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Generic Confusion

When you leave, my blog just fades to grey
Nu ma nu ma iei, nu ma nu ma nu ma iei

News? Check. Politics? Check. Music? Check. Random thoughts about life? Check. Readership? Ummm.... let me get back to you on that. Updated when I feel like I have something to say, and remember to post it.

Sunday, September 16, 2007

The economics and psychology of gross profits

And by gross profits, I mean disgustingly obscene profits. Forget the oil companies. If you want to criticize anyone for gross profits, it should be companies that sell food and drink for far above normal costs. Your vending machines with their $2.50 bottles of soda? That's just insane.

But even at $1.00, there's an incredible level of profit on a bottle of soda. And I doubt I'm alone in being more willing to buy a $1.00 soda than a $2.50 soda. It's a psychological thing. You're willing to pay for convenience, but don't want to feel ripped off.

If you travel, you may see two key examples of this situation. Compare the food that airlines sell to the food available in a hotel mini-bar. The airline sells a sandwich for $5.00. Most people know that two slices of bread, three ounces of meat, and some condiments are a lot cheaper, but the prepared sandwich is a level of quality above that. But they also know a sandwich from Subway, the closest comparison to the airline's sandwich, runs between three and four dollars. And that's outside the airport. Inside the airport, food is even more expensive. The $5.00 airline sandwich is probably the best deal, and the convenience of not having an additional item to carry on the plane makes five dollars both highly profitable for the airline and worth it to the consumer.

On the other hand, the cost of items in the mini-bar are truly obscene. $2.25 for a 69 cent candy bar? At that price level, I think two things: "I'll never buy that," and "I can probably find a convenience store or gas station in walking distance if I want that."

I fail to see how mini-bars are even profitable. Eventually, the food inside gets old, and needs to be removed. Do they even sell enough to cover that waste? But more importantly, would profits be higher with lower prices?

I'm reminded of an ancient computer game, a lemonade stand simulation, from school days. It was loaded onto a Commodore PET computer, using a tape drive, to give you an idea just how old. (Not as old as you think, since the school district was cheap.) Each day, given a temperature and humidity, you set the price for a cup of lemonade at your stand. If it's blistering, you can get away with 25 cents a cup, but if it's sixty degrees Fahrenheit, you might have to charge 3 cents. The goal is to maximize profits, with the highest income (price per cup times cups sold), considering expenses (cups and lemonade concentrate). I got very good at guessing the ideal price; I believe the sales formula was a parabola, with one ideal maximum price.

So, if a minibar sells 10 Snickers bars at $1.00 versus 1 at $2.25, I have a fair idea which makes more money.

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Punditry and the Petraeus report

Predictably, opponents of the war in Iraq spoke ill of Petraeus and the report, though none worse than MoveOn.org. Meanwhile, supporters of the war cited the report to show that the surge is working, and needs to be continued.

All of this contributes nothing to the debate. It's wholly expected. I'm no journalist, but I see an obvious approach to correct this situation. In advance of the release of the Petraeus report, journalists should have interviewed prominent opponents of the war and asked the following:

"The Petraeus report is released. In the report, he concludes that the surge is a failure and America's continued presence in Iraq is a mistake. Under what circumstances would you attack Petraeus and the report?"

Then, when the report comes out, favoring the war, you hold these individuals to attacking the report only for the reasons previously cited. Anything else is demonstrated to be playing politics.

For those who support the war, you ask the similar hypothetical, discussing what would make them question the report given that it is positive.

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MoveOn, 1942

Over at RedState, we have the full-page ad MoveOn would have run in the New York Times in 1942.

"America is in an unwillable war on two fronts that are thousands of miles away. Even if America could win, we could have to keep thousands of troops in Europe for decades."

How true!

Sunday, September 09, 2007

Where I was this weekend

(Note: BugMeNot suggests "butler" and "butler")

The Days Inn immediately became ground zero for an intense manhunt that sought the unknown shooter, who was believed last seen, according to witness reports, running toward the hotel.

Within several minutes, the first Butler Township police officers arrived at the crime scene.

A procession of additional officers from the township and other municipal police departments, as well as the state police and Butler County Sheriff's Office would soon follow.

Before long, a number of officers peeled off and headed to the Days Inn. A police dog appeared to confirm by scent the shooter's route toward the hotel.

