My local food truck trusts me with their money. Why?

A while back I wrote a post called “This nation is built on trust and self-service fountain beverages”, which was about how casual dining chains often trust you not to steal their drinks. It has always been amazing to me that these places trust me with an empty cup that they’ve given to me for free to actually fill it up with water rather than Orange Fanta.

A taco truck near my office had me thinking about this concept lately. It’s cash only, and I ordered three tacos for $9. After I collected my food and was about to hand the guy at the window a $20 bill, he quickly pointed to an open cash register and asked me to take the change myself. I’d never seen that before, and I thought it was awesome.

Why would a business do this? Aren’t they afraid of someone not paying the right amount, or worse yet, taking money out of the register rather than putting money in? The clear calculation that a business like this makes is that whatever they lose in customers cheating them, it’s worth it not to have to slow down the whole assembly line by taking off the latex gloves, handling the cash transaction, and putting them back on.

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Is kindness economically efficient?

When I was a sophomore in college my microeconomics professor talked about gift giving as an example of an economically inefficient cultural practice. The lesson of the day was on how human beings efficiently allocate their resources. When we have the freedom to choose exactly how to spend our money, economic theory tells us, then we can maximize our own personal well-being. But when given a gift, some of this freedom is removed; in efficiency terms, it would be much better just to give cash and let the recipient figure out on his or her own how to spend it.

There was one important caveat: As my professor put it, when two people exchange a gift there are some “warm fuzzies” involved, a benefit that we can’t easily quantify. It’s one thing to go out and get what you want, but it’s particularly special and heartwarming when a loved one is thoughtful enough to get it for you. On a related note, let me digress for a moment and offer some free advice to all men reading this: Don’t ever give your wife or girlfriend cash as a gift, no matter how big an econ nerd you think you are. You run the risk of injury, death, or worse.

For whatever reason, recently I’ve been hyper-sensitive to all the subtle ways that economic efficiency and basic humanity butt heads, just as is the case when it comes to gift giving. And when it comes to this subject, the example that keeps smacking me in the face is my morning commute to work.

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Do deficits matter? Yes, and here’s the real reason why

Everyone seems to have an opinion these days on how to fix the US government’s debt issues. But these two paragraphs below, from Simon Johnson and James Kwak’s White House Burning, might be the best description of the issue I’ve read thus far:

Every time growth goes down and deficits go up, we’ll cut spending on government services and make modest reductions to Social Security and Medicare benefits. Growth will return as the business cycle turns up, deficits will come down for a few years, and the national debt will fall off the political agenda. But then deficits will come back because of a recession or because of demographic and health care trends. Then we’ll repeat the process, cutting spending some more. Each time, services and social insurance programs that lower- and middle-income people depend on will bear the brunt of the spending cuts, eroding away our already modest social safety net. Since many government programs, broadly speaking, distribute money from the rich (who pay more in taxes) to the poor (who benefit more from social insurance), these periodic rounds of deficit cutting will have the net effect of reversing this flow, shifting resources back toward the rich and increasing inequality above its already historic levels. A few rounds of this and the United States will look like a stereotypical Latin American country, with the super-rich living on private islands in the Caribbean, a comfortable professional class that holds the desirable jobs, and a large, struggling lower class.

America does face a long-term debt problem. Today, the specter of the national debt is a blunt instrument that is used to block needed investments and chip away at the modest programs that benefit the poor and the middle class. As long as we face the prospect of significant long-term deficits, our political system will continue to be dominated by hysteria, demagoguery, and delusion. Given the current balance of political power, the most likely outcome is that government deficits will be invoked to slash spending that ordinary people depend on — while continued tax cuts ensure that the deficits never go away. In other words, if we don’t solve our debt problem the right way, it is certain to be solved the wrong way. Our challenge is to defuse our national debt crisis in a way that is credible and fair, that maintains our ability to make vital productive investments, that preserves the services that most people value and depend on, and that encourages economic growth for decades to come.

This is basically the same argument I tried to make a while back, in the context of decaying public services. The poor and middle class disproportionately rely on those services, whereas the rich are impacted very little. (Think of someone who needs a publicly-funded commuter train or bus to get to work, compared with the person who takes a chauffeured car.) Because the former group lacks a political voice, they will always lose out when the debate shifts to how to fix the budget gap, probably in the form of cuts to services that the rich don’t need. Continue reading

The world’s poor: Stressed, jaded, and incessantly patronized

1375849_18372716I write a lot on this blog about economists’ assumptions about human behavior, and when these assumptions are useful to understand reality and when they are not. For instance, a while back I touched on the assumption of “rationality”, which for economists has a strict mathematical definition and is needed to make certain clean, elegant microeconomic models work. Unfortunately, some people take this and other theoretical assumptions beyond their original purpose, asserting, for instance that every human action in real life must be motivated by a rational thought process all the time.

