Thursday, February 27, 2020

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:


"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Thursday, February 20, 2020

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

See Big Technology Stocks Dominate ESG Funds: The most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were giants including Microsoft, Alphabet and Apple by Akane Otani of The WSJ. Excerpts:
"Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards.

Instead, many of them look a lot like a portfolio of big technology stocks.

The five most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were Microsoft Corp., MSFT 0.89% Alphabet Inc., GOOG 0.40% Visa Inc., V 1.39% Apple Inc. and Cisco Systems Inc., CSCO -0.74% according to an RBC Capital Markets analysis.

Companies focused on issues that the environmental, social and governance (ESG) movement has come to be associated with, such as renewable energy, clean water, and racial and gender diversity, are relatively underrepresented among such funds. For instance, NextEra Energy Inc. is the world’s largest operator of wind and solar farms. It wasn’t on RBC’s list of widely owned stocks in ESG funds. But big tech companies like Amazon.com and Facebook are on the list.

The data point to one of the biggest frustrations critics have about the world of socially conscious investing: There is no industrywide rulebook to determine what should go into ESG funds.

Some fund managers screen out all companies from a certain industry, like oil and gas, and focus on smaller, lesser-known firms at the forefront of areas like clean energy or boardroom diversity. That risks delivering returns that might drastically trail behind the broader market. So the institutions behind the biggest ESG funds often follow another playbook: They try to minimize how much their fund deviates from the broader market by creating a portfolio that, for the most part, looks like today’s technology-dominated S&P 500—just stripped of the companies with the worst ESG practices within each industry."

"Many of the tech companies that are among the most popular stocks in sustainable funds have earned high ratings across multiple elements that analysts consider in evaluating ESG practices.

Index provider MSCI Inc. gave Microsoft an “AAA” rating on ESG—the highest possible score, awarded to just 4% of companies in the software and services industry. It cited the company’s strength on privacy and data security, corporate governance, lack of corruption and instability, and clean-tech-innovation capacity.

Yet other companies often included in sustainable funds have struck investors as more controversial choices.'

MSCI gave Facebook and Amazon poor ratings on privacy and data security and on labor management, respectively. The two stocks are held by a number of large sustainable funds anyway since they satisfy other criteria. For instance, Brown Advisory’s Sustainable Growth Fund excludes companies that conduct animal testing for nonmedical purposes, own fossil-fuel reserves, derive revenue from “controversial weapons,” or defy the United Nations Global Compact Principles—but doesn’t have in its prospectus any language that disqualifies companies with controversies related to user privacy or labor rights."

"'The fact that definitions of ESG can vary so much from firm to firm has caught the eye of the Securities and Exchange Commission. The agency has sent letters to companies asking advisers how and what they determine are socially responsible investments, The Wall Street Journal reported last year.

Republican SEC Commissioner Hester Peirce has criticized not only the ESG movement but also the way that companies produce ESG ratings and scorecards—saying in a June speech that “ESG is broad enough to mean just about anything to anyone.”"

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Tuesday, February 11, 2020

A Special Valentine's Message On Romantic Love

But first some links to related news stories:

The first one is Researchers at AAAS Annual Meeting Explore the Science of Kissing. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. (that is from 2009) The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

Now the economic definition of romantic love.

 Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.

The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."
The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link.

Then there was this related article: Love really is blind, U.S. study finds. Here is an exerpt:
"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."
More links:

How to Be a Better Valentine, Through Economics by economist Paul Oyer.

Here’s what science says is the secret ingredient to making your love spark 

Can Giving Up Money And Material Things Lead To More Love?

