Practice anyone?

For my students out there reading this, please pay attention to the lecture or I’ll switch the WiFi off.

No, seriously, take a look at this post by John Quiggin (via others). Make sure you can answer questions like this for the mid-term. Also, to the extent that you can, you can also see evidence that you might be outperforming many economics PhDs. (No wonder it is so hard for you to get substitutions for economics in the MBA course!)

Can’t fault these words

Here is some sound advice from Scott Adams, the creator of Dilbert.

  • The person who sits nearest the boss’s office gets the most assignments.
  • Your potential for senior management will be determined by the three H’s: Hair, Height, and Harvard degree. You need at least two out of three. (Non-Harvard schools will be acceptable if it’s clear that you “could have gone” to Harvard.)
  • Your hard work will be rewarded. Specifically, your boss’s boss will reward your boss for making you work so hard.
  • There’s no such thing as good ideas and bad ideas. There are only your own ideas and other people’s. If you want someone to like your idea, tell him he said it last week and you just remembered.
  • Teamwork is what you call it when you trick other people into ignoring their priorities in favor of yours.
  • Leadership is a form of evil. No one needs to lead you to do something that is obviously good for you.
  • You can estimate the time for any project by multiplying the number of idiots involved by one week and adding the number of capable co-workers times four weeks. (The competent ones are busier.)
  • In any group of three coworkers, at least one of them will be a sadistic loser intent on grabbing your ankle as he circles the drain.
  • Non-monetary incentives are every bit as valuable as they sound.
  • Business success is mostly about waiting for something lucky to happen and then taking credit.
  • Preparing a Powerpoint presentation will give you the sweet, sweet illusion of productivity.
  • It is better to be an “expert” than it is to do actual work.
  • The first month on any new job should be spent talking smack about the “idiot who had the job before you.”

Full link here.

Tuning in doesn’t make you tune out

As a parent, access to television is seen as a privilege and not a right. We place a television alluringly in the family room and then place an invisible wall around it saying ‘Off Limits.’ If a request to watch television comes in from one or more household members it is carefully reviewed by committee including taking of submissions from all interested parties, examinations of the time of the day and the day of the week, and a rigorous account as to the applicants’ other merits (doing homework, asking nicely). Then a decision is based with reference to guidelines as well as precedent. Unfavourable decisions usually are accompanied by appeals and requirements for the committee to suggest alternative activities. Favourable ones are then referred to a lower level subcommittee to determine what will actually be watched on television.

In an earlier day, without DVDs or Tivo, that process would have been lengthy enough so that a new problem of ‘there is nothing interesting on TV’ would have come up and the TV may actually not get turned on. Today, we don’t have the luxury and so practices are then reviewed by a non-consultantive panel regarding whether too much TV is being watched overall. In the end, I think an average child in our household ends up watching 4-6 hours per week (yes, per week; about a seventh of the average in the population. For TV loving parents such as us, this is somewhat surprising).

Our review panel devours any studies that might enlighten on this issue. The sum total of those studies has been basically uninformative. Some claim TV is plain bad, others it depends on what you watch and others depend on who watches with you. The end result is too use common sense as these outcomes also apply to books and computers.

A new study has appeared by Matthew Gentzkow and Jesse Shapiro that will get our attention this evening. These economists at the University of Chicago have used the fact that television was introduced at different times in different cities of the US. They have then taken standardised tests conducted in the 1960s to examine the long-term effects of television watching. Theoretically, if television is bad, if you had been watching it for 12 years before taking the test as opposed to 4 years or not at all, it would show up in test performance. [See this article in Slate for a more comprehensive explanation.] Moreover, this is all done at a time prior to VCRs etc where there was little ability of parents to choose what their children might watch and there was certainly no regulation of advertising content.

And the results: there is certainly no negative effect from television watching. If anything the effect was positive and more so for children in non-English speaking households and where the mother had less than a high-school education.

