January 27, 2008

Why do video game retailers buy/sell used video games instead of just selling new titles at full price? (Naturalist Essay #1)

Many video game retailers who specialize in video game sales offer trade-in programs. Wouldn’t they be cannibalizing their business for new titles?

When the market for video game rentals appeared, retailers had to compete with a product (rented games) which had a high degree of substitution for what they sold new. The only real difference between the retailer and the renter was a level of ownership and selection.

Video games have a rapid decline in play value (marginal benefit) after a certain point. Once this happens the consumer will look to purchase a new game. With a trade-in system the marginal cost of buying a new video game becomes reduced as the consumer now has the option of trading in a game which no longer gives them marginal benefit (enjoyment of play) that exceeds their marginal cost (time to play it). The retailer is giving the option of turning part of the buyer’s sunk cost (purchase price of the old game) into a reduction of marginal cost for their next purchase.

It extends even further because the retailer is now buying from one consumer and selling to another consumer directly instead utilizing a third party producer. This allows the retailer to realize a greater overall profit. A buyer who has $100 to spend on video games could buy 2 new games for $50 each which the retailer has purchased from the producer of the games for $30 each. The retailer nets $40 profit and the consumer is able to play two video games.

With a trade-in program the buyer purchases the first video game for $50, then trades it back in for $10 of store-only credit. Store-only credit encourages buyers to return to utilize unused store credit and ensure maximum profit since it can only be spent with the retailer. The consumer then purchases another used game for $20 (which the retailer purchased from another game consumer for $10), the marginal cost for a new (used) game is now $10. The buyer can now repeat the process a total of 5 times. Each time the retailer buys and then sells a used video game they net $10 for a total of $50 from the five used game transactions (the game they buy they sell to another buyer). Now the retailer has netted $20 on the original game and $50 from the used game transactions for a total of $70 profit and the consumer gets to play 6 video games. The only one who has lost anything is the original producer of the game.

This also allows the retailer to provide a supply at a lower price and capture more of the buyers in the marketplace. For example, they will now attract the consumer that will pay $49 or below for a video game but not $50 per game. This also allows the video game retailer to offer a wider selection at a range of pricing, including older titles that may no longer be in current production. Here, the retailer is price targeting the individual consumer.

January 23, 2008

California gas price fluctuations (Naturalist Essay 1)

Why do California gas prices fluctuate so much?

Gas prices have been increasing all over the united states for a variety of reasons. More and more people are demanding oil, including new demand from China and India. Production decreases as a result of hurricane Katrina and other events have also played a roll in increasing gas prices. But why is it that California seems to always have the highest gas prices and the most fluctuation of prices? The majority of domestic oil produced for the U.S comes from the Gulf of Mexico and so we could expect that prices would be higher the further you are from there.
I believe the reason California has gas prices higher than the rest of the U.S is because the large number of people who live in the state. Pollution in California is a big problem and the state has set standards on gasoline that are higher than the federal standards. The higher standards within California restrict the trade of gasoline. The result is a trade off between price increase and a decrease in pollution. The state of California operates its own refineries to produce this gasoline so additional taxes are placed upon the fuel.
California operates its own refineries so there are a smaller number of suppliers. The refineries in the state usually operate at maximum capacity to fill the states demand so when a refinery shuts down, the others within the state cannot produce more to keep the same level of supply. If one plant shuts down and the supply is cut, prices will be pushed up. California cannot easily replace the supply because of its restrictions on gasoline and its proximity to the gulf. As plants in California shutdown and reopen, the supply will be greatly reduced and increased. The result is a large fluctuation in prices. Many other states in the United States do not have gasoline restrictions above those set by the federal government. If a refinery is shut down in one of those states, the state can then buy gasoline elsewhere to keep the level of supply relatively similar to its previous level.
Proximity to resources and restrictions are causes for price fluctuations in California that are not experienced in other parts of the country. There could be other reasons for high prices and fluctuations in California. The cost of living in California is higher that some parts of the country and income levels will reflect that. Higher income levels may result in consumers being less price sensitive to fluctuations in gasoline. California may also not have as many gas stations that are close together so the individual stations have more power and can charge a higher amount. Other areas, such as Garden of the Gods road in Colorado Springs are full of gas stations. The gas stations on Garden of the Gods face a large amount of competition and will price their lower in order to stay competitive.

January 21, 2008

Forgotten Life Lessons

Tyler Cowen sums up his book Discover Your Inner Economist with a lesson that is completely forgotten in todays society. Cowen says “ It is not about grabbing as much as possible as quickly as possible”( 221). This is opposite of the teachings and values that exist in todays society. It seems as though the idea is to make as much money as possible, consume as much as possible, and work as hard as possible while able. However the concept of taking time to enjoy life, understand culture and appreciate both are so simple yet profound. The illustration of corruption that exist throughout the world is almost like a slap in the face to Americans who's lives are completely consumed by greed. He makes an example of people in India paying bribes in order to keep the babies they gave birth to, and through this example he demonstrates the lack of law, government and individual rights that are taken for granted everyday by people living in the U.S.

This is a sad reality that Cowen emphasizes throughout his book. He illustrates the ridiculous way people view life and work with a comedic voice that allows people to connect. Chapter 10 is short, simple, and concrete. Life is not about how much you get, but how you spend and appreciate what you have!

January 20, 2008

The Economics of Eating

Thankfully, the second half of Tyler Cowen’s Discover Your Inner Economist was much better than the first half, with Chapter 7 being the best of all. Of course, the sections on the benefits of playing hard to get, his beliefs on tipping, and how to capitalize on sin were interesting, but Chapter 7, which was about how to find and cook the best food at the best prices was the most applicable to me and my family.

Although I think that much of the advice, such as exactly what dishes to order at each kind of restaurant, was based more on Cowen’s personal culinary opinions than on solid economic principles, I appreciated his honesty throughout the chapter. For example, many people in America avoid discussing the economic and ethnic disparities between the cookers (producers) and the eaters (consumers) in restaurants. But Cowen is not worried about being politically correct. He openly admits that food is getting better in America and other western countries, because we pay Mexicans next to nothing to make it. This means that restaurant owners can spend more to buy quality ingredients. Of course, if I were one of those grossly underpaid cooks, I would be upset at being treated so poorly simply because my boss knows that being treated poorly in America pays better than being treated well in Mexico, but this really has nothing to do with me, as a consumer, picking a restaurant.

Some of the advice was common sense, such as it is cheaper to eat at a restaurant off of 5th Avenue in New York than it is to eat at a restaurant smack dab in the middle of 5th Avenue, but some other advice was definitely worth taking home. For example, Cowen explains that low-rent areas can sustain more mom-and-pop ethnic restaurants with good food—which is common sense—but then he goes on to explain that the low-rent areas around a Wal-Mart or other large chain store are not so good, because those places can survive on volume alone, regardless of the quality of their food. Once Cowen mentions this, it seems like common sense as well, but taken along with all of the other advice (like it is better to eat at a Korean restaurant in Chinatown than at the same restaurant located somewhere else) and economic principles discussed in the chapter, the whole thing becomes an overall eye-opener. If nothing else, it confirms many things that I already thought but had nothing “expert” to back up.

One of these confirmations has to deal with ordering weird stuff off the menu. Whenever my wife and I go out, she likes to point out all the gross dishes on the menu and then come up with her own ideas about why in the world and who in the world would order something like calf brains or a whole fish, eyes and all, when a perfectly good T-bone or salmon filet were also offered. I try to tell her that the restaurant would not offer such dishes if they were actually “gross,” because it is too expensive to buy those ingredients and then throw them away because they can’t cook them well enough to make the taste good. Cowen agrees with me, and in fact, he advises his readers to “Look at the menu and ask yourself: ‘Which of these items am I least likely to want to order?’ Or, ‘Which of these sounds the least appetizing?’ Then order that item” (140). Although, again, I am not sure how much this deals with economics as it does with making sure I that have a new, tasty meal to enjoy, I will definitely take this advice the next time we go out to dinner. Oh, the economic principle here is actually that the restaurant has most likely spent its valuable time and money to learn how to make these unusual items taste good, so we shouldn’t waste our own valuable time and money trying to perfect them ourselves.

So, if someone reads only one chapter of this book, I say to read Chapter 7. It’s highly applicable and interesting, even if it isn’t based 100% on solid economics.

Hey, I can give a damn about this!