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

Return of the Love Headhunters

eHarmony To Provide Personal Counselors To Help You Find Mr. Or Ms. Right

Economist Paul Zak, aka Dr. Love (he studies the brain with "neuroeconomics")

This is your brain on love   (brain scans and biology seem to confirm the economic definition given above)

Dollars & Sex: The Blog of Economist Marina Adshade

Do Women Really Value Income over Looks in a Mate? by Marina Adshade

Thursday, February 06, 2020

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

See It is all about the money when discussing ‘planet, people and profits’ by Prasad Padmanabhan. He is a professor of finance at St. Mary’s University.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. I have had some posts on this issue of being selfish vs. being altruistic and if they can actually be separated before. So those links are at the end.

Adam Smith talked about the invisible hand and how profit seeking firms would provide what the public wanted. But what about trying to make the world a better place? What if companies do that because buyers demand it? Maybe if they didn't they would not maximize profits. That is what Padmanabhan's article is about.

Here is an excerpt from The Wealth of Nations found at The Library of Economics and Liberty.

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
Now excerpts from Professor Padmanabhan's article, which says if companies want to make a profit, they have to do good.
"Rightly or wrongly, firms now believe that they should routinely report their performance along financial and nonfinancial lines to outside stakeholders. It seems important for them to prominently display their social and environmental performance in addition to their financial performance to stakeholders. Arguably, each generation of stakeholders believes it is more conscious about social and environmental issues than the previous generation. Hence, firms may seem to be pandering to the needs of these generational stakeholders by showcasing their nonfinancial performance as well.

Blue Apron and Plated are two firms offering meals that target young adults and provide information on their websites to appeal to these stakeholders. Plated, for instance, indicates that its produce is grown organically and its poultry and fish originate from sustainable sources. “Look,” it seems to say. “We are good custodians of the planet and take care of our stakeholders!”

Additionally, in today’s social media world, good and bad news about anything or anyone is instantly disseminated globally. Firms and individuals must increasingly manage information flow very carefully. Together, increased stakeholder focus on environmental and social issues, and the relative ease of information dissemination, can be a deadly combination for firms.

One faux pas on either of these counts can prove disastrous to a firm’s image. Witness the response to the United Airlines CEO’s apology blaming the victim in reaction to a video circulating on social media of a man dragged off a plane. And how about tweets from Adidas congratulating Boston Marathon survivors? It was forced to take down that ad after furor from Twitter followers who suggested this ad reminded individuals of the tragedy.

The cost to erase these errors in judgment proved extremely expensive to the firms involved. To avoid costly missteps like these, firms are more proactively inclined to expend valuable resources to hire people to manage their corporate social responsibility, or CSR, profiles and their advertising campaigns."

"But in today’s globalized, social-media-filled world, a firm cannot be profitable unless it takes care of the people and the planet. The most profitable firms of today are successful because they are good stewards of the planet and take good care of the people."

Research by my colleagues and me also indicates a direct link between a firm’s CSR activities and its future financial performance. We found evidence that current CSR activities for a group of service firms are strongly positively correlated with how much future profits the firms can generate from its assets, after controlling for other factors.

In another study, we found that global manufacturing and service firms use CSR dollars as strategic dollars to be spent carefully for maximum financial benefits.

Another related analysis found that banks offer lower interest rates on bonds to firms that follow good CSR principles relative to firms that do not. Bankers may feel good about firms that implement good CSR practices, but they still follow the money. They offer lower interest rates to such firms since they may recognize that such firms are likely to attract higher revenues in the future — lowering their business risks, which translates into more money — capital.

Ultimately, firms cannot make money unless they take care of their stakeholders. The harsh limelight of social media punishes irresponsible firms because potential, and even loyal, customers will avoid its products. Decreased revenues, in turn, lead to lower profits. Lower profits can negatively affect the stakeholders of the firm. It is essentially unimaginable for any firm today to earn sustained profits while being irresponsible custodians of the planet and/or not taking care of its employees and customers."

Here is a link to another interesting article by Prasad Padmanabhan: Corporate activism in politics creates business strategy dilemmas.

Related posts:

Why Doing Good Makes It Easier to Be Bad

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