Can we disband our review processes now and let the kids watch TV until they are sick of it? Then we would have more time to get back watching as much TV as we did when we were growing up.

Game Reality

The Fox TV Network announced today yet another reality series. They all have their twists but this one’s quite interesting. Nine contestants will be locked in a bunker. They will be asked to vote which of them should receive $1.5m. If they ‘can’t decide,’ the amount they could win would be reduced and they will remain in the bunker to vote again the following week. However, as is typical of these things, one contestant will be ‘removed’ from contention each week but will still be able to vote. The interesting thing is that it is possible that the series could last anywhere from one to eight episodes.

The name of the show is ‘Unan1mous’ so we can presume the vote for the winner needs to be unanimous. It will be interesting to see if contestants will be able to vote for themselves. Either way it will be interesting. I am going to refrain from predicting what will happen here until we get a better sense of the rules (tune back in March) but it should be clear to all that the basic set-up here is akin to the Prisoners’ Dilemma: in order to generate the maximum prize, all but one individual will have to sacrifice winning anything at all. This is usually a recipe for social disaster and I am pretty sure that is what Fox is banking on. Even better, the bigger the disaster, the cheaper the program is to produce.

Experimental economists go to alot of trouble to conduct experiments that test the predictions of game theory. But reality television is offering a new dimension to all of this with much higher stakes. In an earlier era, Scientific American offered its own slice of reality. Formulated by Douglas Hofstadter, in June 1983, Scientific American made the following (seemingly extraordinary) offer:

This talk of holding back in the face of strong temptation brings me to the climax of this column: the announcement of a Luring Lottery open to all readers and nonreaders of Scientific American. The prize of this lottery is $ 1,000,000/N, where N is the number of entries submitted. Just think: if you are the only entrant (and if you submit only one entry), a cool million is yours! Perhaps, though, you doubt this will come about. It does seem a trifle iffy. If you’d like to increase your chances of winning, you are encouraged to send in multiple entries without limit. Just send in one postcard per entry. If you send in 100 entries, you’ll have 100 times the chance of some poor slob who sends in just one. Come to think of it, why should you have to send in multiple entries separately? Just send one postcard with your name and address and a positive integer (telling how many entries you’re making) to:

Luring Lottery c/o
Scientific American……

You will be given the same chance of winning as if you had sent in that number of postcards with ‘1′ written on them. Illegible, incoherent, ill-specified, or incomprehensible entries will be disqualified. Only entries received by 5:00 PM on June 30, 1983 will be considered. Good luck to you (but certainly not to any other reader of this column)!”

Well, what happened? It turned out that the vast majority of people in the world sacrificed for the common good and did not subit a ‘claim.’ However, a few thousand others did including one person for a googol entries (that is, 10 to the power of 100 or what Google would have been called if their founders could spell). So there was no chance of Scientific American paying out.

Given this, it is a wonder why Fox didn’t make this more interesting: say $10m or $100m or even a googol million! But how much faith you one put in game theory translating into reality.

For any of my students out there, one thing you can be sure of: I am going to find a way for this to be on the exam.

Entertainment of the people, by the people and for the people

There is a part of me (actually a large part) that believes that in modern democracy the real differences between alternative governments is not politics or policies as much as how much entertainment value they might provide during their term in office.

When it comes down to it, Australian politicians do not offer what U.S. ones do in this regard. This week’s events with the Vice President are a big case in point (see this link for one example). In an earlier era, we had such value from Dan Quayle; so much so that a part of me was sad when Bill Clinton was elected (especially as he droned through 45 minutes of acceptance speech). But boy did he turn out well on the entertainment front.

It seems to me that Australian politicians really need to get out more. What the above US examples have in common is that they happened on vacation or out of the office (or at least out of meetings) time. Australian politicians appear to be overworked and not spending enough leisure time or time in front of primary school classrooms. If they did this, we may be able to get a better quality of government (for our amusement that is) with probably little sacrifice in the quality of other things politicians provide.