As I read both of the books by both Harford and Cowen I always kept in the back of my mind something that Dr. Paul Ballantyne told my intro to macroeconomics class a few years ago. He said that Economics most important aspect is that it can be used to make peoples’ lives truly better off. I have always remembered this because it seems so important that it should always be strived for. While reading both of the books I was searching for ways to understand my inner economist to help make myself better off. Yes, I’ve learned a great deal on how I should look at the world and find ways to make the best decisions for the choices I have. However while reading Harford’s book about the people of Cameroon and how he thought that those people could be helped, it seemed that there were no real answers that could be realistically achieved in a relative short amount of time.
I took 214 pages of Cowen’s book for something to really hit me and make my inner economist get the goose bumps. He mentioned something I had never heard of and that was micro-credit. My inner economist has always steered me away from giving to charities because I can just sense that hardly any of the proceeds actually get to the people who really need it. I feel that a charity like the Red Cross that has really nice offices, high paid officials and gobs of resources just doesn’t sit right with me. I understand that most people that work for these charities are paid and probably paid very well because it is their career not a volunteer position. So my inner economist says to me “Me, if you did give money, what percent actually would do what you want it to do? And I would tell myself “Self, probably not much” and I would go on about my way without giving.
But, Cowen had introduced me to a new way of helping others out with what seems to be a more efficient way. And as economists we understand the benefits with finding more efficient ways. Muhammad Yunus’s idea of micro-credit just seemed to speak right to me. I do believe that the idea of giving small loans to poorer people in other countries can be extremely beneficial. This gives people in those countries real options to better their lives. Just in my own life I can see that having a loan can be a life changing opportunity, I could not have attended college without a loan and by doing so I have opened doors that would not have otherwise been opened. By giving the less fortunate the same opportunities to better their way of life I feel is way more efficient then sending them food.
Like Cowen said to be really effective when giving to a charity, a real importance is to get behind a cause and give a damn and continue to give a damn. The micro-credit idea is something that I can give a damn about, because it squashes my apprehension of having my donations squandered, ether by the charities themselves or the governments of the receiving country. Not only can my donation help someone but after the loan has been completed that same money can be loaned to others and continue to help people. Is it really possible to have our cake and eat it too? I hope so.

review: second half of "Inner Economist"

The chapter on self-deception was my favorite, I think Cowen said some things that are really rather challenging to modern mainstream economic thought. Cowen discusses the idea that this factor, is what determines the utility that we seek to maximize. This idea is a correction, or at least a modification (if not a challenge) of the idea that people have "rational expectations." They do not necessarily do things because it is the most efficient thing or the smartest thing to do from a well-calculated standpoint. Nor are people's actions always the best or most efficient way to bring about a desired end, but rather a step in progressing a person's "life narrative".

This was very interesting, and perhaps the most applicable part of his book. He cites studies about how people who more closely stick to their self-confidence. are more successful than those with a more realistic (read that as "cynical" if you want) world view. I have often wondered about this. Put in economic terms, it can be said that confidence and decisiveness (even if one is blindly so) are more marketable traits than being highly analytical. People with the more marketable traits are more successful and happier because more people seek the company of these people, and the more thay are praised and followed, due to their "attractive" traits. That is what is meanwhen I say that ther traits are more in demand.

When I think about this I am reminded of the Movie Ed Wood. Bill Murray's character is a famous television fortune-teller. When asked how he knows his predictions are true he says that he does not. He says:

"It's Horse-Shit. If you speak well and look good while speaking people will buy whatever you say"

It can be said that the market for calm, rational thinking is highly competitive. True Scarcity power comes in the compliment good, decisiveness unwaveringly so. Rational thought is slow and skeptical and cautious in motion. Self-dilution bringing about the opposite of this is also necessary to life to an extent. It is the other side of a coin. we need both to an extant, and we have not yet hit the point of negative marginal returns when it comes to self-dilution.

Fake Girlfriends...What Value Judgments?

In Chapter eight of Cowen’s Discover Your Inner Economist he provides examples of how markets exist for the seven deadly sins. Just to put them in common terms, the sins are pride, greed, lust, envy, gluttony, wrath, and sloth.

One thing that gets me about this chapter is the inherent flaw present in it (the flaw being one of value judgments). In the beginning of the chapter Cowen states “not everything we want is good for us” (163). Later on, he says “This chapter doesn’t have a major or startling recipe for self-improvement. It is instead a cautionary tale of how the learned still can go astray. It is a warning not to get too smug” (163).

It is my guess that many of you have seen the movie, The 40 Year Old Virgin. After reading about Imaginarygirlfriends.com, I could not help but draw a comparison to the part of the movie when Andy tries to make his friends think he is not a virgin. It is common knowledge that TONS of guys say things about their escapades with various women in order to make people think they are cool. Men like this are the reason why markets for imaginary girlfriends exist. The market for imaginary girlfriends enables these “men” to actually purchase evidence to prove that their girls actually exist.

After Cowen describes Imaginarygirlfriends.com he states “Markets without values-or markets based on bad values-can misfire, with ugly results” (166). The problem here is he never defines no or bad values. What is a bad value? Maybe a bad value to Cowen is, actually, not-so-bad in someone else’s eyes. I think that it is absolutely hilarious that a guy would go as far as to pay for a girlfriend that isn’t real. In terms of ugly results, if the man caught purchasing the fake girlfriend is caught, people will point and laugh. This creates an ugly misfire for the fake girlfriend-purchaser, yet creates a moment of happiness for others, especially those who had to listen to the stories, as they watch the “man” bask in shame. Maybe the joy created by this market actually outweighs the harm done to the consumer of the fake girlfriend.

What I simply don’t understand is why this market is so bad. Obviously, it is sad for a man to purchase a fake girlfriend. However, you must admit, that creating a business in the fake-girlfriend career field is an interesting idea. After all it is a market which, most likely, possesses great demand and little supply. Selling fake girlfriends is about as creative a business idea as one can come up with. What makes this so bad? In order for Cowen to make a strong argument as to why this market is bad, he would have needed to say what his value judgments were. By not revealing his value judgments, we have nothing to base his statements on, making it much harder to deduce their validity.

My Hot Date

Last Friday night I ate dinner with a friend who was visiting from Seattle and happened to be in the Springs for the weekend.

She’s Italian so I thought Biaggi’s would be a great place to go since 1.) it’s a ristorante Italiano (to me this implied authentic food) and 2.) I had always seen cars parked outside and therefore assumed that the food quality was high.

Well, I wish I read Cowen’s chapter on dining out before I actually ate out.

The food itself wasn’t bad but my assumption that Biaggi’s would be a phenomenal Italian restaurant proved incorrect (you see, I had never eaten there before and I simply guessed that because Biaggi’s was located in a high-rent shopping center that the food itself would also be top-notch).

Cowen advises that we order the item “we are least likely to think you want” (141) but the truth is that we tend to buy what we are familiar with rather than exploring with the “ugly and the unknown” (141).

Now, I didn’t order a pasta dish (because it’s so simple and cost-efficient to make at home, and Cowen says to make items that are cheap and tasty at home) or even the roast chicken.

However, I did order the Oven Roasted Duck. Not your usual, but still a conservative pick.

How did I end up with this?

I simply asked the waiter, “What’s good?”

I should have asked, “What’s best?”

Here’s what I believe happened: The waiter wanted me, as the customer, to be satisfied so that I would leave a nice tip (if you’re not satisfied, then you don’t leave a tip). If I tried something new that could give me an upset stomach and force me to make frequent trips to the restroom, then this could potentially cause my evening to go downhill from there.

The waiter had no way of knowing that the girl I was with was actually a friend I grew up with and would not care if I had diarrhea or not. Instead, he must have thought that we were on a date and that I was trying to impress her because we ordered a fairly expensive bottle of wine so he guided my decision-making to the “safe” menu choices.

At any rate, the lesson learned here is that I should not be going to a restaurant to eat something that I can make at home (sure, roast duck might not be easy to make at first but I would be willing to bet that I could produce a decent one after a few attempts). Instead, I should be adventurous. In hindsight, I should have ordered the Lobster and Shrimp Stuffed Trigger Fish.

That being said, I’m not here to complain about Biaggi’s. My meal was decent and I was happy but now that I’ve read Cowen, I think I would have been happier if I tried something unique. Yes it’s true that I didn’t go to Biaggi’s to order an Americanized Italian dish but then again, I shouldn’t have picked something so mundane either.

Last but not least. I need to give Cowen some credit because the appetizer I tried, Crab and Lobster Al Forno, is indeed a delightful treat that I highly recommend. But before I ever suggest a restaurant to someone in the future, I’ll make sure I’ve eaten there beforehand.

Careful choice and Government

Reading through Cowen's Chapter 6 on self deception, I got thinking about a lot of things. Self interest is obviously very prevalent, and a long time ago, I would have wondered why he says it is necessary. I suppose it does keep people happy. I don't think it's completely necessary to keep us happy though. Some people are indeed content with things, and they don't need to deceive themselves into believing they will actually be rich and live on the beach someday.

But enough of this small talk. What I really thought was great in this chapter was Cowen's short discussion on self deception in politics, especially those of health care in this country. For example, why do people clamor for health care for those who can't afford it? Do they really care that much? I doubt it. This discussion relates to many things, but insurance is relevant in today's climate because EVERYBODY is talking about it. And they won't shut up, either.

I'll say this once, and I hope it sticks: There is nothing generous about talking about the government helping people. That isn't a helpful act. I don't even think that qualifies as compassion. Real compassion and generosity can be found in soup kitchens, at poor houses, and other places where charitable action rather than talk rules the day. Talking about the government helping people may make some people feel good, but in reality it is an easy out for people who don't want to actually contribute to society.

