Blog to check out

Just in case you miss my snarkiness during my blogging absence (due to the dreaded finals week), check out one of my favorite behavioral economics blogs, written by Tim Harford.

CASH: The most thoughtful gift this season?

With financial strain facing many American families, consumers look for ways to maximize their gift-giving utility. Though consumers flocked to department stores in droves, coupons in hand, on Black Friday, traditional gifts are not the best use of limited Christmas funds.

Gift cards have long been viewed as a “middle ground” in the gift-giving realm. Though more thought is exerted in choosing the origin of a gift card, there is less worry that it will go underappreciated.

According to research by TowerGroup, Americans spent $92 billion on gift cards last Christmas season, and Nielsen projects that even more money will be spent this year. Consumer Reports estimates that approximately 62 percent of Americans purchase gift cards during the holidays.

Though a preferred present among consumers, gift cards prove to be inefficient in terms of generating Christmas cheer, both for the giver and the receiver.

The sobering truth is that nearly 30 percent of consumers never redeem their gift cards. Last year alone, $6 billion of card contents were siphoned from fees and expiration. The extent of unwanted gift cards is so vast that auction websites specialize in gift card swaps.

Pressure from Congress has curbed gift card waste by amending Regulation E of the Electronic Funds Transfers Act to extend expiration dates of credit and bank-issued gift cards to five years and eliminate fees on cards that remain inactive for 12 months. The act does not protect gift cards issued by individual stores and restaurants, which typically carry one-year expiration dates.

Despite the waste in gift card spending, giving physical gifts produces even less overall utility. Close friends and relatives may be able to purchase a favorable gift, but typically gifts are not well-matched to their recipients, creating deadweight loss of utility. Post-Christmas surveys reveal that utility of gifts are valued only at 80% of their actual cost to the giver.

Monetary gifts are the only sure way for both the giver and receiver to maximize the utility of a present. Though it may seem tacky, the gift with the most love and sentiment this Christmas season is a gift of cash.

 

 

"A crisis is a terrible thing to waste."

This rather witty quote attributed to Paul Romer is particularly poignant during this sluggish economy. A leader in the “New Growth Theory,” Romer advocates the notion that long-term growth is propelled by spending on education, research & development, and new business subsidies.

This rather recent economic view takes opposition to core aspects of Neo-Classic Economic theory that focuses more on the short-term stimulus by way of capital inputs and labor efficiency. With economic forces fueling job loss and cost cuts, slashes in expenses often manifests in wage cutbacks, keeping the Keynesian prescription for growth stagnant.

However, despite funds being diverted away from labor costs, spending on Research & Development has actually increased over the past year.

Apart from big industry companies, like Detroit auto-makers, thirty of the largest companies have, on average, sustained their R&D spending, despite a revenue loss of 0.7 percent the past quarter. 3M, Intel, and Microsoft are keeping up their R&D spending with a clear vision of future profits. Apple is the research success story – their aggressive spending in the early 2000s, despite drops in revenue, came to fruition with their iPod and iTunes success.

Technology is constantly improving and if companies want to stay ahead of the curve, they need to think of the long-term when dolling out limited resources. Globally speaking, China and India have surpassed U.S. growth in R&D spending (4%) by three percent.

Although the 10% unemployed Americans may clamor over limited revenue being allocated to expensive research that may or may not pan out several years in the future, economically speaking, it is a risk worth taking. If American companies slack on R&D spending in favor of keeping more employees on the payroll, they could lose technological ground to their Asian competitors.

So in order to take advantage of these bleak economic times, instead of cutting investment in research, companies should ramp-up their spending and hope for the best. Though no research is a sure-fire recipe for success, betting on the research is the safest method of investment for struggling companies. 

Beware of Free Lunches

During the first day of Introduction to Microeconomics courses, students become acquainted with the ominous phrase, “There is no such thing as a free lunch” – no wonder that cynicism results from years of economic study. With the knowledge that everything has a “price,” whether or not that price has a denomination attached, certain skepticism is needed to navigate purchasing options, especially the tempting offers that seem “too good to be true.” 

With recessionary worries on the forefront of everyone’s minds, the promise of “free money” is especially alluring. With vulnerability at an all-time high, malicious businesses can pounce on unsuspecting victims in pursuit of keeping in the black.

Despite my scrutiny of questionable corporate tactics, even I was astonished at a recent scheme that hit too close to home.

My dad received a small refund check in the mail from his credit card company. Assuming that he must have overpaid the bill, he deposited the check – big mistake. On the next month’s bill, while perusing the list of charges, he spotted an anomaly – there was a charge to an unknown company for credit card insurance. Though the charge was relatively small, my father immediately called the company to inquire about the charge.

Apparently, by the depositing the “refund check,” the company immediately enrolls the customer for credit card insurance. The customer receives the money from the check, but is then charged for the insurance – indefinitely – until the service is cancelled. Of course, at least one month of coverage is charged before the statement is released. Luckily, early scrutiny of the bill staved off any further charges, but I am sure that many unsuspecting customers are not so fortunate and wracked up more charges before realizing their error.

The lesson to be learned from this entire debacle is not only the deceptive methods that struggling agencies stoop to in order to cull business, but also the absence of free lunches, especially during these economic times. If something seems too good to be true, it probably is. 

What the Cost of Convenience Really Costs

Everyone knows that lunch out, buying an ice cream cone, and purchasing a cup of morning coffee are more expensive than preparing those exact items in your home, but what about the other little conveniences in life that you pay extra for?

To continue with the food and drink examples, think about your trip to the grocery store. If you decided to purchase ingredients instead of relying on take-out, pat yourself on the back, but just be aware that you are still vulnerable to grossly overpriced items at the supermarket as well. For example, a bag of salad mix costs about $4, whereas a head of lettuce is $2 and the meager amount of carrots and radishes that are sometimes present in such mixes equate to less than $1, resulting in a 33% markup. Even Jell-O, quite possibly the simplest dessert to prepare carries a staggering convenience premium. A 6-pack of Jell-O snacks retails for $5 compared to the price of Jell-O to prepare it on your own, which is less than $2. Are you in that much of a hurry to eat Jell-O that you cannot wait for it to set and would rather spend a $3 premium?

Valet parking and overnight shipping are two other high-cost, yet often needless, expenses that are often incurred. Some valet parking is unavoidable, especially when parking at a hotel. However, many restaurants in downtown areas charge exorbitant fees to park a car, banking on the fact that hungry restaurant-goers would rather add the cost of parking to the night out than spending the extra time looking for low-cost (or free) street parking. Overnight shipping is often the result of poor planning. Neglecting to drive to the post office until the last minute or ordering last-minute gifts online are two common catalysts for overnighting a package with costs in excess of $10.

These are just a few examples of the plethora of traps that people fall into on a regular basis. Before spending the extra money for conveniences, it is important to evaluate the value of your time. Instead of just factoring in add-on costs to an overall price, look at charges as individual entities. Maybe you highly value the 5 minutes of time that it takes to make Jell-O, but everyone needs a break from work. Instead of cutting back on stress-relieving entertainment, try to economize on the unnecessary conveniences that do little to your overall disposition.  

Black Friday: Fact or Fiction? The Myth and Mayhem Revealed

After dozing off from the trytophan and that third piece of pumpkin pie on Thanksgiving, American consumers turn their attention to a pressing matter – holiday shopping. I love shopping, and I definitely love sales (I rarely ever buying something that is full-price), but I am not a fan of Black Friday. I definitely have spent many post-Thanksgiving days in the mall with the hordes of manic shoppers, but to what end? Are Black Friday deals really that great?

The little television that I watch has recently been flooded with commercials touting Black Friday sales, not just Friday, but from now until Christmas. Scanning through the fliers, there are “incredible” deals, but are they really that great?