Most of us are observant enough to know that at least sometimes, human beings do not, in fact, behave rationally. Addiction is an often used as example. I’m sure you can construct a model showing how a person could behave rationally and still drink himself into oblivion. But it’s much easier simply to admit to oneself that irrational behavior exists in the world, and basic models based based on an assumption of rationality are limited.

The question is, Just how widespread is our irrationality? That’s the question asked by many behavioral economists and psychologists who’ve attempted to document and codify all sorts of irrational things that human beings tend to do. (Dan Ariely’s best seller Predictably Irrational, though a few years old now, is a great book for a summary of this line of research.) I tend to believe irrational behavior can be found almost everywhere, and understanding this can help us improve ourselves and our society. A few months back, for instance, I made the argument that certain types or consumer loans preyed on individuals’ irrationality, specifically their impulsiveness and lack of understanding of finance. The poor are prime targets, in that they may be less likely to have had some basic financial education, and are naturally more susceptible to the “Interest Free Loans!” thing and other scams, perpetuating the imaginary dream of unlimited access to money without consequences.

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Is it capitalism that’s so rotten? Or is it us?

Is this really the face of capitalism?

Is this really the face of capitalism?

Economists and other social scientists are familiar with a concept called “framing”. Ask a question one way, and you might get a particular answer. But ask the same question differently, or in a slightly different context, and your answer may change completely.

There are tons of experiments that show the power of framing in influencing our decisions. A recent example I read about in this Atlantic article, however, tells us something important not only about ourselves but about the debate over capitalism.

As the article summarizes, an experiment a few years ago had college students play a classic “prisoner’s dilemma” game — that is, a game between two people where the individual has no incentive to cooperate — and separated the participants into two categories. The behavior of the students in these two groups was strikingly different:

[The researchers] told half the students it was called “Community Game” and the other half that it was called “Wall Street Game.” And that was all it took to turn these undergrads from team players into Gordon Gekkos. Fully 67 percent of the students cooperated when they were told they were playing “Community Game,” but only 33 percent cooperated when they were told they were playing “Wall Street Game.”

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The moral dilemma of swanky business schools

A couple posts ago I wrote about some of the ridiculous advertisements I’ve seen for the luxury apartment complexes in our town. Not all advertising is bad, I argued, and even some advertising that went beyond simply conveying factual information to the consumer had a purpose in society. Namely, it could allow a company to “signal” something about its product efficiently to the market. The problem is that sometimes advertisements try to signal something that isn’t quite true true (the right beer gets you babes, for instance), and the market doesn’t seem to correct this flaw as theory would predict. Worse yet, sometimes the thing that’s being signaled is actually detrimental to society in the aggregate.

A recent article published in the New York Times a few weeks back about issues of class at Harvard Business School opened my eyes to another way that the economic concept of “signaling” can go very, very wrong.
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When a place to live is a way of life

As I’ve mentioned before, I live in a Connecticut city that is convenient for people who work in New York. Naturally, over the years property developers have seized on this and erected various apartment buildings within walking distance of the train station, many of which market themselves as “luxury” complexes.

A home would seem to me the type of good that stands on its own merits, the demand for which can’t be impacted much by clever marketing and hype. Though I’ve never been a home owner, I’d assume the main factors people take into consideration in making a purchase would be things like the quality of the construction, the attractiveness of the school district, property tax rates, the prevalence of crime in the area, proximity to public transportation, etc. That’s different from a car, for instance, which is a good that lends itself to all sorts of marketing and branding opportunities that don’t really have much to do with the car’s specs or performance. For many of us our choice of car is about style and personality. The point is that it seems easier for an individual, rightly or wrongly, to make a public statement about oneself to others by means of a car than it would be to signal the same thing by one’s choice of apartment building.

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The moral case for good public services

I’ve been working in New York City for the past several months (taking the train in from Connecticut), and I must say I’ve been thoroughly unimpressed. It’s not that I dislike New York in general. I used to love coming for fun when I was younger, and there are still aspects of the city that I find truly unique. The food, for one, is superb. Never mind New York’s restaurant culture; what you can often get out of the side of a truck can be equally impressive.

