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Cognitive Biases

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This infographic has been floating around for the past few months.  It explains common cognitive biases that push decision makers away from rationality.

In my MBA classes, we often debate the idea of rationality when agents make decisions.  Students still believe that ideas such as the efficient market hypothesis still exist, even though there is clear evidence contradicting the idea that rationality is an empirically sound assumption.

What I like about this chart is that students should be able to clearly see where their own biases reside.  I find myself struggling to always overcome these biases even though I should know better when making decisions, and I assume students are share that sentiment.

What I wish this chart did was include some of the recent econometric advancements which contribute to irrationality so that students can see how to model deviations from rationality.

 

Uber and its surge in market share

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In my MBA class we discussed at length the advantages and disadvantages for Uber being a First Mover (or Second Mover to taxis) in the ride share market.

The economics section of fivethirtyeight recently posted an article detailing Uber’s fight for market share in Manhattan.

Some of the takeaways from the article are that:

  • The net change in NYC pickups has remained relatively unchanged over the past year, indicating that Uber is eroding the market share of yellow cabs in NYC
  • What is striking is that Uber is aggressively picking up market share in Manhattan, essentially replacing the loss in yellow cab pickups to the tune of 4 million rides
  • Uber is adding rides to just about every borough of NYC they have increased the number of rides from 2 million 2014 (from April to June) to 8 million in 2015 (from April to June)

To say this is impressive is an understatement.

My students correctly predicted many of the pitfalls faced by the first mover (second to taxis) in the ride sharing market, but their optimism wasn’t as robust.

The Job Outlook is Grim. Everywhere.

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In a recent article from BloombergBusiness, we get a very sobering view on what the job outlook is like for young people around the globe.

Here are some draw dropping facts:

  • People aged 15-29 are twice as likely to be unemployed as adults, ACROSS REGIONS OR CONTINENTS
  • The world will need to create 600 million (yes, million) new jobs just so the situation doesn’t get worse
  • The youth unemployment rate is projected to be 13.1% in 2015 compared to just 4.5% for adults

So why are we seeing such staggering numbers of unemployed youths?  Employers are citing that the necessary skills to engage in everyday business are not being developed.  Again this is GLOBAL problem.

There are many reasons why this is a very real concern for all governments and this article summarizes the most dire,

“Social costs are ever mounting as well,” the report said, citing youth-led uprisings in many Arab countries and the rise of economic insurgency and youth extremism. “What we see is a generation in economic crisis.”

Along with climate change and water rights issues, the global youth unemployment crisis should be a priority for policy makers.

It’s all about who you know

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The Washington Post recently posted an article describing what your neighbor knows rather than what you know.

A quick puzzle to tell whether you know what people are thinking

Their example requires you to observe a fictional town and the connections between the population.  What becomes apparent is that popular opinion may be biased in some way.  The network in this example shows that the majority believe their the minority.  This is a very real perception that many people in our society posit.

I think that the article said it best when they state that: “our sliver of local knowledge, can lead us to the false conclusion.”

This article speaks to how agents make decisions in the economy and this is very far from the idea of rational expectations.  Behavioral economics is beginning to explore these deviations from traditional methodology and with articles such as this, I believe that even macroeconomics will benefit from the change.

Incentivising your work-staff: a case study

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Although this article from Fortune was published over the summer it highlights an important economic concept: incentives.

No tipping policy

The “no tipping policy” introduced by Bar Macro institutes a new incentive structure for the staff by providing profit sharing, health care, stable wages, vacation days, etc…

The immediate effect was an increase in revenue of 26% and decline in costs of 8%

Is this really a surprise though?  We teach our MBA students that efficiency wages, profit sharing, and fringe benefits are important motivators for workers.  It cuts down on turnover, shirking, and general inefficiency.

So is this model sustainable in the food service industry?  I would argue that it is but only for certain restaurants.  Since, tipping is generally an ineffective method of judging service it would take an owner dedicated to their customers and employees to institute such a policy.

Pricing in the pharmaceutical industry: Profit driven or Morally motivated?

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Just recently, news broke of an american company, Turing Pharamceuticals, and its CEO Martin Shkreli increasing the price of the drug daraprim from $13.50 to $750 per pill.

Our class discussed the practice that The New York Times reported on

Drug Goes from $13.50 to $750, overnight

We first discussed the pricing decision and how revenue should rise given that this drug is fairly inelastic.  They question was then asked: If a firm’s organization structure is that of maximizing profits, is what Turing doing wrong?

We watched the interview from Bloomberg next to see how the CEO positioned the price increase:

Reaction was mixed.  Some students agreed with the pricing decision and respected how Turing used the free-market system to maximize profits.  Others quickly pointed to the moral obligations of the firm to provide the drug at a fair cost.

Our discussion was marked with some very good insights/questions:

Is it the moral obligation for the seller of the drug to vet the buyer of the drug?

At what point does regulation in the pharmaceutical lead to all drugs being classified as necessities?

What is the fair-profit price if no R&D is being done and should we follow up on R&D promises?

What is preventing the company from investing the profits claimed to be earmarked for R&D into another drug in a similar market setting?

 

Students were quick to identify that this CEO has done the same price hike in a previous company, with no track record of producing any tangible R&D.

CEO hikes price of kidney drug by over 2000%

Turing has since rescinded the price increase and has settled on a lower, yet to be disclosed, price.

 

 

How Does The World Spend Their Money?

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This chart from The Economist, shows how countries all over the world spend their money

How countries spend their money

The chart summarizes percentages of spending into distinct categories like Healthcare, Food, Transportation, etc.

What immediately stands out is the large proportion of healthcare spending by the United States.  Not only do households spend roughly 30% of income on healthcare, there is a staggering difference between countries.  Only Australia and South Korea spend above average amounts with the remaining countries spending below average amounts.

Other observations include South Korea spending the most in Education at 6.7%

Russia spending the most on Alcohol & Tobacco at 8.3%

What this chart doesn’t account for well, is the purchasing power of average income of households in different countries.  With lower incomes, wouldn’t we expect to see Mexicans spending a majority of their income on Housing, Transportation and Food?

 

 

 

Paper, Rock, Scissors: The game theory approach

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In class today we discussed the theoretical structure of the game: Rock, Paper, Scissor.  We came the conclusion that a random strategy is generally the outcome we would witness, even empirically.

The business insider posted an article awhile back describing this exact solution and how no Nash equilibria exist in this game and that the best strategy should be a random one.

http://www.businessinsider.com/how-to-beat-anyone-at-rock-paper-scissors-2014-5

They go on to describe an interesting pattern which developed among winners and losers.  Winners tended to replicate their winning play over multiple games while losers tended to switch to the next strategy sequence, i.e. moving from rock to paper to scissors.

This begs the behavioral economics question as to why?  If random is the best we can do, what factors are influence the strategy set for winners and losers?

Mapping the Difference Between Minimum Wage and Cost of Living

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A recent post found in The Atlantic:City Lab described the lack of a livable wage across the country.  They created a nice little map tool to identify areas where the disparity between minimum wages and costs of living were the largest.

http://www.citylab.com/work/2015/09/mapping-the-difference-between-minimum-wage-and-cost-of-living/404644/?utm_source=SFTwitter

No surprise in that areas across the country like the Northeast and California where high costs of living outweigh the minimum wage disparity is seen to be the largest.

What becomes interesting is that for single individuals Washington state becomes a “living -wage oasis”.  That has to be due to the recent changes in minimum wage laws that state has seen.

Regardless though of the area it becomes clear that a family of two children fails to meet the basic costs of living with a gap in the wage needing to be about $20 per hour higher.  WOW.