A savvy shopper can spot bargains throughout the year and actually have a chance to buy the product, without camping out overnight at a mega store like Walmart or Best Buy. Yes, the sales are tempting – we are all lured by the fabulous deals and items that stores are nearly giving away. The prices seem almost too good to be true – how can they actually be making a profit?

Before I delve into the nuances of marketing and prices, think about the concept of Black Friday for a minute. What is Black Friday anyway? Is it a day set out every year by retailers nationwide to be especially altruistic and help out the American consumer, by offering unbelievable one-day-only sales??? Even I am not that idealistic. The sales figures that retailers garner are nearly completely based on hype. Black Friday is the day where the stores mock you for not having every gift bought, wrapped, and ready to distribute, even though Christmas is a month away. In my mind, a month is plenty of time to check off every item on your list; there is really no need to panic – the stores just want you to panic because the more you panic, the more you buy.

Just as companies like Gillette sell you a relatively cheap razor holder only to gouge you later on razor blades, and HP sells you the 3-in-1 printer for $70, but charges you around $20 for each ink cartridge, retailers lure you into stores in the same manner. Yes, there are some fabulous sales, but only for the lucky few that sacrifice sleep to be the first people in the store. The rest, once they are lured in, are crestfallen at the thought of missing out on their coveted item, but wait – the store is to the rescue! There so many other great sale items to choose from – how can you resist? So before you get the tent out of the attic and set up your coffee pot for your camp-out at the mall, examine your priorities. Is that one item really that important? You may see me at the mall tomorrow, coupons and list in hand, but before you max out your credit cards: stop, inhale, and really think about what you are about to do. If it is something that you actually want, go ahead, swipe your card, but just remember to keep the receipt. 

The Great Pumpkin Mystery

The first sign of cool evening breezes and sight of changing leaves not only toll the beginning of autumn, but of pumpkin season.

I am not sure how the tradition of eating pumpkin pie on Thanksgiving began, but if wikipedia doesn’t include it in their vast database, then essentially it is unimportant. What I do know is that pumpkin is delicious.

I love pumpkin – pumpkin muffins, pumpkin cookies, pumpkin flavored coffee, and yes, even pumpkin flavored pasta (try it with shitake mushrooms and gorgonzola – amazing). So you can understand the utter panic that I experienced when three grocery stores sold out of pumpkin in mid-October (this was after my first massive round of pumpkin baking, of course). Luckily, my roommate came to the rescue and lent me a can so that I could whip up a batch of scrumptious chocolate chip pumpkin cookies.

At first, I thought that this pumpkin scare was a fluke – maybe New Yorkers just had an usually high pumpkin appetite to satisfy this past October, but when I started poking around the Internet, I really went into panic mode when Nestlé (the supplier of 85% of canned pumpkin) reported an uncommonly bad crop this year and feared running out of pumpkin before Thanksgiving. With a scant crop, the only obvious solution is to increase the prices, so that the diehard pumpkin fans can satiate their cravings. However, I worry that the revered status of the pumpkin pie parallels hot dogs on the 4^th of July, and the tradition will elevate the canned pumpkin to a nearly-inelastic state, which would only just gauge the consumers instead of distributing it based on valuation.

Unfortunately, no one really thinks about running out of pumpkin. I purchase it year-round. Pumpkin seems to be in plentiful supply. I have always thought of pumpkin as a rather hearty crop. I know that there are alternatives like baking butternut squash, but that is just not time-effective for a pumpkin fiend like myself – it is a viable option for those Thanksgiving only pumpkin bakers. So the bottom line is, if you cannot live without that quintessential pumpkin pie on Thanksgiving – buy it, and don’t expect it to go on sale anytime soon.

 

* This blog was crafted while consuming a pumpkin muffin. The crumbs in my keyboard serve as evidence.

Roll the Dice

With high unemployment, slow job creation, and the future economic state uncertain, Americans are more price-conscious than ever. While no one tries to “throw away money,” wasteful spending is a typical occurrence whether it is paying for unnecessary conveniences or simply gambling away hard-earned money.

20% of lotteries have experienced a drop in revenue, 65% have remained stagnant from the previous fiscal year, but 15% have increased, despite the recession. Las Vegas has been hit hard by the recession. Since less people indulge in vacations, gambling trips have been less frequent and less lavish. However, the online lotteries have faired relatively well since gambling takes place from the comfort of one’s own home.

Though, gaming commissions would argue that the industry is failing, I cannot help but think that the lotteries and casinos are doing much better than I would have anticipated. Slot machines have up to 15.20% advantage, with their edge lessening as the minimum bet increases. Blackjack, for an experienced player, is potentially more lucrative with less than one percent advantage of the house over the player. One of the worst games to play is Keno with between 25% and 29% house advantage (so that scene in National Lampoon’s Vegas Vacation – completely unlikely). So why would people continue to gamble away their scare funds when the odds of winning are clearly against them?

Gambler’s conceit is one of most detrimental occurrences among gamblers. The rational gambler always contends, before laying a single chip on the table, that they will quit when they are ahead – the famous last words. If only a gambler set aside their initial investment after a big win and continued to play with their wins, the better could conceivable walk away even after an enjoyable evening of gambling. However, that simply does not occur when the stakes are high.

The gambler’s fallacy is the driving force behind dipper further into one’s pocket after a devastating loss. Also called the “Monte Carlo Fallacy,” it is a belief that a string of unfavorable outcomes will eventually end in order to even out the deviations. By attempting to change the string of bad luck, a gambler will continue to dig a hole despite their better judgment.

Superstition is a prevailing sentiment among gamblers. Whether it is wearing a pair of lucky underwear, shacking die in a certain way, or using a specific slot machine, many chronic gamblers adhere to the inverse gambler’s fallacy, assuming that the so-called “good luck charms” can defy the laws of math and boost their odds. 

Unfortunately, some of these principles carry over to investing in the stock market. Those same hedge fund managers that think of themselves as nearly infallible are the same people that will delve further and further into their gains to cover their losses. And as for knowing when to quit – so many people hold onto a stock, waiting for it to start rising again, only to lose everything in the end. I cannot claim to be an investing expert, but the advice that I can give you is: cut your losses because in the end, worrying about the small declines (and the sunk costs of investments) will only result in even higher investment pitfalls.  

Add This to Your "To Do" List

This week, I interviewed Michael Galpert, co-founder of Aviary, a website that offers free photo and audio software, and it got me thinking about the role of media in society.

The media has always played an integral role in society as a conveyor of information. Whether we watch the local news, read a blog, or pick up a tabloid while in line at the grocery store, we are influenced by the media around us. The advent of weblogs roughly 13 years ago served as an impetus of information circulation via the internet. The popularity of social media networks like Facebook and Twitter make dissemination of information infinitely easier. Media outlets like Foursquare serve as GPS-like systems to locate your friends. We are definitely embarking on a new direction and further delving into the possibilities of new media.

Everyday, new start-ups and online entities come to fruition and provide a plethora of new services. Part of the momentum for innovation is the move toward a DIY society – a welcome departure from the rampant consumerism that we have been facing in the past several years.

Instead of just “paying someone else to do it,” many consumers are taking on new endeavors. Perhaps, fear of economic future has skewed the consumer behavior, but unlike the possibly fleeting savings rates of Americans, I believe that the DIY shift is a result of the proliferation of new internet media, and it will be here to stay.

No longer is Ikea the sole provider of assembly-required furniture, but extensive assembly of small furniture pieces appears to be the norm. Home improvement stores, like Lowes, emphasize store assistance with building projects. Websites like Adafruit.com allow budding electricians to build a variety of home electronics, and NYC Resistor composes a group of forward-thinking hackers, pushing the limits of technology.