While other officers, some carrying long guns, headed in all directions, up and down the road and in woods and across lawns, the Days Inn was placed in "lockdown" mode.

No one was permitted in or out, allowing police a room-by-room search.

The lockdown and search briefly disrupted the annual SIBCON convention sponsored by The Circle of Swords, a 200-member gaming enthusiasts' guild based in Butler.

That was the scene Friday night. Strangely, the hotel chose to indicate the hotel was in lockdown mode, with no one permitted in and out, by sounding the fire alarm. Call me crazy, but that sound tells me to leave, not to stay put.

From what I saw, the police did not come into the ballroom where the games were being held, so this event had little impact on me.

From another article came this pair of sentences:

As police were responding to the 911 call, a couple who had been dining at Burger King, just across Route 8 from the distributor, told police they saw a man wearing a dark shirt and jeans carrying something in his hands.

The search was made more difficult because most of the attendants of the Circle of Swords gaming convention in the ballroom of the hotel wore dark T-shirts and blue jeans.

Yes, dark T-shirts and blue jeans are the de facto uniform of gamers. But the similar clothes may not hide the perpetrator. It wasn't until a later article that the newspaper mentioned the suspect was a white man. If he were another race, he would not have blended in that crowd. While it varies by location, gaming is a hobby favored by white males, and almost everyone at this gaming convention was white.

Wednesday, September 05, 2007

Agriculture is not the lot of humanity

Peter S. Magnusson has an article discussing recent worldwide employment and productivity figures, and notices an interesting milestone. Worldwide, the percentage of people who earn a living via agriculture (versus service and industry) fell from 42% in 1996 to 36% in 2006. Just over one in three people worldwide works to feed the world, a reversal from pretty much all of human history.

It's an especially interesting subject to read, since I've been reading S. M. Stirling's Dies the Fire, a novel where technology suddenly stops working, and people must revert to living as they did in the Middle Ages. It's an interesting book, and enjoyable to read because it focuses on two groups who manage to build their pre-industrial worlds, rather than on the billions who will die.

(Via Instapundit)

The mortgage crisis: what to do, what not to do

Searchlight Crusade has an important post on the mortgage crisis, and USA Today's short-sighted suggestions to fix it. It seems the editorial writers at USA Today lack even the most basic understanding of economics. Their suggestions of allowing judges to freely change mortgages, to give the bank hundreds of thousands of dollars of losses by fiat, really should have been rejected by some editor's smell test.

The situation we're in now all comes down to saying "Putting your financial well-being on a risky mortgage that only pays off if housing prices increase considerably over the next two or three years is foolish." It's just like saying "Investing in an unproven tech stock at an inflated price is foolish."

But consider many people, me included, would have said the same thing about housing back in 2004, and tech stocks back in 1998. And people investing in both would have seen their investment pay off, big time.

Now, I have some common-sense suggestions that, while not helping people who foolishly entered mortgages they couldn't later afford, would help people understand the risks they voluntarily undertake.

1. Illustrations

Let's start by adopting a requirement seen in insurance. An insurance product called universal life insurance was created in the 1970's and 1980's, when it was both technologically feasible and a marketable product. Universal life insurance has unbundled the product's mortality, expense, and interest components, and when interest rates were high, the product looked quite impressive, even reaching a point where you wouldn't have to pay premiums because the interest on the policy's cash value exceeded the costs. Unfortunately, that required double digit interest rates to continue. Now, insurance products like these require illustrations, showing the product's cash value under current assumptions, and the worst-cast scenario showing the less-favorable guaranteed assumptions.

It's not a perfect analogue, but you could show any mortgage product's payment schedule, principal/interest split, and outstanding debt by month under current assumptions, assuming ten-year average mortgage rates, assuming twenty-year average mortgage rates, and under an arbitrary higher interest rate. Let homeowners see the jump in payments with an interest-only mortgage, or see how much payments will rise if mortgage rates go to 10%.

2. Plain English documents

You can describe mortgages in plain English, and make that description the first thing people sign.

3. Audio records during the signing

We have the technology to record mortgage brokers or bankers explaining the mortgage, and homeowners acknowledging they understand what they're signing. I'm sure a fair number of the people now complaining about how they were misled once said, "Hey, I'll just refinance this $450,000 mortgage in two years, when my house is worth $600,000, and lock in a fixed rate then. What could possibly go wrong?"