Sunday, September 30, 2012

Public transportation: Can you locate the driver?

Good morning economists and have a great week. Today I would like to discuss the rising prices for gas (petrol). Specifically, one of the Troika measures for European countries is the increase in tax for petrol. This will have two main impacts.

The first, is that we will most probably witness a rise in the general level of prices because petrol is used for the production of the majority of goods and services. As such any tax rise will be transmitted from the supplier to the consumer.

Secondly is the substitution effect from private vehicles to public transportation. More people will be using buses, the metro (where that is applicable). My question, however, is that given the poor economic state of the majority of governments around the world and the public spending cutbacks that need to be enforced, how many bus drivers will be left to provide this service?

 Given that he must have an unobstructed view of the road, can you locate the driver? Have a nice day!

Thursday, September 27, 2012

Should lap dancing be taxable?

Good morning economists. I recently came across an article from USA Today on a court case involving "Nite Moves", a  strip club located in Albany. Apparently the strip club owes the government $124,000 in taxes (the 8% sales tax) from nude lap dances given to customers.

The strip club refuses to pay as it argues that lap dancing is a form of art which is considered as tax exempt.
 The New York Attorney General argues that "such a dancer isn't engaged in a genuine choreographic dance performance when she removes her clothing."

Although hilarious, this point makes me wonder whether traditional cabaret shows like Moulin Rouge or Crazy Horse should be tax exempt. How many pieces of clothing need to be removed so that the appropriate tax treatment applies?

Have a nice, fully clothed day!

Wednesday, September 26, 2012

One picture is worth a thousand words

Good morning economists. Yesterday afternoon I was driving by a busy neighborhood in the town that I live in. The area is filled with coffee shops, restaurants and night clubs. The street was literally packed with people as September is still busy season in Cyprus.

My eyes wondered on a beggar who was asking for money as he was presenting himself to be disabled. (I say presenting because there is evidence to the contrary and this is the topic of another future post). This got me thinking. Who was the richest person on that busy street? I came across this picture the other day from my friends at "Trust me, I'm an economist" which I am reproducing as food for thought.
Net worth is basically the assets (wealth), that one has, minus the liabilities (what he/she owes). I will let the picture do the talking.

Have a positive net worth day.

Tuesday, September 25, 2012

Boycotting jerks and their companies

Good morning economists. While surfing the web, I came across this article on how to boycott a company. While this seemed kind of extreme to me at first, I quickly realized that I was guilty of such behavior in the past. Allow me to present my stories.

When I was 14 years old, my mum used to send me for grocery shopping to the nearby store. Given, the store was only 100 meters away and it was located in a very quiet neighborhood. I remember I could carry two or three bags at a time because I was using my bike. One day while playing with my friends, the grocery owner's son deliberately damaged my brand new bike. Although my parents fixed the bike the very next day, I refused to visit the particular grocery store for the next 10 years because neither the son nor the grocery store owner apologized for the damage! (Yes, I was holding a grudge). I preferred to buy groceries from another store that was further away. The grocery store owner had lost 10 years worth of shopping.

My second story is also from my personal experience. A couple of years ago I ordered take out from a Chinese restaurant which admittedly was not conveniently located in regards to where I live. However, I really liked the food so I was a repeat customer. One day I ordered my usual which cost 7.90 Euro. When it came time to pay I noticed that I had a 5 Euro bill, two1 Euro coins and five 20 cent coins, that is, 8 Euros in total. I paid the owner (who happened to operate the cash machine at the time) but he did not have a 10 cent coin to give me change. (It is necessary to emphasize here that in the case of take outs in Cyprus, tips are not typically left). Now, OF COURSE, I would tell the owner not to worry about the change but before I communicated this to him he said "I do not have any change. I guess I owe you 10 cents."

I remember thinking at the time how much of a bad move that was!!! It was not the value of the insignificant 10 cents, it was the untactful approach of the owner that bothered me. For 10 cents, he lost me as a customer. Needless to say I did not return to the restaurant ever again. It closed down two months later. Apparently people were boycotting the owner because of similar incidents.

The moral of the story? It is not enough to be a professional at your place of work. You may be the best at what you do but if outside the workspace you are a jerk chances are that your business will suffer.

Have a boycott free day!

Monday, September 24, 2012

Slow drivers at traffic lights

Good morning everyone. Have you ever fallen victim of slow drivers at traffic lights? Allow me to explain. You are driving along when all of a sudden you notice that the car in front of you is reducing its speed. You also notice that you are approaching a green traffic light. As it happens (in most of the times) you are in a hurry so you really want to make it across the junction before the red light stops traffic.

A few feet (or meters) before the junction the traffic light turns yellow and the slow driver in front of you floors the gas pedal to beat the red light. While he makes it across the junction, you and a few other frustrated drivers are forced to wait because the light has now turned red.

This example above points to the fact that the slow driver is not familiar with the concept of Pareto efficiency. Pareto efficiency or Pareto optimality occurs when it is no longer possible to make one individual better off without making someone else worse off. Pareto optimality is rather rare. Instead Pareto improvements can be made with the appropriate modification of human behavior.