Whether your motives for creative and/or technological projects are sources of entertainment, catharsis, or simply part of cost-cutting efforts, the Internet has organized information on every subject imaginable, making your next project literally just a click away.

Keeping Up With the Joneses

In 1916, Arthur R. “Pop” Momand debuted the cartoon, “Keeping Up With the Jonseses” in the  New York World.  The comic strip features a suburban family and there are constant references to the illusive Joneses, their nextdoor neighbors, who are never actually pictured, but serve as a benchmark for success.

Data from September 2009 estimates that revolving credit (basically credit card purchases) dropped by 10% to $889 billion as opposed to the $975 billion peak in 2008. Bank credit card debt represented 85% ($710 billion) of that debt. The Federal Reserve estimates that 40% of households spend more money than they earn.

The average credit card APR is 13.71%, a number that has been steadily climbing over the past few months. However, the Fed approximates that 9.55% ($84.9 billion) of those loans will never be paid back, a striking rise considering that the estimate was only 7.85% during the last recession. Though only a small percentage difference, the actual increase is drastic when you are dealing with BILLIONS of dollars.

The good news is that consumers have been spending less – consumer spending only represents 70% of GDP, and monthly debt fell by $10 billion in September. The end of September brought the total U.S. mortgage debt to $2456 billion (excluding home mortgages).

So what does all of this have to do with the Joneses?

Achieving the “American dream” has a plethora of implications, but one aspect that can be agreed upon is the realization of success. Every American, whether a new immigrant or multiple-generation citizen, strives to achieve success. Of course, the degree to which the dream is attained varies greatly between people and their relative personal expectations – some hope to live in a suburban house with a white picket fence, others a penthouse in the Upper East Side.

Many people are not content in knowing their own personal achievements, but attempt to peacock their wealth and success, taking part in “conspicuous consumption.”

I am not saying that there is anything wrong with wanting to live in a big house, have a lucrative career, and go on nice vacations, but it is important to keep things in perspective. Not everyone is destined to live in a $2 million dollar home, regardless if a mortgage company gives to a loan to purchase one. Consumption has been driving the economy, resulting in wealth for many Americans, but consumption has been, in some respects, the downfall of the economy. Many factors led up to the recession and consumers are not the sole culprit, but let’s be honest, overextending credit and over-consumption definitely had an impact on the already delicate situation.

Personal savings may have increased, and as long as there are job cuts and unemployment hovers around 10%, the total consumption will fall, but how long will this conservative consumption persist? It is hard to say, but as far as I can tell, the Joneses aren’t going away anytime soon.  

eHarmony’s Thirtieth Dimension of Compatibility?

Many factors contribute to determining the “perfect” potential spouse. While some people may have a laundry list of detailed qualifications, others may only have a few key qualities that they look for in a boyfriend or girlfriend.

When speaking of relationships, it is often said that, “opposites attract.” While the narcissists may choose to differ, the allure of opposing qualities manifests more often than not. The cause of this disparity in ideals is that people seek mates who possess opposing qualities of aspects of their own character that they despise. 

In an attempt to capture spending habits, George Loewenstein introduced the Tightwad-Spendthrift scale. The TW-ST scale represents the polar spending habits of consumers, ranging from the most frugal to the most liberal in terms of consumption. In accordance with the premise that opposites attract, spendthrifts and tightwads are typically attracted toward each other since thrifty people envy the spendthrift’s ability to indulge in purchases and, suffering from nearly perpetual buyer’s remorse, the spendthrifts envy the self-control of the tightwads. 

While it may seem like an ideal situation that tightwads and spendthrifts are attracted to one another, their relationship does not form a meeting of the minds or anywhere near a balance of the extreme spending habits. In fact, disparity in spending habits is one of the leading causes of marital strife. Especially now, during a recession, finances are a concern for many couples/families. An already tense subject – finances – easily leads to more dispute in a marriage when coupled with future economic uncertainty and unemployment.

Most people’s habits lie closer to the mid ranges of the scale, but not every couple is so fortunate. Spending habits are not easily changed and are formed over time by a variety of contributing factors. When a family is very financially secure and/or during times of economic prosperity, the difference in spending habits is not quite as influential on a spousal happiness, but as financial concerns take the forefront of discussion friction arises. My advice: maybe after “for richer, for poorer” in the wedding vows, “for frugality, for squandering” should be added. Just a thought. 

If you want to buy less, take an economist with you

Living in a capitalist society, Americans are constantly being force-fed the notion of consumption. We are constantly inundated with advertisements of new products that we “have to have.” Not only do consumers mentally allocate different values to money depending on their source, but consumers find justification in their irrational actions.

Just as the dieter convinces herself that one more bite of chocolate cake won’t ruin her diet, and a teenager stays out an extra 10 minutes past his curfew when he is already running late, shoppers can always find a reasonable justification for a purchase. This symptom is called cognitive dissonance, and no matter how much one denies it, we all suffer from this burden. Ever splurge for the $200 pair of jeans because they were “on sale” (even if it is just 10%) or raid the clearance rack and buy a stack of unnecessary items because they were “such a good deal”? Sales are especially alluring – consumers tend to focus more on how much they are “saving” on the purchase than truly examine the money being spent on the purchase. The exhilaration of a great purchase, whether it be clothing, a new television, or a piece furniture, soon fades after the initial swipe of the card, leaving you with a sinking feeling in the pit of your stomach – “buyer’s remorse.”

Some fortunate people can experience the sensation of buyer’s remorse before throwing away the receipt or taking off the tag of that expensive purchase and return it. Others are not so fortunate and will perpetually be haunted by their overzealous purchase.

Personally, my worst cases of buyer’s remorse come from regret of not purchasing something, and of course, it is always the items that I cannot go back for that I yearn for afterward. Most days, I find myself holding an item in my hand or staring at an article of clothing in the dressing room mirror, listing pros and cons in my head (of course, I always look at the price before even looking to see if the store has my size). If I really like something, I can make a nearly instant decision to purchase, but if I begin to mentally debate for too long, I simply put back the item – rationalizing that if I really wanted/needed it, I would not need to take such a long time making a decision. That is not to say that I never regret putting something back, but it does save me a lot of money.

So next time that you go on a shopping trip try to remember that all money has the save value regardless of the source, and it is not how much you save, but what you spend that counts, and if all else fails, please just save the receipt. 

When $100 ≠ $100

What IS money? While the word, “money” has several connotations; the actual dollar bills and coins are a representation of value, which is used in everyday transactions. During times of economic slump, which we are now wading through, saving money is essential. Americans traditionally have one of the lowest savings rates worldwide – consistently zero percent and many even maintain debt due to excessive spending. As of May, the U.S. savings rate jumped to nearly 7% indicating that saving habits have shifted in wake of the recession. When then, do people continue to compartmentalize money based on origin?

All money is created equal. $100 equals $100 regardless of the origin. When you receive a paycheck after the daily grind, there is a sense of emotional attachment to that money. The money in a paycheck represents long hours, hard work, and the time that could’ve been spent at more enjoyable activities. The perception of income inherently has a high value since it derives from working. Conversely, when someone picks up a $20 bill from the sidewalk it is often perceived to be “free money.” Since no effort was exerted to “earn” the money, there is less hesitance to squander the money.

As irrational as it may seem, most people place different values on money depending on the source, placing virtual stickie notes on each bill to separate how much money is able to spent and on what. In reality, regardless of whether money is a gift or part of a salary or a rumpled bill found in a coat jacket, it equally contributes to a person’s wealth. When $150 is spent on a pair of designer jeans that were an impulse buy, the $150 is not just coming from gift money, regardless of how much someone wants to believe that it is, but the money is subtracted from a consumer’s overall balance.

