Wednesday, February 12, 2014

Live now, pay later...

A few days ago, I met with a friend who started his own business back in July of 2013. I asked, of course, how his business was doing. "Well, I can barely pay the bills", he answered. "I only hope that people would pay me for my services."

It turns out that my friend is rather naive at the promises of customers that they will pay him in the near future. So he proceeds to complete the work (with a small deposit) only to be met with excuses by customers when the payday approaches.

Could it be that people are purposely refusing to pay for services that they received or do they live by the motto "live now, pay later"? Has it ever happened to you? You know that in a couple of months time you will have to pay a huge bill and despite of that you do not save the necessary amount. Perhaps you had an unexpected expense. Perhaps you are just not earning enough.

Yet it always surprises me the optimism that some people have for the future. Indeed I could describe some consumers as being overoptimistic in monetary terms. "People believe that something will happen in the future, perhaps that they will win the lottery or something", my friend argued. They overestimate their chances of being well off in the future. As such they tend to spend more today, sometimes burdening their credit cards or getting into debt.

Perhaps the old saying should be switched to "Pay now, live for later". Remember, your debt never goes away. It only becomes larger.

Have a great day!

Thursday, November 7, 2013

Game theory is to blame for unjust system!

Good morning economists! Long time no see. I was rather busy (as usual), you know the normal married, gone to my honeymoon, taught three economics classes and so on :). Now that things are starting to settle down, I hope to tend to my blog again. A lot of interesting stories to tell as always.

A few days ago, I was drinking coffee on the beachfront in my hometown when I noticed something strange. A police car parked on the side of the road and the officers were stopping all people riding motorcycles. From what I could make out, they were asking for license, registration and checking to see whether riders were wearing their gear. They were even stopping old men riding small scooters.

At one point I noticed a teenager riding a GSXR. For those who are not familiar with motorcycles, this is a rather fast one, capable of reaching speeds well in excess of 200 km/h. The teen was not wearing a helmet and was showing off by doing burnouts (spinning the back wheel hard so that smoke was coming out as a result of the friction). I thought to myself that the police will most likely arrest this guy.
To my surprise, the police did absolutely nothing. They did not even flag him down. Upon further reflection, I understood that game theory is to blame (game theory is a situation where two or more players act based on their beliefs on how others will act).

The teen knows that his bike is fast enough to lose the police car in the small city streets. So if the police gave chase he would most likely run. So if his decision set was comprised of the decisions to run or not to run, he would always choose to run because the punishment from getting caught would be very severe.

The police on the other hand know that the teen would most likely run. The decision set of the police officers is comprised of the actions to give chase or not to give chase. If they decide to give chase and they catch the teen, they will most likely get a pat on the back from their superior officer. If however they give chase and cause an accident (or the teen gets injured from trying to get away) the officers will most likely end up in court and will lose their jobs in the process (yes it has happened before). So weighing their options, police officers decided not to give chase and they went back to giving tickets to 60 year olds riding scooters....oh the injustice.

Can you think of any other situations that game theory messes things up?

Monday, June 3, 2013

What keeps you from launching an innovative product?

Good morning all! I was watching on the news the other day the horrific accident of Air France's concorde (yes concorde is spelled with an -e-) aircraft which resulted in the decision by Air France and British Airways to retire their fleets.

The Concorde was, arguably, the most successful and sturdy aircraft that ever existed. During its 27 year service (!) only one accident involving a Concorde was recorded in 2000. The weird thing was that despite the fact that the accident was caused by a titanium strip that fell on the runway by an aircraft which took off only seconds before the unlucky Concorde, all airlines were quick to retire the aircraft citing safety issues. The real reason, however, was a well hidden secret.

The Concorde cost the airlines more to operate and run compared to a more conventional aircraft. It was supersonic, thus it needed a significant amount of fuel for each trip. Flying with the Concorde was only the privilege of the rich. As such, not a lot of Concordes were built during these 27 years. Some may argue that it was retired because of the operational costs.

However, when Sir Richard Branson, owner of Virgin Airways offered to buy the British Airways fleet for 5 million British Pounds, he was inexplicably denied.The fleet was retired and most of the airplanes are now part of avionic museums around the globe.

What was the reason for the retirement of such a successful aircraft? It certainly was not operational losses as BA could have sold the retired aircrafts to Virgin Atlantic. It seems that in the midst of the Boeing-Airbus war, the Concorde was a victim of economics. Carrying passengers subsonically, was found to be more profitable and profit was the punchline in the aircraft competitive market.

Even though the Concorde was ahead of its time and even though it was truly a revolution in travel even by today's standards, it was sacrificed for a higher profit. Afterall, Airbus (who was maintaining the Concorde) decided to stop maintenance and allow the aircraft to be retired.

The moral of the story? It does not matter how original or impressive a new product is. If the profit is not there, the product will be doomed to fail.

Have a great day!

Tuesday, May 28, 2013

A new market for positive pregnancy tests?

Good morning everyone! The secret to every success story in the business world involves the discovery of a new product, one which revolutionizes (most of the times) and redefines the industry. A great example of such a success story is Apple products during Steve Job's second run.

Now you do not have to be Steve Jobs to enjoy success, however, some bizarre products are being launched in the market lately maybe due to the economic desperation that overwhelms people during the economic recession.

One such product made an appearance on craigslist in Buffalo, New York.

 A woman is apparently selling her positive pregnancy tests. She maintains that ever since she became pregnant she has been asked many times for a positive pregnancy test. It is only natural to assume that deception is the aim of the potential buyer. I am really wondering how many positive pregnancy tests the woman will end up selling and how on earth she reached the decision to charge $25 for a test.

A couple of days ago I posted about a market (beard advertising) which excluded women. This time I guess the market described in this post excludes men...well, until they are shown the positive pregnancy test that is.

Have a great day!

Monday, May 27, 2013

Growing a beard can solve your financial problems!

Good morning economists! I think I speak for everyone when I argue that I am pretty much fed up with all the advertising media and the largely unimaginable attempts to sell products or services. The same old billboards, the same old ads on TV and radio.

A couple of marketing companies have attempted to revolutionize the way that products are advertised by paying individuals to tattoo an ad or a web link on different parts of their body.

The problem with this approach of course is that not a lot of people will be prepared to sacrifice their skin (literally) for the sake of advertising a product no matter the monetary compensation. In other words the opportunity cost of tattooing a marketing ad is quite high and thus the compensation must also be high.

A company in the US, however, came up with another way to market products. The company is prepared to pay $5 per day to anyone who is willing to wear a mini advertising billboard on his beard. 

The idea is quite interesting as all it takes for someone to make money is to grow a beard. And since a beard is not permanent, the opportunity cost and hence the monetary compensation is only $5 per day or $150 per month. A sense a new type of company in the works..."Rent a beard"! Kind of sexist though as the market excludes females.

Have a great day!