Political rant aside, there is another interesting point of the discussion. Cowen says we should help select people in crisis, but choose them carefully. That doesn't sound so bad, and the economic ramifications would probably be so small that they aren't worth thinking about. But then I have to wonder: Can we trust government to choose selectively, in a just manner? And if intentions are good (are they ever? I hope so...), exactly how should government choose who they help? Certainly some sort of code would have to be made, and I believe that this could be done, especially on a small scale.

But say we start out only helping those in crisis. How about the people in semi-crises? They'll start complaining, I guarantee it. Or someone will start complaining to get their votes. Either way, they're going to end up getting help too, or being very discontent (I'd go with the first option; it looks better for politicians actually doing the "work", and politics are all about show). Then the semi-semi-crisis people will want and get help, and so on. It's a never ending tidal wave of aid, and it will never stop in a representative government made up of people trying to win votes.

Maybe jumpstarting some charity organizations focused on health care would be a better go. Sometimes it's just better to not start something, because you end up getting a whole lot more than you bargained for. The effects in health care are already seen with the ballooning of medicaid, medicare, and SCHIP. Can we expect them to stop growing and set a limit? Nah. They'll keep going until they get too big and explode in our government-dependent faces.

Shopping Deception

How many people can say that they may operate in a cloud of self-deception? After reading chapter six of Cowen's book it seems that I may be one of those people. I found several portions of this chapter to be particularly relevant to my life and to the lives of people who are close to me. I am an avid shopper as are many of my friends. By this I mean I will go at any time whether or not I have the money to do so. Inevitably I find something that I must have, and if I don't buy it right then I just dream about having it until I finally get it. If I never get it, I always wonder what if, or I really wish that I had that. I know this is a silly thought for those who have never had this "problem." And it probably sounds like a deep dark confession I should have weekly meetings to talk about, but when Cowen talked about self deception his points on this subject were very relevant. If I go to make a large purchase that may or may not have been planned, I will often buy little unnecessary things along with it just because I don't think it matters as much cause I am already spending a lot of money. Bad idea! How do I look at this in a more logical and direct way, and step outside of my own self-deception? Cowen suggests paying for items as you pick them up so that you calculate the costs as you go and are able to properly maintain your finances. I think that this is wise advice that is applicable to even grocery shopping.

One question that this "new" type of shopping behavior brought to mind however is, what about efficiency. Doesn't it just make sense to buy all of my items at once and save myself the time of waiting in a check out lane every five minutes that I pick something up. Just a second ago I was prepared to write, "look out Target, here comes a smart shopper," but maybe the best thing to write is watch out wallet here come my bad spending habits. The best way to deal with this type of personal self deception in my case is to just not have access to all of my money at one time. I know that I am able to block some amounts of lavish spending purely by not having access to all of my money while I am at the store. Now, what to do about those high limit credit cards? Shread them!

Cowen Highlight #1 (a little late)

Finally an established economist who openly acknowledges a dynamic set of incentives rather than the conventional monetary standard! Tyler Cowen presents a fresh view of the world of incentives in chapter 2 of this book when he discusses the weaknesses of monetary incentives. He acknowledges the complexities of human nature and makes a case against the exclusive use of money as the standard economic incentive.

Everyone is familiar with the idea that every man has his price. It’s s simple yet rather comprehensive statement that largely sums up economics’ definition of incentives. Specifically the empirical based efficiency economics camp heavily relies on monetary rewards as its sole source of incentives in problem solving scenarios. I’ve struggled with this for a long amount of time on a couple of levels. First, I think it’s naïve to think that on a large scale we can accurately entice large portions of an economy with monetary incentives. We just can’t predict individual preferences on a large scale like that. Somewhere along the way there will be a misallocation of resources. Second, I personally feel that when you degrade a society to a level that says money trumps all other things, it creates a somewhat dull and robotic society. Humans are more complex than that. I am fine with saying that self-interest generally trumps all other interest, but saying that monetary interest trumps all other interest is rather degrading to the human race as a whole.

Cowen makes a good point in this chapter that there are many cases (as with the car salesman example) in which monetary rewards function very well. However, in potentially many more cases monetary rewards are just a cover up for more core issues inherent in human character. I agree with Cowen in saying that if money rewards are used at the wrong time, corruption in destruction are the only true outcomes

Highlight Lowlight Cowen 2

Pay it Forward:

In the second part of Cowen’s book, I found chapter 9 to be of the greatest interest for people interested in reading this book. I titled this short essay pay it forward for a reason! People usually want the best for themselves and others around them, and this can even be true for Countries wanting the best for them selves and other countries. Tim Harford made a reference to the IMF and the World Bank in his book The Undercover Economist, which is designed to give money to developing countries. The WB was primarily funded by the United States after WWII for Europe. France was the first recipient; for self-interest the United States wanted to help get these countries up and running for trading partners. The overall goal of the WB is to increase the number of trading partners. In Tyler Cowen’s book on page 187 he wrote “suppose we wish to go out and do the world some good. To get good results we must ask what is truly scarce.” Mr. Cowen then goes on to say “we must ask how people both donors and recipients will respond to incentives.” So the goal is to further look at incentives and what is truly scarce. The WB and the IMF were set up in away to help countries, and I think you can look at it as paying it forward. These organizations were put in place to help countries and individuals in these countries and hopefully in the long run these people will be able to help other countries in need. Mr. Cowen gives facts that Norwegians are the most likely to volunteer, with 52 percent of the adult population volunteer in some manner and giving back to others in their country.

The second big point that I think is important in chapter 9 is begging and receiving. Tyler Cowen thinks that if we give money to the poor that just encourages them to beg. I have had first hand experience with this, in Mexico. The first time I was in Mexico I found it heart wrenching to see young kids begging for money and for at least twenty-five cents they would give you Chicklets in return for the gift to them. These kids sure made an impact on my heart, so I gave one young boy five dollars, and to me that was a Starbucks coffee and I never thought much of it. After walking around the town, a group of older women had caught up to me and were begging for more, because they knew I was the one that gave the money to the young boy. The fact is that there are many starving people in the world and we all know begging is not going to stop. There are many worldly organizations that do charitable type work, that people can contribute too, and have a feeling that their money is actually going to people that need the money.

For the most part I found that the second part of this book was more valuable than the first, Mr. Cowen just approaches economics from a different aspect. Paying it forward would be a way to help start to solve our worlds poverty issues and by doing this lessen the need for people to beg.

Cowen Highlight 2 on Avoiding the Seven Deadly Sins (or not)

While reading the second half of Tyler Cowen's Discover Your Inner Economist, Some very eye opening ideas were presnted in chapter eight. Chapter eight is called avoiding the seven deadly sins (or not) and there would not be a title to better fit the chapter. The chapter really points out the fallicies in our daily lives, or the obbsessions and habits that we fall into.

The first deadly sin is called superbia and focuses on certain leverages that we take to get ahead in life. Cowen states... "Self confidence can be a good motivator, but when accompanied by excessive leverage, off the books partnerships, and phony accounting, watch out." If any of us students become CEOs or high ranking executives, we need to do our part to be fair in our business practices, or we will be going to jail.

The second deadly sin is called avaritia and is sononimous with greed. I would agree with Cowen that some markets are directly tied to greed, however there is a difference between moral greed that makes a company money and immoral greed that will end up hurting someone. In the world today it can be easily seen that our business world relies on entreprenuers looking out for number one, when our human nature enters the busness world. It is important that we use our best judgement and try to find solutions that will benefit more that just ourselves.

The third deadly sin is called luxuria, which Cowen defines as extravagence and later lust. This type of corruption is seen everywhere in our world today. A great example is Cowen's equation where alcohol plus a cell phone usually ends up in next day drama. I have personal experience with this and now have found it easier to turn the cell off, or hide it from myself. I think that this application could apply to other aspects of life such as habits, drugs, taking oneself out of a volient situation, etc... I think that we as humans do a lot of stupid things that we wish we would have taken a couple extra seconds to think about. This theory applies on only to personal life, but into the business world as well.

The forth is envidia, or envy. This is one that I am shying away from because I don't believe that we as humans are capable of not being jealous. I know I'm not capable.

The fifth deadly sin that Cowen uses is Gula or gluttony. I am incredibly guilty of this type of sin, and am also guilty of loving certain meals. In all reality there are not many meals that I cannot stop myself from consuming. Although I personally don't think it is as bad of a problem for myself, I can see that some people have trouble controlling their edible urges. I am able to balance a somewhat healthy diet with daily exercises, and am able to say that once you get in the habit of a 20 minute a day workout schedule, some gluttony is ok. This is where I can see that (or not) clause in Cowens chapter title comes into play.

The sixth deadly sin that Cowen uses is Ira, or wrath. He relates this into murder and my own personal opinion is that killing another person is 100% immoral and should not be tolerated, whether this be war, abortions, or one man (or woman) killing another human.

The seventh deadly sin is acedia or sloth. Sloth is also a (or not) type of "sin." I believe that leisure is good for the human soul, and we as humans need a break from our daily hectic lives. My personal leisure activities are playing beer pong, snowboarding, and playing guitar. I believe that if a person is willing to work and be able to afford leisure time and activities, than he or she should have fun in life.