Americans are heading in the right direction as far as saving is concerned. 6.9 percent is a drastic jump from the negative saving rates of the past, but until a consumer can view all money as holding the same value, wasteful spending will ensue.

“No one actually likes the Yankees…it’s just herd theory.”

To follow-up my earlier observations on baseball, I would like to examine loyalty. Why are people loyal?

Sports epitomize the sentiment of loyalty. In many instances, devotion to a specific team is ingrained from an early age. Most fans support their local team, feeling a sense of pride in the locality in which they live. In big cities, like New York and Chicago, where two teams reside, sports can cause a poignant rivalry and divide during the season with sports allegiance passed down along with the more conventional family traditions. Of course, there are always sports enthusiasts who support a specific team, outside of their immediate area, for a multitude of personal reasons,

In a sense, sports allegiances are built artificially – the love merely is passed down from generation to generation, without actual examination of merits. That is not to say that a fan’s desire to root for their favorite team is not out of genuine concern, but had someone been born in a different region to a different set of parents, they could potentially feel loyalty to a different team. Once a feeling of loyalty toward a certain entity is built, the foundations of the faithfulness are rarely scrutinized.

In many aspects of our lives, loyalty is established for a plethora of different reasons.

When you dip a salty french fry into ketchup, can you immediately tell if it is Heinz or Hunt’s? Does the organic butter taste any different than the cheapest store brand? If the answers to these questions, and many similar inquiries, are a resounding no, then brand loyalty has been built. Marketers attempt to build the same type of unwavering devotion that sports teams garner for the items that they are marketing. Even celebrities attempt to build a following so strong that the biggest movie flop or song recording will not cause their fans’ loss of support. If the brand is built solid enough, declines in quality and moments of corporate weakness will not tarnish their reputation and the customers will remain.

The aforementioned Phillies example of herd theory again applies to loyalty. When a spectator/customer lacks particular attachment to a brand, team, or other type of entity, they seek to feel a sense of inclusion by aligning themselves with a crowd. In many cases, the most popular group is the most attractive group. If a brand is able to build itself up sufficiently, the momentum can take over, causing exponential growth.

Whether you support the Phillies, the Yankees, or any other baseball team, remember that the true fans support their team not matter what. It is so easy to get caught up on the hype and jump on the bandwagon, but it is when a team is losing that you really can see who the true supporters are, regardless of the source of their devotion.

How Pirates and Mobsters Act More Rationally than Members of Reality Shows

Anyone who has ever watched a reality television show can attest to the fickle positions of the cast members toward their teammates. In the isolated world created by the producers, a sense of “survival of the fittest” immediately emerges with leaders that tend to dominate the rest of the contestants throughout the season with each individual finding their niche in the group.

While “forging alliances” are common and backstabbing becomes a vital component of survival, all conventions of a moral society are completely lost throughout the process. The most heinous example is the elimination in which contestants anonymously vote against their teammates, influencing a sense of detachment from the action. While vocalizing votes could influence a contestant to be held more accountable for actions, the improvement is only marginal since a potentially cruel vote is embraced as the “popular” decision by the crowd.

Contagion Theory attempts to reconcile the behavior by postulating that the formation of a crowd as a whole eliminates individual association and consequences of actions. A cohesive group can withstand ridicule from opponents far better than any member as an individual. In the formation of a crowd, the audacity far exceeds the demeanor of even the most extreme component of the group, propelling behavior to the realm of irrationality.

The contagion dynamic, while comprised of many members, each with unique roles within the group, is essentially a unit without a leader, overarching the actions of the crowd. Without an outside factor of regulation, the crowd becomes unpredictable, further detaching themselves from such insignificancies as cause and effect.

Though viewed by pop culture as rough and reckless, pirates have a strict behavioral code. They abstain from gambling, seducing women, and drinking in their quarters after 8pm. Desertion during a battle can be punishable by death. Each pirate is entitled to a fair share of booty as well as a vote in matters of concern. The mafia, despite reputation, has their own version of the 10 Commandments, including laws that forbid them from looking at another’s wife and taking money that belongs to family members. Additionally, all members are mandated to respect their wives and missing an appointment is considered to be disrespectful.

So what does this all mean? Is it proof that the government needs more regulation? Possibly, but I feel that our current three branch system with checks and balances is sufficient. I think that the real problem faced by financial institutions is accountability. Most egregious financial scandals can be attributed to lack of accountability on the part of the perpetrator. During the Enron scandal, there were several parties involved who doctored the books. Since no singular person reaped benefits, the crowd as a whole disassociated themselves from the illegal actions. The same results occur when the wrongdoing is completely concealed. Just as criminals commit crimes in the evening, when it is less likely for them to be caught in the act, white-collar crimes often take place “behind closed doors.” It is not until a scandal is brought into the light, that the culprit begins to associate themselves with the deeds.

So next time you watch your favorite reality TV show, pay attention to the collusion taking place between the characters, and I am sure that you will easily be able to identify the ringleader of the shenanigans.

Hop on the Bandwagon

I flipped through the television channels Wednesday night only to see the Phillies v. Dodgers in their final three innings of game five of the MLB National League Championship. Growing up in the Philly-area, the Phillies have always been my family’s favorite baseball team. I have attended my share of games in the past, but to be perfectly honest, I think I only watched one or two other games this season. For some reason, however, I felt compelled to watch the end of the game – to see the Phillies clinch their spot in the World Series. Speaking of the World Series, which was another game that I watched, I still remember the moment when the Phillies won last year – I could hear the roar of exhilarated fans resonating down the street.

The question is: why did I feel the need to watch the “big game” when I clearly do not have much invested in the team? Of course, millions more watch the Super Bowl each year than tune into the featured Sunday game, but the social circumstances surround the game can mostly explain that. I was sitting in my bedroom watching the game – by myself. I did not watch because I was invited to a party in honor of watching the game, nor did I sit down to watch it with a friend who had already turned it on.

This “bandwagon effect” is a phenomenon associated with herd behavior. As more and more people start to do something, in this case, watch a baseball game, the attention mounts, and the number of followers only escalate further. The theory originates from observing what happens to herds in panic situations; as the members of a herd of animals start to panic, they move together, attempting to force themselves into the center of the herd for more protection. A similar effect happens with people. When looking for a restaurant for dinner, do you walk into the empty restaurant or do you find yourself being gravitated toward the crowded restaurant, despite the lines? The rationale is that the empty restaurant must not be very good, hence the lack of customers. Regardless of the actual quality of the crowded restaurant, the perception is key. A crowd of people conveys the notion that the crowd must be right. In respect to watching sports, as there is more and more talk about an upcoming final game or a close match-up, the desire to watch the game and be “part of something” mounts.

The same effect happens in financial markets. Ever wonder why the price of houses was able to rise so quickly and form the bubble? – Herd behavior. As more people took out mortgages and traded-up and entrepreneurs bought and flipped houses, interest in the market heightened, driving up demand and causing prices to rise. The mass movement of groups of people causes havoc in the financial world – the major peaks of valleys of the stock market are a result a frenzied transactions, amplifying effects. Herd behavior can be observed in every aspect of society in every decision that is made. The idea of “majority rules” is a powerful force, especially when there is no other basis for a decision. The popularity of toys, movies, and clothes are fostered by the hype surrounding them. If enough momentum of a product or event is cultivated, the herd can just take over and propel something into the limelight.

Let Them Wear Jimmy Choos

Have you ever sauntered into a luxury shoe store, promising yourself that you will only be window shopping, only to find yourself lovingly holding a pair of Christian Louboutins, on the precipice of purchase, when you realize that they cost nearly as much as a month’s rent?