If for example the driver in front of you was driving normally, then the maximum number of drivers would make it past the junction. Such behavior would lead to Pareto improvement as now more drivers are better off without making someone worse off. Wouldn't it be nice if everyone was better off?

Have a Pareto optimal day!

Sunday, September 23, 2012

Would you ever tell on your friends?

Good morning economists and have a great week. Have you ever caught yourself in a situation that you did something you shouldn't have done and you are worried that a friend of yours will tell on you? Of course you have! Our childhood years are filled with such experiences. Today I would like to focus on game theory economics and more specifically Prisoner's dilemma. Consider the following scenario:

Two thieves are arrested for burglary. They are put in separate rooms and are interrogated.

If both thieves confess they will each be punished with 6 years imprisonment. If A tells on B but B stays quiet then A will be set free and B will be punished with 10 years imprisonment. The reverse will happen if B tells on A and A stays quiet. If neither confesses they will both receive 2 years as punishment.

The weird outcome of this game is that the tendency for people is to confess, in other words to turn on each other. This is because A knows that no matter what he chooses B is better off ratting him out. The same applies for thief B in reverse. The prisoner's dilemma has several applications like in periods of diplomatic or business negotiations and even at work during evaluation periods.

Would you ever tell on your friend? Have a nice day!

Thursday, September 20, 2012

Sex and chocolates

Good morning economists. My friends over at Freakonomics posed a very interesting question yesterday. They presented the following photo from a CVS store presenting chocolate and condoms on nearby shelves. The author wondered at the time whether the two goods were complements or substitutes.

Complements are goods that are consumed together like CD and CD players. In general, the consumption of the first good pushes consumers in buying the second. A substitute on the other hand is a good that can be used in the place of another good, for example Coke and Pepsi.

I will not actually answer the question of whether chocolate and sex are complements or substitutes as I believe the answer is rather subjective, not so clear and certainly gender biased.

What this debate made me think is the spacial competition which may exist for shelf space in supermarkets. The next time you find yourself shopping for groceries take a look around you and see whether your favorite product is located next to a complement or a substitute. For consumers, the best deals would probably be had in spots where a lot of substitutes are located in bundles. In general, we should expect the most high priced items to be located next to complements so that they attract the buyer to purchase.

Consider the example of nachos and salsa. The most expensive brands of salsa are located next to the nachos where the cheaper brands are located together with competitive products on the salsa shelf.

Food for thought, no pun intended.

I would also like to take this opportunity today to congratulate my good friend and colleague Maria Constantinou on starting a very useful and interesting blog entitled Marketing Cache. I urge you to visit her blog and start exploring the fascinating world of marketing.

Have a great day!

I want to buy a limited edition of something!!!

Good afternoon everyone. Apologies for the late post but it was a busy morning. Today I would like to discuss the latest trend not only in fashion but also in pretty much every type of market out there. I am talking about the use of the word "limited" in front of the product or service offered.

You walk in a store and your eyes wonder towards a pair of jeans that is displayed in a strategic point in the building. You immediately notice that you will have to pay twice the normal price to buy this pair. The attendant is quick to let you know that this is a special pair of jeans because it is a "limited" edition piece. If you have the resources (money) you will probably think to yourself that this is too good of a deal to pass on and you proceed to buy the product.

If you do not have the money, however, you will be thinking about this special pair of jeans in the days to come, thinking how privileged you would be if you end up buying it. It is afterall a "limited" edition.

One quick look around reveals that many people are wearing the special edition piece you just bought. Suddenly, your "limited" edition pants, do not look so limited anymore. Jerry Seinfeld, the stand up comedian once told the following joke:

"What's the deal with limited edition cars? They are all around. Apparently they are "limited" to the number of cars they can produce."

So what IS the deal with limited editions? In most countries price discrimination is illegal. Price discrimination is the action of selling the same product at different prices in the same market. It is very profitable for companies to price discriminate because they can ensure that each income group (for simplicity rich and poor) would pay the maximum for the product thus increasing revenues. This is more profitable than just charging one uniform price for both groups.

Limited edition pieces are attractive to the rich income group, but in reality, in very few cases is the product substantially different than a "normal" edition.

So next time you come across a limited edition item you have to decide. In which group do you classsify yourself in?

Have a nice evening.

Tuesday, September 18, 2012

Customer rewards: after nine car washes you get free sex!

Good morning economists. Two days ago I was reading the newspaper and I noticed an article about a Malaysian car wash business. We have all heard about customer rewards. Buy one get one free coupons or buy nine coffees and get the tenth one for free like in the case of Starbucks or Gloria Jeans. One would expect that a car wash would offer a wash for free for their returning customers.

The crafty businessman instead of opting for the obvious he instead made a deal with a massage parlor to offer free sex to the clients who paid for nine car washes. The plan was a hit for three months until the police found out. They did not appreciate the entrepreneurial  genius of the business man and arrested him and three of the clients that were "enjoying" their customer rewards at the time.