I believe that there are some types of markets which we should do away with and some markets that do have a purpose.

Churches, kidnapping, sinful markets

Sin for sell! Sin for sell. I have heard a lot of discussion (especially in this Colorado Springs we call a city) about the immorality of selling sin. Personally, I always felt that sin was a necessary evil (pun, fully intended) in the world and if somehow the government could tax sin, then the perhaps the basic necessities could be provided for every man, woman and child!

Economically speaking, if the question of equality (as referenced in Tim Harford’s The Undercover Economist regarding the juggle between efficiency and fairness) is merely a transfer of money and wealth from the rich to the poor, then chapter 8 is a highlight that I’ll like to keep in mind when entering into markets and considering transactions!

The idea that such kidnappings can be insured against, and thus a secondary market springs up, is something of interest. If a government were to be involved and offer a form of insurance, people might consider it corrupt. But, if an insurance company offers kidnapping insurance, it’s seen a necessary evil, but in the form of a safeguard. Coincidentally, kidnappers actually seem to prefer kidnapping (working with) people who are insured because of the higher rate of successful transactions! So, does having kidnapping insurance protect you from harmful circumstances, or do they actually increase the possibility of encountering harmful circumstances?

The same question can be pondered regarding all sorts of ‘sinful’ markets. Perhaps this is where politicians can be considered useful! Some such markets can be squelched by police forces which are built by elected officials. In this manner, the idea of there being a balanced amount (an efficient allocation) of crime is skewed towards there being, perhaps, too much crime-busting.

Perhaps another way government works to diminish sinful markets is to encourage anti-sin establishments. Churches aren’t taxed, and they are a means to devaluing sin. Perhaps when the market of churches becomes more flooded, the competition between churches gets more rigid and then competition (game-theory principles are) is applied and thus religions attempting to eradicate other religions. But, I guess that depends on who you ask and what religion is their preference!

Economics is more prevalent than we realize! Sin for sell! Sin for sell.

Preferences the ignored assumption.

The focus of this blog is really Tyler Cowen’s chapters Eat Well, Bananas Aside and Avoiding the Seven Deadly Sins (or not). Both of these chapters seem to be dealing with similar topics: understanding and mastering our preferences. Preferences to economists are the stuff we never touch when building models, we assume them away. To me its interesting how he takes this assumption and brings it to the fore front of arguments based on economic models.
The first question I must ask is is this economics? The book attempts to sell itself as an everyday guide to economics, and preferences are very much part of economics. But are making those preferences economics? Cultural identity is much more important in this regard. A person must want to maximize the benefit of eating “good” food to accept Cowen’s premises. If Joe down the street eats as at a fancy restaurant to entertain possible clients then the function of the Classy establishment changes to impress the possible client. What if the entire purpose and preference for a restaurant is for business and status meetings? I believe this shows preferences to be a cultural agent and not an economic one. The decision to go to a certain restaurant could, and would, be an economic decision; the value of status vs. the cost of the meal. In that regard economics would come back into play in the form of a cost benefit analysis.
If then we assume that people have a preference for good food then his arguments about how to find the best food hold true. But makes an assumption that he knows are preferences or he can then change our preferences closer to his view. The way in which he tries to change our preferences are almost affront: “Appetizers are often better than main courses.” This tries to influence are preferences for main courses vs. appetizers. Don’t get me wrong this could, and maybe is, great advice but it goes against the basic assumptions we stick to of taking preferences as given. This shows a more culturally minded and preference changing approach to economics. Is that good?
Changing preferences isn’t part of economics but maybe it should be considered a possible expansion. In his last chapter he leaves an opinion of changing preferences as a way to change the possible bad parts of the world (as we see it). I think he is right. Why build these models and develop these theories if we are not ready to make the world a better place from our point of view. Its the old tree in the forest syndrome; does it make a sound? Well the answer could be yes and we could and do explain why it happens, but if it doesn’t impact the world what’s the point of knowing? This titers on the edge of philosophy but no discipline is truly separate from another.
Cowen dives into an area we ignore and exclude from our studies and I believe this to be the greatest highlight of his work. Expanding our understanding and influence isn’t a negative just a new path. Maybe we should start mapping the territory out for future endeavors into the area. I hope one day we can map and change preferences to make the world a better place, at least in our eyes.

Scarcity and attention to culture

The discussion of scarcity in chapter four left me feeling disjointed. There was an emphasis on scarcity and why those items that are scarce are more costly then items in abundance. Obviously this make sense, but his analysis of art and museums is where I began to loose him. I appreciated his honesty in the scarcity observations of time and attention, but that is where i feel he begins his tantrum. The truth is that time is a precious commodity especially in the United States. Time is prized by everyone and I think this is a legitimate claim in economics. Attention is also lacking, yes, but our attention to culture where does that fit? I was confused by his example of culture. The collection of expensive art versus inexpensive unknown art and the paucity of museums and its dependents.

This seems like a personal gripe not an economic principle. The understanding of time scarcity connects to how people choose to live. It is a battle to decide how much to work and how much to play. How much money we want or will sacrifice for free time. These principles I connected with. These explain scarcity. As does the explanation of why one of a kind art is so expensive.

However, the idea of attention to culture does not seem as clear. That seems more like a branch of leisure activity than an economic decision that will affect how much you work, or don't work. The discussion of the appreciation of art seemed distant. The chapter felt very disjointed to me and more of a rant by the author about his personal beliefs.

To Whom it May Concern

Dear Presidential Hopeful,
As a citizen of this nation, i write to you with a sense of honor and thankfulness that I am still able to exercise my first amendment rights. Lets preserve this as it was handed down to us, and let us preserve the commandments that were brought down from the mount to us as well. It has become very clear to me, and many others before me, that we are entering a period where we must leave our self-deceptions at the door. As we live in our comfy cocoon, there are many men and woman in uniform who are trying their best to repair our nation's image abroad as we recover from the actions of several bad apples that we have accrued. We buy the mesh netting bag of fruits, but we cannot possibly expect to receive the healthiest of fruit. Which is why i am writing to you.
The author Tyler Cowen devotes a chapter to viewing some of the world's problems in terms of the seven deadly sins. For Ira, latin for wrath, he notes "Markets in murder, arms sales, and terrorist killings can be found on the news virtually everyday. Halting or slowing down wrath is one of the hardest problems we face in the world. Enough said." I understand that extending his analysis of this particulary fault of man coud detract from the theme of his book, but i do not feel that "enough" has been said in this particular economic muse, so I look to you, our nations prospective leaders, to finish his statement with this in mind.
In times of suffering in our world, when mother earth lashes out at the most unsuspecting of her creatures, we can place our trust and reliance in the U.S. Navy for acting as a conduit by which aid can be delivered. It is just one arm in the branch of our armed forces. We saw it in the Tsunami of 2004, and we have seen it in many other global catastophes when the status and future outlook appeared to be futile. We are nation with roots of compassion and empathy, yet we believe firmly in the right to private property, enterprise, and the solid foundation of competition. It could also be said that we have a belief in our divine right to direct the course of a nation, be it away from strong willed ideologies or nation buiding.
Now, i understand that many of your constituents have ties to the defense industry. The security of their jobs relies on their vote, but many others have altogether different objectives when placing their vote in the candidate whom they trust and whom their believe will make the best decisions in group think, be the most productive in bringing about change, and will persevere with wisdom should events occur that require extreme vigilance, calmness, and level headedness. As we approach a new chapter in this book, we look back on the chapter and mark the differences in the way we conduct business both domestically and abroad, compared to how we have done it in the past.
In building nations, for whats it worth, we have a duty to assume responsibility that improves the lives of those who we are reaching out to, but many would say that all we are doing is improving the "livelihoods" of those who the government has awarded contracts to in reconstructing a nations infrastructure. There are many young men and woman who would rather be Kayaking in the rocky mountians, but who have been called by their leaders to serve their country. With little accountabiity through instutitional protocol, there have been many instances both known and unknown to the public where our nations image abroad has been put into question, if not demonized completely. With no American military statutes to abide by, certain contractors answer to no one but their own, and there have not been steps in high leadership to correct these errors in thinking and acting. We have little means or punitive measures at our disposal for dealing with problems such as these, atleast we have been taught to think, or individuals themselves, when a conflict has been largely privatized. My question to you is, what steps will you take to ensure that our soldiers on the ground are not dying in vain when attempting to repair our image abroad, and what concrete actions will you take to help repair our image abroad? How will you work with congress and the international community to reinstitute the very international human rights, or Geneva code, that Christopher Dodd's father devoted his career to? As Cowen would say, telling little johnny not to push his little sister when she bothers him while he is playing his X-box is not enough, you must make your position very clear, but that is not enough, you must take the reigns to either punish or remove privileges in order to correct this behavior. YOU ARE THE COMMANDER IN CHIEF. Not commander in cheif to special interests. You owe it to the people who care to make this change.
Some might pity or go so far as to say that i am being too sophomoric in my outlook. I beg to differ. The incentive to change, to truly give every breath you have for a cause, is an incentive to save life and to improve ones reputation, no matter how lost in the wind or dust it may seem. I beleive in you, many will too if you revolutionize your vision. May peace be upon you. God willing.