Very few people can afford to drop $600 on a pair of shoes, let alone $5,000 or more as is the trend with serial high-end shoe shoppers and fashionistas alike. Financial woes perpetuated by high inflation and mounting unemployment have only made such splurge purchases further from the average American’s grasp.

Is the middle class destined to only covet the most luxurious items of prominent fashion designers?

For years, fashion designers have released B lines of clothing, like “Lauren” (Ralph Lauren), “McQ” (Alexander McQueen) and Marc by Marc Jacobs, but even so, those secondary lines still carry high price tags.

One of the first retailers to bring quality, affordable, fashion lines from notable luxury designers is through Target’s GO International line, which rotates through limited edition clothing and accessories lines from a lineup of star-studded designers. Kohls department stores have been successful with bridal guru Vera Wang’s line of clothing and shoes called “Simply Vera,” which is a permanent feature at Kohls. While shoes have been components of these discount designer lines, the main focus has been on clothing.

Stores like Zara have gained devout followings from their designer shoe and clothing recreations at more affordable prices, but two new shoe lines have garnered substantial attention from the fashion world. Christian Siriano, past Project Runway winner launched a line of shoes at Payless Shoe Source this past month at locations nationwide. The launch has increased traffic at Payless Stores and his pumps, which sell for about $35, sold out in less than two weeks at the midtown Manhattan location.

Another new exciting fashion development is the new line of shoes (as well as selected handbags and clothing) by Jimmy Choo at H&M stores. With a launch date set for November 14, it is sure to be a big seller, especially since Jimmy Choo shoes retail in excess of $500.

Christian Siriano’s new line has already proved successful, and I suspect that the new Jimmy Choo line at H&M will be popular as well.

Do discount lines of designer clothing and shoes detract from the sales of the original lines? Definitely not. Those who can afford the original lines would only supplement their wardrobes with discount offerings. As for the impact of these new lines, I think that the result will be a marketing success. The consumers of the new discount lines, finally able to afford the “luxury” offering, after having a taste of high-end fashion, will develop a strong desire to purchase the “real” items at the designer price tags. So before you praise the fashion elite for their philanthropic desire to bring luxury to the masses, take a look at their bottom lines.

Glee over the new direction of the music industry

The music industry is perhaps one of the most volatile segments of industry, experiencing rapid changes throughout its history. In order to survive up until now, adaptation has been absolutely vital.

Early classical composers like Beethoven and Mozart struggling to survive, relying on patronages from wealthy families to commission their work. Early dissemination and sale of music was in the form of sheet music, but it was not until the late 19th century that a centralized publishing house emerged in New York City (Tin Pan Alley). The impetus for the growth of the industry was the sale of over 1 million copies of the song, “After the Ball,” in 1892.

Thomas Edison’s development of sound recording devises in 1877 marked a new beginning for the music industry, and Emil Berliner’s launch of disc recordings under his company, Victor Talking Machine Company, helped to popularize newly recorded music.

With the availability of sound recordings, the sales of sheet music shrank drastically, and by the 1920s, it only represented 15% of music revenues. Growth occurred in the industry until 1923 when a new threat came – the radio. From the 1930s through 1950s six major labels dominated the scene – Decca, Mercury, Capitol, RCA/Victor, EMI, and CBS Records.

The music industry again made another turnaround in 1948 when CBS Records introduced the LP to the world. The 1950s marked resurgence in musical consumption with the popularity of rock and roll. The music industry thrived from the veracious teenage music consumers and disk jockeys were paramount in the promotion of new music on their radio shows. Fierce competition among labels ensued to secure the coveted new song slots on popular radio play lists.

Shift in musically tastes and introduction of new genres like reggae, funk, and disco, in the 1970s, led way to the development of independent record labels, siphoning profits from the major labels and marking decline in the industry.

The early 1980s again represent a further turning point in the music industry with the debut of MTV in 1981 and the introduction of CDs in 1983. Indeed, video did “kill the radio star,” and music aficionados looked toward the latest music videos to satiate their music hunger. The most popular videos on MTV translated into high sales of CDs and singles, producing big profits for record labels and their most popular artists.

This model of music videos (and radio play) translated into high CDs sales and consequently big profits for the record labels, but 19-year-old Shawn Fanning’s development of Napster in 1999 as well as the bevy of other “free” music downloading websites changed the face of the music industry forever.

With the ability to stream music literally “at the click of a button,” record labels’ profits are dwindling. File-sharing has never been easier and despite threat of lawsuits, illegal downloading remains rampant. What does the future of the music industry hold?
As I mentioned before, the industry is cyclical. As new technology is developed, changes occur, and in order to survive, the industry has to be willing to change. The inception of the itunes store was a step in the right direction – the first true acknowledgment of the changing musical landscape.

But what next? Just as the radio promoted new songs in the 1920s and MTV brought visual enhancement to musical releases in the 1980s, television shows seems to be the new vehicle for musical promotion.

Every cable TV show promotes downloading artists’ songs that have been featured in the program. Though specific downloads have varying levels of success. One new Fall show has stood out among the rest. Glee.

FOX’s new Fall show, “Glee” chronicles the trials and tribulations of a misfit group of high school singers on the road to the show choir nationals. As a singer, I can appreciate the show’s vocals, as a fashionista, Emma’s amazing wardrobe, and of course, the storyline – it is funny, lighthearted, but at times, serious. Not surprisingly, the show has been consistently the #1 itunes download - I highly recommend it. Of course, the best part is the actual singing. The cast does an amazing job singing a wide range of songs, covering everything from Journey’s, “Don’t Stop Believin’” to Beyoncé’s “Single Ladies.” The songs from the mash-up episode (“Halo / Walking On Sunshine” and “It's My Life / Confessions, Pt. II”) are particularly great. In fact, currently eight of the show’s songs are in the top 100 itunes downloads – an amazing accomplishment. Notably the songs “Don’t Stop Believin;” and “Walking on Sunshine” from the 1980s have sprung back into popularity, due in part to the shows success.

For the music industry to continue to grow and profit, they need to embrace new methods of promoting music and gaining revenue, and I think the new mode of dissemination will be through popular television, but I guess we will just have to wait and see.

cha-ching

Not fully satisfied with my conjectures based upon the second test, I decided to conduct a third test. I based this test on the first phase of testing, but this time, the price point was lower. The scenario was identical, but customer was purchasing a $200 12MB Canon digital camera instead of a $1,000 television. The three purchasing options were essentially the same: a 15% discount ($30 savings), a $40 gift card, or a free gift valued at $40. The point of this third test was to determine if the anchor effect translated to a similar scenario that involved a lower price point. The results of this third test did not produce striking results, but it can be inferred that the anchoring effect is not as strong when the money involved in the transaction is lower. In this test, 66% chose the discount, 22% chose the gift card, and only 12% chose the free gift. There was not an overwhelmingly high percentage that chose the discount as was true without option three, but there definitely is a wider gap between the number of people who chose option 1 versus option 2 compared to the first test that I conducted.

From a marketing point of view, the best promotion for a company would be to implement a gift card as a marketing technique as opposed to a percentage discount. The gift card presents the highest likelihood of future sales from a customer and, even though not chosen as frequently as the discount option in my study, the gift card was very appealing to the test subjects.

Upon searching, electronics sites I did not find the “gift card” option as a sales promotion (maybe they should hire me), but I did find package deals. Of the respondents in the first test who chose to accept the free gift, the vast majority chose the Blue-ray player because it “went well with the television.” In fact, many sites offered special discounts when blue-ray players were purchased in conjunction with the television, which basically equates to the “free gift” option without the choice.