But the day-to-day of commuting in and out of New York has been disenchanting. The air in the city sometimes smells awful. The people hustling to and from work are often rude. My walk from the train to my office is incredibly noisy, even at 7:15 in the morning (I usually listen to a podcast or the radio, and often can’t hear what’s going on with the volume cranked up all the way). And in the summer it can be oppressively hot and humid, especially in the train station, meaning that these days I’m damp with sweat by the time I walk in the office. I can already hear myself sounding like Mister Complainy Pants here, which I’m not proud of. I realize that lots of people have uncomfortable commutes, and I often remind myself of the need to be grateful simply to be employed. But I’d be lying if I told you that New York wasn’t starting to get on my nerves.

The thing that’s become a symbol of my commute into the City, which is the whole point of this post, is the escalator at the 47th and Madison exit from Grand Central that I take every day. It’s broken, and by that I mean that it is out of commission while it undergoes renovation… a renovation that is scheduled to take up to three months.

Maintenance on the 47th and Madison escalator (left) and the private escalator that's replaced it (right)

Maintenance on the 47th and Madison escalator (left) and the private escalator that’s replaced it (right)… Unexpected symbols of public services’ slow demise

Lately I’ve been thinking a lot about this escalator (pretty lame, I know). Specifically, I wonder how many people must pass through that exit from Grand Central every day into Midtown Manhattan, and whose commutes are impacted in some small way by its unavailable status. How is it possible for this thing to be out of order for this long?

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More on self-control, happiness, and marshmallows

These marshmallows would look more appetizing if I weren't too cheap to buy better stock photos

These marshmallows would look more appetizing if I weren’t too cheap to buy better stock photos

In my last couple of posts (see here and here), I made the case that religion and spirituality can help us control our impulses and make sounder decisions, and by doing so, we can improve not only our spiritual but also our material wellbeing.

There’s a branch of research that studies this type of thing (though not the religion part), specifically people’s ability to control themselves and the implications of this trait on their lives. In one famous example, researchers tested kids’ ability to delay eating a marshmallow in exchange for a payoff of more marshmallows later, and correlated their ability to do so with intelligence and achievement.

Today I came across an Atlantic article online about a recent study linking self-control to feelings of satisfaction regarding one’s life.

Here’s how the study worked (summary from the Atlantic):

To start, 414 adults completed an online survey, in which they rated their self-control by indicating how much they agreed with 14 statements (such as, “I do certain things that are bad for me, if they are fun”). The participants also reported their current emotional state as well as their overall life satisfaction. Holfmann’s team then turned to data from a study in which 205 adults were given smartphones and prompted to report their emotions at random moments throughout the week. At the same time, they were also asked to report whether they were experiencing any desires, and if so, how hard they tried to resist them, and whether they ultimately ended up acting on them.

The study indeed concluded that “[Trait self control] is positively related to affective well-being and life satisfaction”.

Now, I can see a few potential problems here. Just to take one example, is it possible that self control and happiness are correlated because the second causes the first, rather than the other way around? Maybe a third factor is the real cause behind both self control and happiness? And can we really trust people’s reporting of their own emotions to indicate how satisfied they are with their lives?

But these are problems that you encounter with a wide range of social science research. There are very rarely any smoking guns, just evidence that seems to point at a particular truth. To me at least, it doesn’t seem like a such a controversial idea that if you can get a hold of your life and not let your impulses dictate your decisions (at least, not too often), in the long-run you’ll be better off. And if submitting to a Higher Power somehow seems to help us control ourselves, and controlling ourselves seems to increase happiness, then shouldn’t it stand to reason that spirituality and religion can help us to be happy?

It’s not rocket science (well, it’s social science I guess). Anyway, I think this is a missing part of the debate over the usefulness of religion in modern society.

The tyranny of bad personal finance

A loan with no interest? That pretty lady with the cash makes a strong case.

A loan with no interest? That pretty lady with the cash makes a strong case.

If you work in Midtown Manhattan like I do, you may have seen this sign. It’s for a pawn shop which has employees man street corners in the area holding up this advertisement. Since I started working in Midtown a few months ago, I’ve been fascinated by it, because I think it captures a lot of what’s wrong with personal finance in America.

The reason this sign is so spectacularly horrible is that it combines the concept of “liberty” with a too-good-to-be-true offer of a no interest loan. It asks of the passerby, Why are you toiling away, living so meagerly, while you could have freedom by means of a fistful of cash?

Of course, money doesn’t buy liberty, at least not a complete sense of liberty. But even more basic than that truth is the fact that there is no such thing as an interest-free loan, at least not one offered by pawn shops that intend to, you know, stay in business. The concept of “no free lunch” applies very well to finance: you have to pay something in order to borrow someone else’s money. Usually that something comes in the form of an interest rate, but it can also be a fee, something you already own, your labor, whatever. In this case, it’s probably a fee. So though there’s no interest rate on the loan, you’d better believe you’re paying something to borrow the money.

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