Getting more (or less) bang for your buck! (Cowen Highlight/Lowlight 2)

I like talking about highlights more then I do lowlights, however I found a minor detail in Mr. Cowen’s book to be so off base that I have to deviate from the assignment and include it at the end of this blog so I’ll have both a highlight and a lowlight. I know we’re supposed to do one or the other but the lowlight isn’t enough to constitute an entire page of material, however I can’t ignore it.

So let’s talk about what else struck me about the 2nd half of Cowen’s book. Actually my friends and I discussed this tonight at dinner (if nothing else, this class is great for dinner conversation that’s really only interesting to me but I force on others!). The dead loss of Christmas Presents and even more so the bigger concept it reflects, that of the difference in perception of value as well as net value of any transaction. I believe this chapter is a direct reference to the economic concept we learn in 101 regarding economic cost vs. accounting cost. You give a present to a relative and they value it less then you , but you value the gift giving so the total economic value is greater, or you don’t’ value the giving at all and the total economic value is less then the cash/time spent so there is a loss. You give money to a charity but by only giving a small amount and not taking your name off the list for mailing you cost them more to keep in touch with you then you have contributed to the cause.

Where else does Cowen go with this? Begging; it’s a very interesting approach he takes on this subject and I find it along with Cowen’s analysis of the low income market places in developing countries to offer a new perspective on something I hadn’t really put a lot of thought into. I relate this to our current welfare and unemployment systems. We give unemployment benefits to those who identify themselves as needing them. The system attempts to correct this in the case of unemployment by only distributing full benefits to those who are actively seeking work, we give value to the fact that they are seeking employment and reward them with incentives as such, hopefully gaining a greater gain then just the money distributed. The unemployed are using some of their resources to collect the unemployment, and report in and government employs spend a lot of time tracking and verifying all this, the net value of the unemployment benefits is much less then the dollar for dollar we distribute. We likewise limit benefits over time, so much so that they can’t be seen as a way of life for the unemployed (although there are those which attempt to abuse the system to make unemployment a form of employment.) Also unemployment benefits are limited by the type of unemployment (were you fired, or did you quit or was it a layoff? It all affects your total allowable benefits). So let’s try and apply Cowen’s ideas regarding the low income beggars of Calcutta to our current unemployment system.

Reading Cowen’s book you might think to not distribute benefits to the unemployed but to pass the benefits onto those who recently lost their job and either aren’t looking for unemployment to gain 100% of the total effect of the benefits given or with my idea distribute the benefits to those who have just become employed again.

Here’s my idea and it’s a crazy idea but hear it out and then please tear it to shreds. During the time you’re employed you accrue future unemployment benefits (let’s say as part of what employers pay into already for unemployment scenarios and/or a portion of the taxes that currently go to the unemployment system.) You then lose or quit your job; you do not garner your benefits right away. You only gain them when you become employed once again. Now there will most likely be an issue with being able to maintain an individual’s livelihood so in order to maintain your household your benefits start at a nominal distribution which decreases every period that you’re unemployed, and lowers your total amount of received benefits by a greater amount then what you receive weekly (every week you receive x dollars and this reduces your total benefits, weekley + lump sum, by twice the amount of x). The benefits are earned for the longer you’re employed so the benefits don’t become enough to quit and restart jobs but enough to provide an incentive to find work quickly. Perhaps a lump sum bonus is paid for the quicker you find work (the lump sum being part of what you accrued from your last job) the amount of this lump sum lessens the longer you take to find work. For example, if you’re only unemployed for 1 week and then find a job you gain full benefits, and for every week there after the benefits you receive weekly as well as what you receive upon employment lessen. You can’t start and stop employment because you haven’t accrued the minimum amount of time to receive unemployment benefits again. You give the benefits to those who are employed, which means the benefits not only gain the full value of the benefits given but also the value of what the recipients are producing from work. And to provide full efficiency the value of the benefits if never collected gain a vested interest overtime plus interest for retirement and can be collected upon retirement by the individual.

It’s not a full or perfect policy, it’s an application of some of Cowen’s ideas to certain public systems. I think it captures the concept of trying to get more your dollar instead of less. Which is what I believe chapter 9 is all about, the true value of incentives.

Okay for the part I had a problem with, which is part of the same chapter. Tipping; now I know that he doesn’t disdain tipping but he implies that increasing tips is a bad form of charity (and how is tipping charity?). Now he may only be talking about raising the expected tip percentage as a whole but if that’s the only aspect of tipping that he’s talking about he doesn’t clearly define this. The first problem with Cowen’s view on tipping is that tipping isn’t a form of charity, nor is increasing your tip, and if someone even views it as charity they’re off base as to its purpose, and if they are just increasing the tip to feel good then again they’re missing the purpose of tipping. Tipping is one of the most direct forms of incentives in the marketplace; you tip more for good service, less for bad service. It’s this concept that drives performance and quality of service personal, if you’ve ever been a service professional then it’s easy to see this isn’t even an exaggeration. Are tips expected in American society? Yes they are for certain jobs/positions, they are a variable cost of whatever you’re purchasing were you can directly give and get value for the transaction, you get $1 worth of service you give $1 tip, true efficiency, in a restaurant situation it’s part of the total cost of the experience (as I had mentioned in a previous blog). And by not tipping or tipping very low you send a very strong signal, hopefully if that trend continues the signal is sent not because you and others don’t want to participate in the market place but because the service professional doesn’t have comparative advantage in this area. Now Cowen mentions that the effect of the tipping is that the employer pays less as they receive more tips, which would be great if it was even possible, the majority of service personal are paid minimum wage or in the case of restaurant personal less then minimum wage ($2.13/hout last time I checked, it may have increased recently but you get the idea). Well not only will employment law not allow the wage to go lower, there wouldn’t be much to take away as it is. Anyhow, maybe I could go for a full page on this but it’s a very narrow part of an otherwise good and broad concept he talks about. I just felt that it had to be mentioned.

January 19, 2008

Food is basically awesome and I'm too unoriginal to think of a better title

In Chapter 7 of his book, Cowen discusses how to get the most out of your meal at a restaurant. He talks about what dish you should order when at an unfamiliar place, which countries have the best ethnic cuisine, what you should cook for yourself at home, and why Las Vegas no longer has $1.50 a meal lobster and steak buffets. The most interesting part of the chapter for me was his discussion on where to find the best restaurants.

The main thing to look for in a good restaurant is its location. Cowen says that the best restaurants are in countries with high income disparity. The thinking is that if there is a large wealthy class and a large poor class with little middle class, there is a high demand for fine cuisine from those at the top, and a high supply of those willing to cook the food from those at the bottom. Cowen describes countries like Haiti that have a large number of people willing to cook for UN troops stationed there. They tend to provide excellent service and fresh ingredients because they have more to lose as there are few alternatives. This also explains why countries with high wages and tough labor laws, such as many Western European countries, are losing their status as the culinary leaders in the world.

But how can you find a restaurant without traveling outside the US that is cheap and very good? Cowen says that to find a good and cheap ethnic restaurant, you must pay attention to the rent. Any given restaurant must pay rent for its location, and a small ethnic restaurant run by immigrants is not likely to attract a large number of people. Because of this, they must choose a location where there are other low-rent businesses, such as strip malls with dollar stores and secondhand shops. Restaurants such as Chili’s or Hard Rock Café survive in high rent areas because they can generate the volume needed, despite their often bland and boring food.

So, to find the best ethnic cuisine, try to travel to a poor country with a large supply of labor able to pay careful attention to the food. Failing that, look away from the center of town for the best ethnic food. Look not at the areas that have a Starbucks and a Macy’s, look for the areas that have consignment shops and nail salons. They tend to have the rents affordable enough for immigrants with better cooking ideas but less money to set up a restaurant.

Markets, Markets everywhere! Cowen Highlight #2

So, since this is a class on discovering our inner economists I think the most important part of the last half of Cowen's book was that there are markets everywhere. This is so important to understand because I think many of us forget to think like economists when making decisions whether it be for consumption or not. Although I didn't find Cowen's book nearly as entertaining and interesting as Hartford’s, I really think that he had some very valuable lessons.

The point that the author makes in the last chapters about markets (even illegal or perverse ones) exist everywhere you go. There are markets for intangibles such as having a pretend girlfriend, finding a real girlfriend or boyfriend or for breaking up with a lover. There are even markets in the medical field, have you ever heard of the "disorder" medical students get while studying to become doctors and they constantly think they are sick? Why do you think there are SO many advertisements for medications on TV? Even the most personal of afflictions are publicized (I think we can all think of one). Everyday, everywhere we encounter markets even if we don’t recognize it.

Since markets consist of buyers and sellers, the best point that was made in the final chapters is to be aware and use your knowledge of markets and economics to maximize your own profits whether you are the buyer or the seller, and whether the profit is material or not. If we use our knowledge of economics we can make better decisions, waste less time, motivate others, enjoy culture, and help people who need it most (which pretty much is the title of the book).

