New Blog

My blog is the same, but I am moving it to Word Press.
http://christinafierro.wordpress.com

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.