The main problem with gift cards is also the best aspect of gift cards by a store’s standpoint. What should you do with a gift card that you do not want, especially when there is not enough money on the card to buy things that you want? The answer came to me when searching for statistics on unused gift cards – trust me they are astronomical and a great money-maker for stores (so try to limit gift cards to stores where you know for certain that the recipient often shops at) and I stumbled across a blog called http://frugaldad.com/ -- you can sell them online. Of course, eBay has always been a platform for a plethora of unwanted items, but there is a website that allows people to list their gift cards at a reduced price. Honestly, it’s a win-win situation for everyone. The website does not charge fees, but makes money through traffic, the seller gets money for a gift card that they would otherwise never use, and the buyer gets, in essence, a coupon.

As excited as I was to find this website, the podcast that I stumbled upon via the same original website was even better and quite amusing I might add. The report began by discussing the traditional wedding gift giving practice in Israel. Only 5% of presents are wrapped gifts and the rest are cash, checks, and gift cards, but recently a new trend has entered into the bridal gift-giving scene – the ATM. For a mere $150, a couple can rent an ATM machine and wedding gifts can transfer monetary gifts directly from their bank account to the bride and groom’s (which makes writing thank you notes a bit easier – no more note taking needed). By having an ATM, there is no hassle of finding that perfectly minted $100 bill to give, and the newlyweds are saved from the onus of cashing checks and making deposits. Everything is digital and they can simply take out any cash needed from their honeymoon destination. Right now the ATM rental phenomenon is only happening in Israel, but I suspect that the bridezillas here in the U.S. will be clamoring for their ATMs before we know it.

something to think about when looking at sale ads

I am conducting a behavioral economics experiment for one of my classes. I decided to test buyer behavior in respect to the most effective sales promotion. The main set-up of my experiment is as follows:

The customer is purchasing a 40” Sony television from a large electronics store. The list price of the TV is $1,000.00. The buyer has three options regarding the purchase.

Option 1: Purchase the television at a 15% discount (a savings of $150)
Option 2: Purchase the television at the list price, but receive a $200 store gift card
Option 3: Purchase the television at the list price, but receive a free gift valued at $200
(iPod touch, 12MB Canon digital camera, or Samsung Blueray DVD player)

As I suspected, the majority of respondents chose Option 1 or 2. In fact, approximately the same number of people chose Option 1 as Option 2.


Of course, that was only phase 1 of my testing, and the next results were very surprising. I decided to conduct the same test again, but this time, I eliminated the third option. A logical conclusion, based on prior results, would be an even split between the two options; however, that was not the case. An overwhelming majority of the respondents chose Option 1 – the discount.

The reason: when faced with two “gift” options versus the one discount option, people were more swayed toward the gift. Needless to say, I was ecstatic to observe these results. Honestly, studies like this are the reason why I love economics.

From a store’s standpoint, giving a discount is the most expensive option. As the price of an item is reduced, the profit margin falls. The free item is a reasonably good option for a store. They secure a sale with the “free gift” and only lose the cost of the free gift. Since the store chooses the free gift, they can purposely choose items with the largest profit margins. The gift card can be a toss up. On one hand, the customer can purchase an item like a video game system in which the list price is below cost. There is always the possibility of the customer losing the gift card. However, the most lucrative situation is also the most likely result of offering a gift card – the customer will reenter the store after the original television purchase and spend more than the value of the gift card, resulting in even higher store profits.

In order to further determine how much the free gift offer sways the consumer, I plan to execute one further test, but this time, the purchase will be less expensive. I want to test whether the same results occur when the item is only $200.

More results to come…

Au revoir Gourmet

It is a sad day for the gourmet snobs. After nearly 70 years of publication, the Gourmet magazine is nearing its final days. In an effort to cut costs and remove deadweight from the company, Condé Nast (often referred to as Condé Nasty by the multitude of disgruntled, newly-unemployed former employees) decided to cease publishing Gourmet in favor of the more profitable food magazine, Bon Appetit.

I am well-aware of the changing landscape of journalism and have heard more woebegone outcries from journalists than I care to recall, but I am still saddened by the loss of Gourmet. With digitalization of virtually every facet of our lives and the abundance of online recipes, it should come to no surprise to me that food magazines were only doomed to fail. However, (and this is quite a big however) I am baffled by this turn of events. I admit to googling recipes, but there is something intrinsically more palatable about the dishes that appear pictured in a magazine as opposed to the myriad of flickering images on the computer screen. Flipping through my Gourmet reminds me why I love to cook and experiment with new recipes. I look forward to receiving my Gourmet in the mail. As soon as I see the magazine, I plop into a chair (often with a cup of coffee nearby) and start absorbing the delectable recipes in the magazine, folding over nearly every corner to indicate new recipes that I absolutely have to make. I occasionally “ooooh” and “ahhhh” as I recount the ingredients of particularly succulent new dinner (and of course dessert) recipes to my mother, pledging to make them for the family. Now what will I do?

I know that I can still continue to browse online for recipes and of course purchase cookbooks, but seeing the dishes in the magazine always pushed me to try new foods as opposed to simply looking up recipes with ingredients that I already know I like. Even the Gourmet makes pork chops look good, almost good enough to eat. Almost. As a concession, there will be a November issue – how else would I make it through Thanksgiving? Not to mention all the new recipes with my favorite baking ingredient – pumpkin. If only they could hang onto December with the Christmas cookie issue; otherwise, I might not be able to try out 10 new cookie recipes this year and stay up baking until 2am.

Alas, this post has very little to do with economics, aside from the financial failure, but I would be remiss in not paying homage to my beloved Gourmet.


Link to the news release.

To give or not to give. That is the question.

As I walked home from work Friday afternoon, I stopped by a corner market in the Lower East Side to buy a cucumber (I know, very random). When I went to the counter to pay, there were two people in front of me in line – a man in his late 30s and a little old woman, amidst a transaction.

The old woman only had a few vegetables – tomatoes, cabbage, and squash – and the bill totaled a mere $4.06. When the cashier totaled the items, the old women struggled to find enough money to pay.

Everyone has felt the effects of the recession, but some are hit more profoundly than others, especially the low income and elderly. Young people constantly gripe about the taxes being removed from their paychecks for social security, especially since my generation will likely never receive social security benefits. However, despite government money, social security money is, in many cases, insufficient. The average monthly social security benefit for a retiree is $1,160.20 and only $571.90 for a spouse. This, at first glance, may seem sufficient to cover expenses if you live in suburbia, but in New York City, that would not even cover my rent. Granted these numbers are only an average,* but keep in mind, the payments are based on workers’ actual salaries, so low income people receive benefits lower than the national average.

What happened to the little old woman? Did she find another dollar? Here’s what happened: the situation was awkward. I could obviously afford my 59 cent cucumber, and the guy in front of me only had a Vitamin Water and V8. The cashier also looked uncomfortable as the women dug into her purse. As the four of us stood there, the cashier motioned to the man in front of me to put down is drinks, so that she could ring them up. As she did, the man chivalrously told the cashier to add the woman’s groceries to his bill (and who says that all New Yorkers are mean?). I know that the bill was only $4.06, but the moment of generosity was very refreshing to witness. The old woman, needless to say, was absolutely floored and could not believe what just happened. The cashier had a smile on her face so wide that it was as if she witnessed a miracle – all from $4.06.

Watching this scene take place got me thinking. Would this outcome have happened in a variety of situations? To what total would the man have been willing to pick up the check? Did it matter that she was a woman? Did it matter that she was old? Would he have felt differently if she purchased a box of pasta or a candy bar or did he assume since her purchase consisted only of a few vegetables that she was truly in need? What makes someone give money? Possibly, the location made it more conducive to giving. In fact, his wallet was already out – it was quite simple to do.