Cowen Highlight for Chapters 6-10

During the last 5 chapters of Cowen’s book “Inner Economist” I discovered the term “cross subsidy”. Many of us at one point or another have enjoyed the benefits of paying too little or not paying at all for a good or service that costs too much money to give away or substantially discount. You might think why, or how is this company turning a profit? How many times have you questioned what is really going on? Do you realize that you are indeed paying?

Cowen uses Las Vegas to explain how “cross subsidy” works. When I was a child I lived in Las Vegas, and we would frequently go to Casino’s to dine at the “great” buffets, and I remember my family thinking the buffets to be so cheap. As a child I had no idea what was going on, but always remembered that food is cheap in Las Vegas. Years after my family moved back to Colorado, I visited Las Vegas again. I suggested that we eat at a buffet, since they are so cheap, and to my surprise the buffet was not cheap but actually in my opinion a bit overpriced. Granted you get shrimp, crab legs and a slew of other items, but I was expecting a $2.50 not $12.50. Was it inflation? No, as Cowen explains the primary patrons of Casinos buffets used to be the gamblers. The buffets could charge a next to nothing price because the money spent gaming made up for the difference. This is as Cowen states: the classic example of a “cross subsidy”. One service (gaming) “cross subsidized” the production of another service (food). However once locals figured out that they could go into a casino and enjoy a buffet on the cheap, without gaming, the casino starts to give more than they gain. You are not getting cheap food because you are really paying for it through the money you are loosing to the games. Just as I experienced, this is no longer the case. Instead we see commercials advertising the great shopping, unique restaurants and spectacular shows, not to mention the spas, golfing and other activities that are probably now cross subsidizing the gaming.

“Cross subsidy” is prevalent all over. For instance if you travel much you can apply it to your hotel. Since I manage a hotel it is easy for me to explain how this works. The biggest point between hotels for competition is amenities, i.e. free breakfast, free happy hour, free internet, free business center, free shuttle and so on. It is probably no surprise that the hotel pays to supply these amenities. The hotel room is the cross subsidy of the other free items. This really works to the benefit of the hotel since we can present it to you as a free service which conveys better value than the hotel across the street that charges $9.99 per day for internet, and $10.95 for breakfast buffet and so on. You are not really saving the money it is built into your hotel room price. It works, because guests perceive free amenities as better value, only because it seems cheaper since it is not broken down line by line.

As you might have noticed by now, key phrases really strike my curiosity as I decide the principle behind them are important to remember for the purpose of applying them in all situations possible. This application makes me stop and analyze what might be going on. I will be on the lookout for other areas where “cross subsidies” may be prevalent.

January 18, 2008

Economics of beggars in India (Cowen Highlight 2)

While reading Tyler Cowen’s “Discover Your Inner Economist” I cam across several interesting ideas. One idea that I came across made me think. The idea of playing “hard to get” and the way it relates to economics. As I was reading through I became increasingly frustrated because I felt like I was reading some guys ramblings rather than a book that would actually help me to discover my inner economist. The book then went into pick-up lines. It discussed a study in which different lines had different effects on women.
“Pickup lines involving jokes, empty compliments, and sexual references did not impress raters. Pickup lines revealing helpfulness, generosity, athleticism, culture, and wealth received reasonable ratings.”

I knew that this story had to have something to do with economics and so I pondered for a minute, then it hit me…duh. The idea is about sacristy. In an open market place sacristy holds value just as men or women who hold some sort of scarcity hold value. People who have value are desired but there is a limited amount of people who possess value (given that each person has a different idea of what value is).

Going back to the pickup lines… Jokes, empty compliments, and sexual references can be made by any person whether they are a loser or not. The pickup lines revealing helpfulness, generosity, wealth, and so on portray value because not every person is wealthy, generous, or athletic.

Once past the pickup lines, playing “hard to get” came into play, a sense of knowing when to back off so the other person wants you more. For example, when you try to kiss a girl and she refuses, you may feel down at first but you will eventually want it even more. The idea of playing “hard to get” is a litter harder for me to see the relationship to economics but I guess that fact that something would be hard to get would imply that it is in fact scarce, and scarcity means value.

I don’t think I will be thinking about this chapter or scarcity next time I am on a date with a women but it is certainly an interesting way of looking at portraying value to the opposite sex.

January 17, 2008

highlight/lowlight first half of inner economist.

The first half of of inner economist caught my attention. It has definitely not been boring or dry or pedantic. Even less so than undercover economist. I think for the most part economics has done about all it can do in terms of monetary economics. In a lot of my classes I hear the same (albeit sound and very insightful) principle applied and here little to nothing in the field of cutting edge economics. Perhaps is everything really was ruled by rational behavior than perhaps everything really could be broken down to matters of dollars and cents. Or maybe not, without throwing us into utilitarian nightmares.

That is why I am always grateful to read a book like this where the assumption of rationality on the part of the actors is challenged. Cowen uses this very economic reasoning to determine when rationality does and does not hold, and for what reasons. I think he really stretches economics to new frontiers, even challenges long-held principles. My example of this is how he completely trashes the idea of the market failure of "adverse selection" within insurance. This principle is incompatible with his base theory which is people's self image and the signals that they (intentionally or otherwise) send out. Specifically he is applying his "parking tickets parable" to this sector of life. where different people have various self-images and they are made manifest with someones behavior an d spending habits. This also burrows from his "dirty dishes parable" where some things are intrinsically valuable, that is fall apart if they an attempt is made to bring them into the world of dollars and cents.

Cowen cites a lot of psychologists in his research. If economics is to continue as a highly renown science, it should do more things like this. As opposed to merely discovering cause and effects in rational behavior but should also discover what other kinds of factors motivate behavior, as Cowen discusses the need for control, and then determine the cause and effect of behavior patterns such as that.

The chapter I found hard to read was the one one art, ironically enough, myself being the theater and art lover that I am. He seemed to ramble on and on for an inordinate amount of time about his own tastes and while there was some, there was not much applicabilty to the world at large. I felt this chapter and unnaturally stretched. It probably would have been better as a sub-set of a chapter, a third of a chapter or something. I did enjoy his observation about how an art form gets more accessible when in can be mass distributed. Which happen to music when the recording industry got big. we went from classical to rock and roll. I daresay the same is happening in visual art, with the emergence of "stick-art."


Tyler Cowen's book emphasizes incentives. I'm not too surprised, he's an economist. I'm curious about your thoughts with respect to the incentives I've chosen for this course. Of course, my goal in choosing incentives is to have you accomplish real learning. Please tell you what you think about the incentives you see in this course. And, if you've taken other courses from me in the past, perhaps you would also comment on the incentives you found in other courses, and how you would compare and contrast incentives across courses.


Tyler Cowen’s book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist, is a must-read for people who want to take some control back in their lives. It correctly points out and explains why offering money, or more money, to people is not always the best way to get them to do something, and it explains why sometimes it is better to downplay accomplishments (counter-signaling) in order to get more respect. Of course these are not the only two things the book explains, but these are the most important ideas from the first half of the book.

However, and it is a big “however,” readers need to prepare themselves to read this book before they ever open the front cover, because, unfortunately, Cowen does not take his own advice on incentives or counter-signaling (The back cover is filled with praise and plugs for Cowen and his blog and has only a few words about the content of the actual book, and the author bio info. is just a list of accomplishments, which makes Cowen seem more egotistical than qualified to write this book.). Unfortunately, the bigger of these two downfalls is Cowen’s failure to provide readers with real incentives to continue reading the book.

For example, because of its title, this book seems like another one of those self-help books that should come with an “educational” seminar, complete with an animated-ClipArt-filled PowerPoint presentation and complimentary book signing by the author. This book does not strike me as being aimed at high-flying professionals with Ph.D.’s, Master’s degrees, or even Bachelor’s degrees for that matter. So, then, how did Cowen think he would make his readers feel by using words like “obfuscation” (7) and by referring to Adam Smith (4), William James (10), and Tammany Hall (11) without any sort of introduction or explanation (Yet he does explain that William Shatner is famous for Star Trek…)? Sure, plenty of people know what “obfuscation” means, who Smith and James are, and what happened at Tammany Hall, but I doubt all, or even most, of the readers of this book know about all four. It simply seems like Cowen is trying to build himself up as a know-it-all economic and life guru by making his readers feel inferior (e.g., You should know what all of these things are, and if you don’t, then you’re worse off than you thought, so you have to finish reading this book to let me enlighten you.). Thankfully, most of the obscure (obfuscated??) references are found only within the first few pages, but readers might not hold out long enough to get to the rest of the book.

Also, Cowen tries to be funny with chapter titles like “How to Control the World,” “Look Good…While Being Tortured,” “Avoiding the Seven Deadly Sins (or Not),” and “How to Save the World,” but what if you just want to “Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist”? Readers might doubt whether this book contains truly helpful, academic advice or whether it was written by some guy who knows enough about economics to know that he can get your $25.95 US/$32.50 CAN.

So, to take Cowen’s postcard advice, it turns out that he is actually worth his salt, so readers should ignore their pride, grab a dictionary and Google access, and dig into the book. After all, Discover Your Inner Economist does contain very valuable material; readers just have to fight through Cowen’s ego to get to the material.