Oh Honestly!

Today’s Australian Financial Review (“Trouble brews for rival brands”) reports that Honest Tea (Australia) has been portrayed by the NSW Small Business Minister, David Campbell, as a “big American corporation” threatening “the little guy.” The remark has to do with Honest Tea’s concern about an Australian rival’s (Springleaf Tea) use of the domain name to promote their own product.

Now I don’t know any more about the dispute than is contained in the press but I do know that Honest Tea is not only not a big corporation but is, in fact, the very epitomy of small, entrepreneurial firm competing with big corporations — American and otherwise. The fact that they are in a position to export to Australia is a testament to what smaller businesses can do. They do not deserve the scorn of Ministers there to protect small business interests.

[Interest Disclaimer: Professor Barry Nalebuff, Honest Tea’s founder and Chair, has visited Melbourne Business School on several occasions and his book Coopetition is required reading for MBAs. We both serve as advisors to Rismark International. Steve Hibbard works at Melbourne Business School. All views here are my own.]

The law of demand still holds

If you want to make a point that people are spending more and more on things they do not need (for the purposes of conspicous consumption), do you have to use bad economics to justify your case? Surely not.

In today’s Age Sunday Magazine, there was an article about what exorbitant prices people will pay for things. It quoted Clive Hamilton (of the Australia Institute) who has written a book, Affluenza: When Too Much Is Never Enough. He is quoted as saying:

People are prepared to pay more for a product if the price is higher, regardless of intrinsic value. … Economists think a market becomes more limited as the price goes up but today that is just not true.

Now it is true that economist’s tend to believe in the law of demand: as you increase price, fewer people will buy. But this may not be the case for everything. Economists since Giffin have recognised the possibility that in some situations the law of demand may not hold (e.g., if price rises for margarine, people have more to spend and switch from margarine to butter). For other situations, price can be a signal of quality and so firms with high quality goods may not wish to drop prices even when there is excess demand (Joseph Stiglitz won a Nobel prize for that insight, so it is hardly obscure).

However, to say that there has been some fundamental change in the economy so that the law of demand is widely violated is simply not plausible. If so, we would see massive inflation and let’s face it, that is not there. We would not see prices fall in the face of competition but we see that all of the time (e.g., telecommunications and computer equipment).

What is true is that firms are using product differentiation — selling high and low quality versions of a product — to price discriminate. But it is still the case that as they increase price for the high quality product, they reduce their sales of it.

My point is that the law of demand can work just fine and we can still worry about conspicuous consumption leading to problems. For an example see Robert Frank’s excellent book, The Winner Take All Economy (published a decade ago).

Nonetheless, I did find the Age article enlightening on other fronts. For instance, it turns out there is significant demand for Kinder Surprise collections. Before we had children, we engaged in some definitely non-conspicuous, but significant, consumption of these chocolate eggs and have kept most of the toys that came with them. I’ll be digging out the collection this afternoon for a visit to eBay to see if I can be surprised further.

Paying for Serenity

Last night we watched the DVD of Serenity, the movie/next episode of the Firefly television series. That series was cancelled after just 13 episodes but has been a big seller itself on DVD. But the movie was a surprise hit as well. And it was excellent by the way (well above average for an already good series).

What is interesting about this is that Firefly has been able to do what few before it have done: fail on free to air television and make money from a pay per view model. Of course, the biggest prior success for this model was Star Trek (and by this I mean the original series; also cancelled and later making a comeback at the movies).

With the cancellation of The West Wing, fans are lobbying for a similar move to pay per view. Their rationale is based on a simple back of the envelope calculation. It currently costs about $6 million to make a West Wing episode. That means that if you charged $1.99 per episode (as on iTunes) then you could break even with 2 million viewers (downloads). At the time of its cancellation there were an estimated 8 million viewers in the US alone, so the economics seem to stack up. (See this article in Slate for a discussion). Change the cast and use some bargaining power and you lower the costs making the case stronger.