I pass numerous musicians and homeless people on a daily basis. I like helping others, but it would be unrealistic for me to stop and give money to everyone who asks for it. However, I do find the people fascinating. Living in a very creative area of town, many people sitting on the sidewalk asking for money are playing music or singing. Some simply ask for money, others for a cup of coffee. And of course, there is the man with a cardboard sign with a hand-drawn marijuana leaf who shouts, “can’t you help a brother out?”

Maybe it was because the women did not ask for help or money that it made people want to help her. Honestly, if the man hadn’t offered to pay, I would’ve. Unless the woman was a criminal mastermind scamming people $4 worth of vegetables at a time (which I highly doubt is the case), it appears logical that she was just a normal person living check to check. I have a confession: as I see people sitting on the street, I secretly wonder if they are still living with there parents in a nice apartment, eating free food from the refrigerator, but are just too high to get a job and instead just sit on the sidewalk and play the guitar. Of course, I have never asked. They might tell me though if I did

The point is – everyone gives for a reason. After all, the market is driven by incentives, even if the incentive is a feeling – making someone feel good for helping another. I am not sure that people could accurately articulate what makes them give money or food to a certain person or charity, but I am positive that there is an underlying reason – a reason in which marketers would love to discover.

*All figures are from: http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/

Why people in the ghetto have flatscreens and millionaires go bankrupt

I always entertain new ideas for blog topics. Per special request of my favorite older brother, I decided to explore this particular topic.

How do people choose to spend their money? Consumerism is a particular interest of mine as evident by my prior posts, but I have only discussed how people can choose between comparable items, not the specific type of items to purchase.

Of course, there are always the extreme cases of shopaholics or excessive gamblers that spend every cent of their money without making “rational” decisions, but what about the “normal,” “rational” consumers?

The famous “Hierarchy of Needs” introduced by Abraham Maslow in 1943 offer a window into the human decision-making process. The foundation of the pyramid is physiological needs such as food and sleep followed by safety needs like shelter and a job. Love/belonging, esteem, and self-actualization complete the pyramid. The obvious (or at least what I would assume to be obvious) conclusion from analyzing the pyramid is that people would do their utmost to satiate their physiological needs, i.e. breathing, water, and food. The Merriam-Webster dictionary defines physiological as “characteristic of or appropriate to an organism's healthy or normal functioning.” Healthy and normal functioning is rather subjective and for most people, it includes much more than food, sleep, and breathing.

Human beings attempt to make rational decisions, but unfortunately most decisions that people make are motivated by irrational incentives and needs. That is why people living below the poverty line have cable and big screen televisions and why millionaires go bankrupt after spending too much money on cars and lavish vacations. Those types of “entertainment” and material items are, to some people, vital aspects of satisfying physiological needs. To some people, those needs are just as or even more important than living in a nice home in a safe area.

In a similar respect, depending on economic situation, individuals have different feelings toward social issues. When you have a good job, nice apartment, and plenty of food, you no longer have to worry about basic needs. People in those types of situations can divert their attention toward social causes like global warming and human rights. For the 1.4 billion (yes – BILLION) people who live below the poverty line, something like global warming is as trivial as deciding which designer sunglasses to buy.

So the answer as to why people choose to spend money that they don’t have on things that they don’t need is simply because they want to and by doing so, it makes them happy. Of course, measuring the amount of utility that someone receives from spending money on a particular item is another topic entirely.

Maslow's Hierarchy of Needs

More Coffee Please!

For those who crave the intoxicating aroma, rich flavor, and relaxing warmth of coffee, simply cutting back on consumption is not even an option. Consumer reports constantly tell of the negative impact on coffee shops due to the onset of recession, but anyone who has ever walked into a Starbucks, may think differently - there are constantly lines at coffee shops, regardless of what time of day it is. The reason behind this phenomenon also explains why the stock of coffee wholesalers and retailers is rising despite recession.

Instead of cutting back on quantity of coffee, people are cutting back on “quality” of coffee – trading the gourmet venti half caff caramel macchiato for a home-brewed cup of joe. A cup of coffee can cost anywhere from $1.25 from a street vendor to $2 at trendier shops and even as much as $3 at a sit-down restaurant. Even McDonald’s coffee prices are up – the 70 cent cup is a thing of the past. So if someone drinks two cups a day, at $1.75 per cup, that would be $1,277.50 a year! It is even more overwhelming when you factor in the price of specialty coffee drinks. A latte at Starbucks is about $4 on average, so if someone were to substitute their two high-priced gourmet lattes for just one latte and a cup of coffee, they could potentially save $821.25 or a pair of Christian Louboutin patent pumps.

If you want to cut back on coffee expenses even further, making coffee at home seems like a logical solution. For those looking for simplicity, a Keurig coffee brewer is the easiest – you just pop in a K-cup, and there is no measuring or mess. The brewers are not cheap; they run anywhere from $80 to $250, but it is an investment. The K-cups, purchased in bulk cost about 40 cents each. Some more quick math proves that 2 cups per day plus $100 for a machine results in a bill of $392, which is almost $900 less than buying coffee at a shop.

However, if you can sacrifice the extra minutes in the morning, you can prepare coffee the way I prefer – with a percolator. If you buy gourmet coffee in bulk (which is necessary for people like me), each cup averages about 25 cents, and the total bill to quench a 2 cup a day habit: $182.50.

I admit to buying coffee out when I need an afternoon pick-me-up or I am running to a morning class, but personally, I garner a certain amount of satisfaction in knowing that I saved $1.50 on my cup of coffee, but maybe that’s just me.

What do Tom Brady and Ben Bernanke have in common?

You are more likely to find me reading a book on a Sunday afternoon than watching a football game, but nonetheless I try to stay in touch with at least the major happenings in the sports world. If I had to choose my favorite sport to watch on television, I would have to pick soccer. I look forward to the minor collisions that result in grown men dramatically flinging themselves to the ground, pulling into the fetal position, with the sharp look of pain in their eyes, only to stand up, aloof, brushing off their shirts, as if nothing happened, as soon as the yellow (or red) card is given.

Unfortunately, not every athlete returns unscathed from a strategic hit during a game. I read an article in the Financial Times yesterday about the economics of sports injuries. (Not the typical article that I would usually read, but I have to admit, the picture of Tom Brady caught my eye). The article pointed out, what is to obvious to all sports fans, that certain players, like Tom Brady, are paid significantly more than the rest of the team, sometimes 10-20% of the entire salary budget. While key players can greatly influence the success and failure of a team, by hiring one expensive player, the owners are putting their eggs in one basket and hoping that their investment will pan out. Sometimes the risk is worthwhile, but one critical injury can ruin a season. In analyzing NFL drafts, some economists argue that teams with early picks should choose the #1 prospect and trade him for several other well-respected players. Statistics will tell you that it is a safer investment to choose several good players (hoping that one or more will have latent skills) than investing an enormous amount in just one player.

Deciding who earns the highest salaries in sports is relatively simple by comparison to other industries. A simple supply and demand model dictates that the most popular players, whether they be the most successful or charismatic, are the most entertaining to root for and therefore add the most value to the team.

If only matters of government were as simple. Virtually every government committee is organized as a team, with one strong individual leading the rest of the pack. However, unlike sports, which can display success or failure in the matter of hours, economic success and failures can take months to manifest. And while the public can choose some officials through elections, we really only choose our financial leaders indirectly through the elections of other, higher offices.

So how do we know that every decision that the Fed makes is the right decision? We don’t. Of course, we hope it is. We can only bank on the fact that several economic minds are thoroughly planning out the future of our economy and that we chose the right person to lead the team. However, I feel confident that the Fed will do its utmost job to remedy the state of the economy and allow everyone to return to a high state of prosperity because an improvement in the economy will benefit us all. After all, the Fed is composed of economists, and they are motivated by incentives - what better negative incentive than a job loss, lack of public support, and loss of wealth?