Are sunk costs really sunk? Sometimes.

Today’s highlight deals with Mr. Cowen’s description of sunk costs. I like it. For the record, the first time a professor explained the concept to me, I basically thought he was an idiot, because that was not what I had been taught. If I buy a ticket to a football game, I’m going. I don’t care if it’s snowing. That ticket probably cost upwards of $100, and I’m not going to waste it. No sir.

Honestly, I do give some credit to the concept. After all, if you have spent a small sum of money and it is now worthless for you to harvest the fruits of said investment, it’s probably better to just forget it and save yourself the worrying. Sunk costs have simplified many areas of my life, especially in areas like movie tickets where they are not so expensive that I need to be worried about walking out. I’m glad Cowen admits he does this frequently. I’d say I walk out of 30% of the movies I attend, so at least I’m not alone.

But the concept only goes so far, and it can’t be misunderstood. Once you talk about big investments, you’re putting more than just money on the line. Big investments lost could mean your reputation, especially if you let them go seemingly lying down.

An example of a misunderstanding of sunk costs: Let’s say a company puts down 10 grand on a new technology system, which will hopefully streamline business and save costs. Turns out, the system crashes on the first day, and the company won’t give the money back because the big boss didn’t buy a warranty (let’s assume he’s not getting the costs back).

Now what should the boss do? Say, “Oh well, that’s too bad the system’s broken and no worries. We’ll buy another one”? Only if he understands sunk costs the wrong way. Realistically, if he did something that stupid, or at least which would seem stupid to his employees, he would probably lose respect. After all, most people are ready and willing to complain and complain till they get their way. Trust me, I used to wait tables.

So the boss should probably talk to the company who provided the technology. At least I think so. He should definitely give them a piece of his mind, instead of lying back and adopting the non-chalant, laid back attitude that the idea of sunk costs can encourage if misunderstood. This way, he at least saves face to his employees, and potentially saves the business from some bad situations that could have resulted from a loss of respect.

A lot of people might think that given the idea of sunk costs, we should always let go and just let everything slide. If the weather sucks, forget the $3,000 Dallas Cowboys playoff game. I think I understand what Cowen is saying though, and how it relates to my initial understanding of sunk costs. If it’s not a big cost in the first place, and you place a high cost tag on stress, then forget it for the sake of the pigment in your hair. If it’s a big cost, it might behoove you to at least try to recover the costs, even if the experience you encounter isn’t quite worth the price you initially paid for. Respect and pride have a lot to do with the way things work, and I believe rational people act upon these impulses just as much as they do upon dollars and cents alone.

January 16, 2008


Economists (and especially their critics) will often say that life is sometimes seen as being all about money, dollars and cents. So it was interesting to see how Harford says our individual choices have more to do with our identities as human beings rather than our innate desire to possess material goods.

Harford says, “The central concept of economics is not money but rather incentives…not everything can be bought with money…money cannot buy love, respect or peace of mind” (2-3).

Therefore, it’s pretty clear that what we want (and one reason we sometimes use money to accomplish this end) is to simply be accepted by others.

And as a secondary objective, to feel that we are in control (29).

In the example where CEOs are late to meetings, people will naturally assume that the CEO was late because he/she was tied up with something more important prior to attending the meeting and the CEO’s mentality might be “these minions who work for me are lucky to breathe the same air as me even if I was indeed late.”

Whatever the actual situation may be, those who are late, if they are in positions of power or influence, will be able to convey the scarcity of their time and therefore give off the image that they are in control by walking into meetings late.

In this case, the CEO is signaling to others.

It was interesting how Harford pointed out that the higher you are up on the corporate ladder, the more time you devote to meetings and the less time you actually spend working on the technical aspects of the job.

As a CEO, you wouldn’t be doing as much number-crunching as much as you would be focused on developing a vision for the future of your company.

Harford points out that attention (because it is so scarce) is perhaps the biggest commodity that a wealthy society craves more than material goods (47-8).

The CEO wants attention and is often found in the spotlight because he/she grabs it.

Furthermore, because the CEO is already in a position that is noticed (84), the CEO does not have to put in too much of a signal in to reap the benefits of it.

Just as a politician has no shortage of romantic propositions, it’s the same way with CEOs: appear powerful, appear valuable, appear coveted by others, and then you will get essentially everything.

CEOs know how to master signaling and know that if others perceive their time and important, then the CEO will be in higher demand.

And with this higher demand comes acceptance from others, which is precisely what we want according to Harford.

Money or Respect?

In the opening Chapter of Cowen’s book he clearly states that economics is a subject dealing with incentives, not just money. I was having a little trouble thinking of a topic for this highlight, until my fiancé said “economics just deals with money, right?” In his introduction Cowen claims that economics is not all about money, because money cannot prove to be an adequate incentive for all things.

In the beginning of the chapter entitled How to Control the World, the Basics Cowen highlights an example when "Economist Colon Camerer took a poll at the Davos World Economic Forum, which plays host to many of the world’s business titans and idea gurus. When asked what makes people tick, the responding participants cited “recognition and respect” as the number-one motivating factor in the workplace. “Achievement and accomplishment” came in second." (Cowen 11)

Knowing what makes people tick can be a very important thing if you are in charge of people in the workplace. Recently, I took classes in leadership communication and resume writing. Both of my teachers said that as we advance in our careers, earning recognition and respect for ourselves will eventually be more important to us than base salary, bonuses, etc.

After Cowen tells us of the, previously quoted, poll from the Davos World Economic Forum he states that economies without decent monetary rewards do not perform well at all. In terms of applying this to real life, the whole recognition and respect vs. money as the best workplace motivator truly depends on a worker’s financial situation. For example, I had a friend at work who everyone considered the best team member in his department. He was loved by all of the bosses and team members. Then a new employee was hired, trained by my friend, and earned a higher wage than he did. My friend asked HR for a raise, without mentioning the new employee, or their salary. HR declined citing they do not offer raises based on job performance or experience (doesn’t that defeat the purpose of a raise?).

As I mentioned earlier, Cowen said that economies with poor monetary rewards perform poorly. In terms of my friend, after this situation came about the quality of his work declined, and he has since found a new job. Even though he had earned much respect, and received much recognition, the poor monetary rewards associated with his job led him to quit.

My take on this topic is that recognition and respect tie in with monetary rewards in that one leads to another. For example, if you are a top executive, and everyone knows and respects you, you will be able to change jobs very easily, and quite possibly earn a higher salary. However, if you have not received much recognition and not earned much respect throughout your career, you will, most likely, not make as much as the respected, and well-known, person. In a nutshell, respect and recognition, without even the slightest possibility of a monetary reward, will not do much in terms of motivating most people (excluding the rich, who don’t need money).

Interesting and Applicable

Author Tyler Cowen presents many ideas within the first few chapters of his book, Discover Your Inner Economist. One idea that struck me at the outset of reading was the "postcard test." Cowen suggests that the best economic ideas and principles are the ones that are easily explained to everyone. An economist should be able to clearly and concisely present his or her ideas on one standard sized postcard. If they are not able to do so, it is probably an idea that still needs a little more thought and analysis. According to Cowen, economic ideas should be easy for anyone to understand, including your grandmother. If this is the case I know that I have some work to do in my own understanding, before I can easily explain any ideas or concepts to others.

The concepts and ideas that are presented in the first five chapters of Discover Your Inner Economist, are not difficult for nearly any reader to understand. One area that Cowen looked briefly at relates to efficiency at work. By having meetings, businesses are able to gather thoughts and expel information to a large population of employees. Though this seems like a good idea on the surface it can quickly become non-productive and an inefficient use of time. Many people experience this in their own jobs on a fairly regular basis. I have often found that not much is accomplished at the meetings that are run at the store that I manage. Although there are many issues on our weekly agenda, we never seem to have time to finish them all. Cowen suggests several different tactics in order to increase the effectiveness of such meetings. Some of his suggestions that I found that might be applicable to our meetings would be having all of the employees stand, or to time the comments that each individual makes so that no one person talks more than their fair share of time. There is a certain amount of absurdity with using any of these suggestions, but it would be interesting to see if they gained results.

Another idea that was clearly expressed and deserves some attention is Cowen's thoughts on rewards and penalties. Many people, myself included, will not work towards a goal if there is not some sort of incentive. We are not often willing to just do something that merely fills our time. There are two basic types of rewards that we can receive and the first is a monetary reward. I would not be willing to spend any number of hours at the bridal shop managing if there was no pay, so monetary rewards are often used in order to compensate me and others for our efforts. We can see monetary rewards used to encourage work or certain behaviors, and sometimes even to deter certain behaviors. Another type of reward/incentive is one that yields internal motivation. When workers do a good job it is not always best to reward with money. Some of the strongest incentives may come from verbal affirmation. When to use the right incentive is generally the most difficult part to determine, but for the economist inside many of us, it may just come naturally with experience.