Sadly, however, while this logic seems compelling, there is a really big difference between 8 million viewers who don’t have to pay and 2 million viewers who do. Let’s imagine that there is a price to be paid to watch a program on television (say a generous 20 cents). Then for a 1000 percent increase in price, demand would only have to fall by less than three quarters to make the economics worse. In a crude calculation, that translates to a price elasticity of demand of the order of 0.075; making it one of the most inelastic goods pretty much ever. This seems pretty implausible.

Now, I for one would be happy to pay $1.99 or more to watch the West Wing. But I am not sure the market will. But a West Wing movie, that is perhaps another matter. We will need to wait and see.

An iTunes Index for Exchange Rates

A few weeks ago, The Economist published its annual Big Mac Index. This has been a long-standing exercise by that newspaper to examine how close current exchange rates were to purchasing power parity (or PPP). The idea is to take a standardised commodity that is otherwise locally produced and compare prices across countries. According to PPP, exchange rates should adjust so that in the long-run, the purchasing power of a consumer across countries is the same. Big Mac prices (and perhaps Starbuck’s Tall Latte prices) can, therefore, give an indication as to where PPP exchange rates should be.

One feature of Big Mac prices is that they, of course, build in variation in local costs. Put simply, the price of beef is lower in Australia than Japan and always will be. What one really needs is a standardised commodity that is free of variations in local costs.

It occured to me that iTunes individual song downloads were such a commodity. Like Big Macs their pricing is set by a single firm. But unlike Big Macs we can expect that there are no local variations in costs as for a given song it is the same music company that negotiations with Apple. Hence, all price variation is likely to be demand related.

There are many iTunes stores but only six distinct local currency prices (USA, Europe, UK, Japan, Canada and Australia). The following table is my calculation of the iTunes Index and based on today’s exchange rates what the suggested over or undervaluation of each currency (relative to the US dollar) is:

There are two things interesting to note here. First, apart from Canada, iTunes songs are priced at a premium in other music stores. This echoes my observations about the Australian iTunes music store in The Age (4th November, 2005) where I noted the substantially higher prices for all iTunes products (if they were available) in Australia as compared with the US. Second, there is no relationship between the PPP implied exchange rates under the iTunes and Big Mac indeces. Indeed, there isn’t even a qualitative consistency.

What is interesting about all of this is that I suspect it is the iTunes pricing — something that was fixed but also was set as iTunes rolled out — that is a poor predictor of PPP rather than Big Mac pricing that is flexible and also has a longer-term history. This suggests that iTunes may face some painful pricing reallignment in the future. Certainly, I do not expect exchange rates to adjust to resolve the distortion.

Of course, this might also suggest that it is just the US price that was set poorly. For instance, according to the Big Mac prices, the Australian dollar is overvalued with respect to the Yen but for iTunes, there is no overvaluation or undervaluation.

Nonetheless, if I am wrong and Apple based its iTunes pricing optimally on long-term forecasts of exchange rates, then the iTunes Index should outpredict the Big Mac Index for exchange rate movements as it is free of local variation. I guess time will tell on that one.

The earlier the better

Professor Jim Heckman (University of Chicago and 2004 Nobel Prize winner) presented a very interesting lecture on education policy here at the University of Melbourne. The main insight from his work is how effective (and productive in a social rate of return sense) early childhood interventions are. These are not to improve IQ but to prove the ‘softer’ stuff that allows you to make use of your IQ (e.g., motivation, social awareness, etc). What you experience prior to age 6 (!) is apparently critical in this.

His papers are available on the web. But if I relate these findings to those in an earlier blog about IR reforms, I worry if the cost of those reforms is going to be much greater economically than anyone has appreciated to date. Coupled with the government’s lacklustre approach to childcare and we are working in the wrong direction on this one.