jamesz

Air NZ gentry reject free markets

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Suppose that a class-based system of privileges existed, in which you achieved high status through long participation in the rituals of the society. Those in the upper classes receive access to luxury goods not available to those of low status. Now suppose that the governing body of our society decided that luxury goods should really be available to everyone with the means to pay for them, rather than just the high status individuals. In fact, the luxury goods will now be sold to the highest bidder, who has the greatest desire for them (and means to pay). Well, that would seem pretty reasonable to most people, given that’s how most markets for goods work. We might worry about inequity because of ability to pay, but nobody would doubt that the luxuries will now go to people who really care about them. Economists would crow about the increase in efficiency in the system and the removal of deadweight losses.

Obviously, the people you’d expect to object would be those of high status, who’ve suddenly had their special privileges, that they’ve toiled to achieve, removed from them. The governors understand that they’d object so a scheme is devised by which people can get discounts on their luxury goods if they buy a lot of them, much as you’d get from many customer rewards programs where you can save up reward points and then spend them on goods from the store. The governors hope that grandfathering in the upper classes so that they have greater means than commoners will placate them. Unfortunately, they’re wrong: nobody likes getting their trinkets of status stripped from them.

Air New Zealand is being accused of driving away its most loyal customers with a recent overhaul of its Airpoints rewards system. …frequent flyers using their Airpoints to book flights on the national carrier will have to bid against each other to get seat upgrades. …The changes have sparked outrage among frequent flyers, with many threatening to shift their support to rival

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jamesz

A new perspective on sunk costs

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The fallacy of sunk costs occyrs when people take past expenditure into account when they make a decision, even though it cannot affect their future and cannot be changed. It is often regarded as a canonical example of a cognitive bias in humans because almost everybody does it. Of course, if it’s so suboptimal to take sunk costs into account then one has to wonder why humans have evolved to systematically make that error. Sandeep Baliga and Jeff Ely have a paper out where they suggest that it’s actually on optimal response to limited memory capacity:

We offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The sunk cost gives additional information about future profits and informs subsequent decisions.

Essentially they say that, if you don’t remember all the reasons why you invested in the first place, then the level of past investment in a project tells you something about the conclusions you initially reached. You can then use that information to inform your decisions about whether to continue, without having to rethink everything from scratch.

Now I’m late to this because they also write the excellent Cheap Talk blog and discussed their working paper a year ago! So if you want to know the details of the ‘Concorde effect’ and ‘pro rata effect’ then head over and have a read.

jamesz

There are too few smart people in the world

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I know you’ve all thought it at some time of your life, but Chris Dillow thinks it really is true:

It could be that the reason why so many “top jobs” are done badly is not that second-raters do them, in which case the problem would be solved by hiring the right people. Instead, it could be that the jobs are so demanding that no amount of brains and ability would suffice. …Humans just lack the skills to do many complex tasks.

It does seem unlikely that many high-pressure, and highly paid, jobs would have only incompetent applicants. Or that the interviewing panel wouldn’t care enough about the future of their firm to put some effort into finding the right person for the job. Yet it is common to hear people complain about how terrible this politician or that CEO are. So perhaps the job really is just too much to expect of a human.

Dillow’s solution sounds like a good one: design jobs that humans can do rather than looking for super-humans to do them. It probably makes sense even if there are some super-humans out there. Not only would the search costs to find them be immense, but so would the salaries that they command! Of course, you have to wonder why, if the solution’s so obvious, someone hasn’t done it before? Maybe the (meta-)problem’s just a bit harder than Dillow is giving credit for.

Matt Nolan

The vegetarian cross-subsidy

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On the Freakonomics blog there is a discussion of why a delicious vegetarian option at a restaurant was cheaper than the meat options:

Was it because his revenue from it was only €63 compared to €91 for a five-course regular menu (which had one meat and one fish course)?  Maybe. But I don’t believe the vegetarian menu used less labor, nor was there a €28 difference in materials cost. My guess is that he prices at mark-up over materials cost, thus making the veggie menu a relatively good deal for the customer—and a relatively bad deal for him. Another possibility is that he thinks vegetarians have lower incomes and higher demand elasticities, and he believes he is rationally price discriminating.

All fair explanations.  However, I’m not convinced by them, as this is an expensive restaurant where the relevant sample of vegetarians will be wealthy.  Furthermore, given they can’t “substitute” to another meal this surely indicates they should be charged more!

I have a simple explanation – cross-subsidisation.

When there is a large upper-middle class group going out to eat there are generally lots of meat eaters, and very few vegetarians.  However, the existence of us pesky vegetarians means that the group has to go to a restaurant that serves vegetarian food.

If we then assume that vegetarians have better knowledge about where the vegetarian food is – they will essentially be the ones deciding which restaurant to go to!  As a result, restaurants will cut the price of vegetarian meals and increase the price of meat ones in order to get the groups to come – and then extract rents.  Huzzah.

For me, this suggests that table bills with vegetarians should be split evenly – if you can get past the issue of over ordering 😉

jamesz

Parking fees enrage locals. Again.

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Wellington City Council is considering lifting parking fees again because it thinks people are holding on to the spaces too long. The local paper disapproves, as does David Farrar. Now, I’m no expert on the local politics and they may be quite right that this is just a revenue raising measure, despite the council’s position that it’s about turning over parks more quickly. But let’s take the council seriously for a minute and consider whether it is so obviously stupid.

First, there’s nothing wrong with a local government body raising funds for the services it provides. It needs to do that but the question is how it does it. Rates are the most common revenue raising tool, but are not a particularly efficient one since they don’t correct any market problems. Now, parking obviously has an implicit price so it makes sense to raise some revenue from parking fees by setting the price optimally. That allows either lower rates or more service provision, depending upon electors’/ratepayers’/councillors’ (delete as you like) preferences.

DPF and the Dom Post contend that parking times are already optimal because they’re controlled by time limits in addition to the charges. However, there’s no reason to believe that the upper time limit is the optimal stay from a social viewpoint. Read more

jamesz

Faking it can be hazardous to others’ health

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Apparently, saying your products aren’t tested on animals doesn’t mean what you might think it means:

…for example a company may say ‘Finished product not tested on animals’ or ‘not tested on animals’, which means the ingredients could well be!
…
Avon says: “Avon does not test products or ingredients on animals, nor do we request others to do so on our behalf. … BUT they may still buy new ingredients that have been tested on animals, therefore benefiting from animal testing.

So the companies aren’t actually lying on their packaging, but they’re not really telling the whole truth. If you don’t know the full set of denials that would be required to constitute no animal testing, as it would be commonly understood, then you can’t know what they are doing: only what they’re not doing. Clearly that’s an unsatisfactory state of affairs for anybody concerned about animal welfare.

So what’s the real problem? The problem is that the companies who genuinely avoid animal testing don’t have any way to tell us about it. It’s what economists call a ‘signalling’ problem because what they want to tell you–that they don’t test on animals–can be faked by a lot of other companies who do use animal-tested products. Read more