were more expensive reported less pain when they were given small electric shocks.

"This is the proudest day of my life," said Ariely. "The Ig Nobels are humorous, but the work often examines things in real life, like why buttered toast is more likely to land face down."

Ariely said his work has serious implications for the medical industry, because many patients are told they can only have cheaper drugs, or have inexpensive-looking medication, which could undermine how effective the drugs are. While the active ingredients of the drug will help treat symptoms, often they work in tandem with the placebo effect, which triggers the body's own healing mechanisms."

Friday, October 03, 2008

The Government Bailout: Are We Replacing Market Failure With Government Failure?

President Bush has signed the bailout bill. So the government will start buying assets from the banks. These assets are hard to value. They include mortgages that may or may not be good (they might not be paid back). How likely they are to be paid back is not clear, so we don't know how risky they are and therefore what price to pay for them. Will the governmnet pay too much for them, costing the taxpayers too much money or will the government pay too little in which case the banks will still be in trouble?

The plan is to get the banks into better financial shape so they can resume lending again, which is very important to the economy. Some say not acting will be worse than what is being done. But how will the government figure out the right price to pay for the assets? That will be the big question.

We could say that we have or are having market failure. That is when the market allocates too many or too few resources to some good, service or activity. Then we get too much or too little of a certain good or service. Pollution (a negative externality in economic jargon) means that too much of some good is produced, like steel. We have too little lending right now. Banks don't want to lend to businesses or other banks because they can't be sure how risky the lenders are or the value of assets they might put up for collateral.

It might be instructive to recall that the lack of this kind of information led Nobel Prize winning economist Milton Friedman to warn us that a government program might simply replace market failure with government failure. So we might be no better off or even worse off as a result of the government program. If lack of information is what caused the problem in the first place, the government can't necessarily find the right solution.

I think an article by Harvard economist Kenneth Rogoff called Significant reasons to doubt wisdom of bail-out expresses this market failure/government failure issue. Here is an exerpt:

"This brings us back to the US treasury’s plan to spend hundreds of billions of dollars to unclog the subprime mortgage market. The idea is that the US government will serve as buyer of last resort for the junk debt that the private sector has not been able to price. Who, exactly, does the treasury plan to employ to figure all this out? Why, unemployed investment bankers, of course!

Let’s ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now."