The Preschool "Market"

I loved Cowen’s Discover Your Inner Economist and I can relate to many of the truths that Cowen refers to. In chapter two, he defines four situations for motivating people using monetary rewards:

--Offer monetary rewards when performance at a task is highly responsive to extra effort
--Offer monetary rewards when intrinsic motivation is weak
--Pay monetary rewards when receiving money for a task produces social approval
--High rewards tend to make individual’s “choke”

Surprisingly enough, I worked in a “market” where my experience and understanding led me to follow these principles when determining when to use a monetary reward (I had no idea it was even remotely linked to economics). I am referring to the past twenty years that I spent teaching preschool.

You might not think of preschool as a “market” and the monetary rewards were not cash or bonus checks, but what we did matches closely with how Cowen predicted it would work.

To start with, the “monetary reward” was a physical object highly desired by the children – a shiny pink bracelet, a loud whistle, a lollipop, etc – something that a three-year- old would rather have than money; and anyone who has spend anytime with preschoolers knows that there are plenty of situations where you want to motivate them to do certain things.

Like Cowen establishes in his first point, those trinkets worked very well when the kids were asked to accomplish a task that they could do, but it required a little extra effort. Things like picking up toys and putting them in their proper place (rather than just throwing them in a bucket), walking quietly and in a straight line through the hallways, and hanging up coats and backpacks neatly in their cubbies. All the children could physically do these tasks – but they needed some motivation to get them to spend the extra time and effort. Knowing that a “payment” was coming after working hard, they were happy to complete the task.

Cowen’s second point takes into consideration intrinsic motivation – and he proposes that monetary rewards work well when there is little intrinsic motivation. This is why we didn’t need to reward children to play in centers, paint at the easel or spend time with friends outside in the sand box – and why the monetary reward worked well when it came to cleaning up or walking quietly. Most preschoolers have little internal motivation for cleanliness or quiet – as most parents would agree.

Cowen’s third point was right on target – when the payment produced social approval, it worked very well. I can’t tell you how many times a child put forth the extra effort to get a matchbox car – not because they really wanted one, but because it meant that they were a “good picker upper”. Kids who earned the rewards knew that they had done what they were supposed to do when they were given the trinket or toy.

Cowen adds a qualifier to his proposal when he states that high rewards tend to make individual’s “choke” and I found the same to be true for preschoolers. While they were willing and able to pick up for a small toy reward and would walk quietly for another small reward – they were not able to do all of these same things for a larger reward. This theory is well known to parents and teachers – children are better able to control their behavior if they are rewarded for small increments. Those times that I offered a better prize for the same behaviors all day resulted in chaos – the kids were constantly concerned with whether they were earning their prize and those who felt they had already “blown it” were unwilling to even try. Cowen ends chapter two by saying “Everyone needs to feel that he is in control of something” and that applies even to three-year-olds.

Highlight Lowlight Cowen 1

Discover Your Inner Economist is an introduction to economics that shows how to build what is already within all of us. Tyler Cowen did a great job setting up the book by opening with the concepts in chapter one. One of the most important lessons of economics and in chapter one is how to cope with scarcity. “People can’t dwell on what they don’t have but rather the health and plenitude and not misery,” quoted from Adam Smith.
Many of the limitations of markets are rooted in the imperfections of the human mind. I don’t think Cowen is saying that it’s all human errors, but rather how these markets are perceived. In chapter one Cowen uses three principles for distinguishing good economies from bad; one the postcard test, the grandma test and the aha principle. The postcard principle is limiting the number of steps that an economic argument can contain. The second principle, the grandma test, keeping to the simple facts and tactics, and last the aha principle, should be clearly expressed, and it should be a revelation.
Mr. Cowen ends chapter one with a powerful statement; “we will see that there is much to be hopeful about. Small improvements in understanding can bring a much better use of incentives leading to much better decisions and much better lives. Human imperfections are not the end of the story, but rather the beginning of a search for all kinds of riches.” To think is what you will create, and to create is what you surround your life around.


In his work, Discover You Inner Economist, Tyler Cowen argues for a position of intuition in economics. The first half of his work deals mostly with incentives and everyday activities. The chapter which intrigues this economist would have to be the Pocess All the Great Art Ever Made. Within this chapter Cowen examines whom museums are for. He argues that museums are not for the patrons of them but instead for the donors and governments who pay for them. This leads us down an interesting road.
Cowen doesn’t really concern himself, in this work, with any more than the incentives and intuition of markets. This is the works greatest strength and weakness. Is it important that there exists a disconnect between who funds the museums and who uses them. I believe that this issue may be more interesting then it appears on the surface. Does this disconnect lead to market failure? Yes, but of what kind? There may be market power, but that wouldn’t be from this cause. Public Good? Maybe, but unlikely because people can be excluded and it looks closer to a club good (non-rival, excludable). Is the market for museums causing an externality? Yes, as far as this economist believes. The market for museums is between donors and the museums, but a third party outside this transaction benefits.
Cowen side steps the issue of a possible externality and just leaves it at American museums (which are mostly, according to him, from private sources), but he doesn’t look for solutions just work arounds. Well some museums are simple better than others because of reason x or y; so, simple go to the better museums is the general idea of Cowen’s argument. Could there be a fix? A third party is benefiting, an externality, we would like the public to be even better off. How would we go about making even more museums and related facilities. In economics we argue that in this case, since the market is failing to allocate efficiently, it may be a role for government.
What kind of role though? Well when the market is producing a positive externality we general prescribe a tax subsidy. This would encourage more museums to be built but in this case it doesn’t seem to help with the problem of bad museums. The issue becomes more museums and better museums. A tax subsidy encourages more, but not necessarily more. Competition between museums could cause better ones; however, museums are expensive and some areas may only be able to support at most one of each type. This then gives market power to the remaining museum, but this doesn’t mean a better museum just a more profitable one. If an area is able to support at least two then the competitive nature may be enough to ensure that both are good. But what about those other museums?
We went from a situation of little to no market power issues to a situation that market power is the overall fact. How do we fix this? I wonder if a committee could fix this. If we take the power of making the museum away from the “owners” and give it directly to the people I wonder if this would work. Another words make a museums a “public” property. Give the power of what and where, the full functions of a museum, into the hands of a public committee. Say the committee is similar to a school board where all the members are elected and then vote upon the issues happening with the museum. This would give the people a voice within the museum: it may not please everyone, but may please the majority. In this case at least its geared toward the people.
So on finally view, he brings up the issue and presents a work around but I don’t believe he fixes the issue. And I don’t believe I have either, but at least I have brought the discussion to the fore front.

don't forget to brush!

If i were to describe the first five chapters of Cowens book i would start by saying that it is a reading that should be read in one sitting, as the facts and social observations he portends are streamlined into a conscious effort to understand economics in a more human sense. He oscillates quite a bit between various subjects, but he spends most of these chapters relating to us a more refined idea of how we value our time and the attention we give to the cultural arts of both past and present. As a dabbler in various books and their ideas, i try not to skip chapters or even look at the table of contents before i read, as I want the writers ideas to drip down to me as i apply them to my own experience. I wasn't expecting a Nathan Halesque version of economic theory and human liberty, nor was I expecting a tutorial on resisting "effective interrogation procedures." What did catch my attention, and brought back vivid and delightful memories of growing up, was this notion of intrinsic motivation in attaining desireable outcomes, through systematic rewards or penalties. Each scenerio is different, and there is no universal theorem he asserts. In branching off his casual research with his dentist, i could relate because as a child my fears were placated by the dentist in the simplest way. I never really did "fear" the dentist, but i could always look forward to this treacherous experience because of the box on the floor that contained various childrens gifts. I couldn't see what was on the floor in the box until he finished, but each time i would abscond with a lucky rabbits paw for my willingness. Drowning people in bonuses may hinder motivation and negate the desired effect in some cases, he argues.
The lowlight of this book comes from different angles. I might not be interperating his approach correctly, however, on the one hand he seems to have a black and white view on cultural tastes, on the other he romantisizes about cultural decisions to help create stories and internal narratives that embody our soul as an individual. In one instance he generalizes using phrases such as "most americans." "most americans i have found cannot develop a taste for microtonal wailing of Egyptian pop" How can anybody possibly know what a persons tastes are without either extensive surveying or obtaining financial records of their musical purchases? Which brings me to my next point. If people demonstrate more distaste for rap, a euphemism for "lower classes whining," as Cowen implicitly states, as a result of higher education, would this not be signal to some people that there might be a projection by higher economc status of insecurities for a lyricists ability to maximize scarce time (tracks), compact aeons of information (ancestoral trauma, current societal stresses or tragedies, attitudes and identifications with ideas, values, and beliefs in those tracks) with a careful selection of words deemed dominant by the collective, then why do we categorize genres as though they are separate? It doesn't take much effort to find that artists are brushing hips, reinventing themselves with the art and sounds of those before them, (Phil Collins In the Air Tonight remastered by Tupac Shakur, Enya mingled with Fugees Ready or Not, Falco's Amadeus remade by Tech nine Im a playa) all with different attitudes and beliefs about systemic environmental realities. We are learning that you don't have to live the lifestyle to be completely mezmerized or comforted by it and identify with it in your daily life, the diffusion of American culture (music) has made its way all around the world. If you buy it and are not satisfied then consider it a sunk cost, as most economists would agree.