We just can't escape Wall Street

One cannot walk down the street without a reminder of recession. Whether it be a "for rent" sign, a going-out-of-business sale or empty tables at a once-crowded restaurant during lunchtime. The financial news is saturated with analysis of the economic state and news of debt, bankruptcy, and large-scale layoffs of employees. It only seems logical that people would look for an escape from all the vivid reminders of hardship.

Last week, the sequel to the popular movie, "Wall Street," which won Michael Douglas an Oscar, began filming in NYC. Serendipitously, I wandered onto the set today while in Chelsea following a story lead. I watched the "action" along with a few other onlookers and of course, the paparazzi hoping to catch a glimpse of the stars. Many people would stop by the area and inquire about what was happening. A few people seemed interested in watching the filming, excited about the cast, but that was not the case for most. Two young professional females asked me what was being filmed, but when I said "Wall Street 2" they turned around and went back to work. One of the girls said, "I was hopping that it was 'Sex and the City.' They are filming today too."

With an obvious interest in business and economics, I will likely see the movie, but can the same thing be said for the majority of the population? The New York Times (http://www.nytimes.com/2009/09/08/movies/08stone.html?_r=1&scp=2&sq=oliver%20stone&st=cse) lauds Oliver Stone's new script, and Michael Douglas said that the financial crisis was the main influence for his reprise role in the movie. However, I am skeptical about this movie's success - not because of the script or the acting or the cinematography, but simply for the basic storyline. Movies are meant to entertain, hence their position in the "entertainment industry," whether by making us laugh, cry, or scream. However, this movie may hit a little too close to home right now when it comes to echoing economic failures. Maybe I could be wrong and a little acerbic satire is just what we need to ease our minds about Wall Street. I guess I will just have to wait and see.

Comparing Organic Apples to Organic Oranges

As is the case whenever there are economic hard times, people tend to cut back on their spending. Whether the cut-backs include eating out less often, renting movies instead of going out to the movies or being simply more savvy when clothing shopping. One area where there is room for possible cutbacks is at the grocery store.

New York City is literally saturated with organic and gourmet foods. While cutting back on quantity of food is not typically possible for most families, there are always cheaper food options available. There has been a trend in the past few years to buy "organic," but what does organic really mean? In some cases, there is only a fine line between what is organic and what are just the everyday fruits and vegetables. Some scientists have even reported that the health benefits of eating organic foods, if any, are negligible, but yet people shell out hundreds of dollars more per year to buy organic groceries. Today, while at the grocery store, I was faced with the tough decision of whether to buy the Trader Joe's brand butter OR the Trader Joe's brand organic butter - the organic was almost twice the price. Needless to say, I did not purchase the organic. I might have to risk my health by purchasing the less healthy butter. Oh no.

The same debate on whether to buy organic transcends into purchasing the "name-brand" versus the generic. I have to admit: on the whole, I almost always buy generic. The dirty little secret that stores do not want you to know is that they are not - I repeat NOT - toiling away in a factory reproducing nearly every item that they sell in their store as their generic. Most of the time, the generic item next to the name brand in the exact same shaped bottle is in fact the same product. The only difference - it costs less. For me, of course, there are some exceptions - I always buy Hellman's mayonnaise, Heinz ketchup, and a few other random items to ensure buying the original. I am also a cheese snob, but that is an entirely different discussion.

I know that everyone has their random preferences when it comes to grocery shopping, but when you are tight on cash, isn't easier to just buy generic and only organic produce? You can save so much money over time. I know that buying generic and organic are two separate issues (one has to do with capitalism and the other with health), but are the organic black beans really that different than the regular black beans and worth $0.30 more? Why must we be completely driven by the forces of advertising to compel us to buy a particular company's item even though it tastes the same as a less expensive brand?

Personally, I think more effective than the food marketing campaigns to promote brand awareness is the societal sentiment pressure to live and eat healthy, which roughly translates to, in the minds of the public, to buying organic. Forget exercising and eating more fruit as snacks instead of candy.

The verdict (unless money is of no object) of buying only organic and name-brand: irrational.

The Beige Book

On Wednesday, the Beige Book came out. What is the beige book you may ask? No - it does not foretell Fall's hottest fashion trends, but it attempts to summarize the "current economic conditions," and look at the trends in each major U.S. city.

The results...about what I expected.

To be quite honest, I did not attempt to read the entire 48 pages. Who has time for that? However, I did read the 4 pages on New York City. The economy of NYC has "stabilized," which is Fed-speak for, the economy is not horribly out of control, but it is not going to start increasing any time soon. As for sales, the auto dealers have reported some increase, but retail sales are well below 2008 levels. The explanation: "cash for clunkers," of course. There was a great incentive to buy a new car in the recent months, but no such comparable incentive in the retail industry (I seriously think that we should adopt the European policy of tremendous sales in January and July).

As for hotels, occupancy levels were in the mid-80s the last couple months, which is not too bad considering the huge decline in business travels. Great news for leisure travelers - the rates have fallen between 25 and 30 percent. However, Broadway has not taken the same cue - in order to offset the 10% decline in attendance, the ticket prices have raised by 16%.

I think anyone who has turned on the TV or looked at a newspaper, even once, in the past 6 months could predict the current state of the housing market in NYC. The vacancies of office buildings are high because so many companies have downsized or gone out of business, rents have fallen (which is great for me), and the price of new condos have fallen sharply.

The job market is not quite as bad now as it has been. Though the unemployment rate is sky high, some companies have begun to bounce back and hire new staff, but do not expect a high salary - asking prices are about 10% below what they were a year ago. As for loans, everyone is still afraid to borrow.

The wrap up: It's a good time to visit New York City. The hotels are cheap, and the retailers will likely be offering discounts. As for a show, do not expect a good deal to see a Broadway play, so try off-Broadway. For people just moving to New York City, you can find low rent, but maybe not a job, so be wary. It's a bad time to be a retailer - low consumer confidence is never good.

The real problem: The low consumer confidence. I have always viewed consumer confidence as somewhat of a catch-22. When the economy is sluggish, consumer confidence is low, but the only real way for the economy is for consumers to spend money.

My advice: If you have money, spend it. That is the American way after all. I'm not saying that you should go on a crazy shopping spree, but right now, you can find deals and if enough people increase their confidence in the market, even just a little, the market could be on its way to recovery.

Hello

I hereby commence my blog. I took the title from one of my absolute favorite books, This Side of Paradise, by F. Scott Fitzgerald in which the main character Amory Blaine ponders the notion of being a "cynical idealist." As all students of economics, both of academic study and personal of research can attest, maintaining anything but cynicism toward human nature is nearly impossible. Thanks to my economics professors and the myriad of economics books and magazines that I have ingested, I cannot help but look at the world and the actions of all of its inhabitants in terms of incentives. However, I do attempt to look at the world somewhat optimistically, perhaps due to my youth or naiveté - hopefully the former as opposed to the latter. Though I do not have such lofty ambitions of completely changing the world to a near-Utopian society (of course, world peace would be nice), I do think that the right economic improvements can greatly enhance the well-being of society as a whole. No economic program, despite overwhelming promise and a "guarantee" of success, can hope to make drastic improvements overnight. Perhaps that is one of the most poignant points of misunderstanding among the American public regarding economic policies such as stimulus packages and changes in interest rates - nothing in economics is ever certain. Not only is there a question of when the effects will take place, but IF the effects will take place. No magic wand exisits to end recession and unemployment and inflation becuase if there were, now would be the time to use it.

Through this blog, I hope to comment on the economics that I observe in my daily life, whether it be a new healthcare plan, action of the FOMC, or even just an observation, such as the price of coffee, that I observe in my daily life. So, read and enjoy!