Customer rewards is a great way to attract returning customers and is a strategy employed by a large number of businesses around the world. Better stay within the parameters of the law though.

Have a rewarding day!

Sunday, September 16, 2012

"Toddlers and tiaras". Where has the ceteris paribus gone?

Good morning economists and have a nice week. Last week in a post, we discussed the idea of fairness and we concluded that people have an inherent sense of what they consider to be fair or unfair. Sociologically speaking, we expect people to act within the parameters of the norm. When we see a family of seven for example, we assume with no extra information that the parents like children and that they are, for the most part, a happy family. This is what we consider the norm to be.

Yesterday I was watching an episode of "Toddlers and Tiaras" a show on TLC where families enter their children in beauty pageants and compete in various age groups. I, have to admit that I am not a fun of the show because I cannot accept the idea of putting make up on little children nor "selling" their image for the sake of ensuring large numbers of viewership. The episode that I watched showed how the mother, Jamie Sterling, was preparing her twin daughters aged 6 for the competition. Now, what is wrong with this picture you may ask. Watch and see:

Jamie seems to favor one daughter over the other to an extend that she ordered a brand new dress for her favorite while letting AshLynn to compete in a torn dress. I was so upset when I watched this, that I searched online about the particular episode.

It turns out that there was an outcry against this type of shows and the mother was quickly labeled as a b@#$&. In the end, viewers were outraged because the show shot down their ceteris paribus assumption, that families with twins treat both their kids in the same way. A ceteris paribus assumption is one that we usually make based on the norm when there is no more information about the subject of discussion.

What do you think of the show? Have a nice day!

Saturday, September 15, 2012

Have a nice weekend!

The Everyday Economist will be back with you on Monday for more fun and economics!

Thursday, September 13, 2012

The secrets of dating with an economic twist

Good morning ladies and gentlemen. Following yesterday's discussion on photoshopping on Facebook, I would like to focus on the ever complicated topic of dating. When I was studying for my undergraduate degree I was good friends with a lady who had all the characteristics of a model. I remember her complaining to me and the other friends in our "crew" that she was always single and that no one paid any attention to her.

For the men as well as the women in the group this was a true puzzle. She was pretty and she was all around a nice person. Why was it then impossible to find someone? Have you come across a similar story? At the same time, other less attractive and meaner girls in our group were in happy relationships.

It was not until I watched "Beautiful mind" and started studying game theory in economics that I started to understand this type of human behavior. We can consider the dating world as any market where there is demand and supply for members of each gender. Approaching someone is a rather tricky business.

Remember the scene from the movie when a group of three women enter a bar? One of them really stands out and immediately draws the looks of every male in the establishment. Where the men's primal urge is to approach this lady, Nash is correct to suggest that such a strategy would be self defeating. If all the men approach the woman that stands out the probability of failure for everyone is high. If however the men approach the remaining women in the group first, the beautiful woman will find this strange and begin to wonder about her ability to attract men. It is at this time that she will be the most vulnerable.

Let us take another look from the female perspective this time. Consider that a group of young but bald men enter a restaurant. They look successful and well mannered. You, as  lady have three options:

What do you do if someone from their group approaches you? The answer lies in the perception of yourself, but the game theory behind your decision is still the same.

As a lady, you have the luxury of being approached rather than approaching. You can reject or accept based on what you see in front of you. A sociology professor once said something during a lecture that stayed with me. Subconsciously we are looking for our other half, and our other half is not significantly different from our personality. True happiness lies in the ability to see past certain attributes and adapting without losing the scope of reality. The Nash equilibrium in the game above would be to reconsider the rank of attributes and look past the "baldness". Anything else would be short lived and doomed from the start.

How would you play the game? Have a nice day!

Wednesday, September 12, 2012

Photoshop fails on Facebook

Good morning all. Yesterday, I was browsing my news feed on facebook and I noticed that a friend of mine shared a photo of another young female facebook user that looked to be photoshopped. Out of sheer curiosity I clicked on the profile of the aforementioned female and behold, all of the photos she ever posted on facebook were manipulated in some way or another on photoshop.

Now, I know what you are thinking. She is not the first and probably she will not be the last facebook user who does that. To some extend I can understand the need to be accepted by the facebook community for something that she is NOT. In fact, this was the topic of discussion for an older post. Psychologically, these type of people are trying to hide something about themselves they consider to be inadequate and hence it is the source of disutility or discomfort. In economics, we could argue that such a strategy (fooling other users on facebook) could have been successful, ceteris paribus. Ceteris paribus is the assumption that other factors that are involved in a particular action remain the same. We are assuming therefore that the rest of the facebook community is sincere.

What really surprised me though is that literally all users (since the profile of the female was public) were commending her on how good she looked and some even described her as "goddess". The ceteris paribus assumption in this case goes down the drain.

It is not our concern to examine the reasons for this behavior but the lesson learned here is that when you are dealing with online social websites be prepared to lie and be lied to. In the end are we fooling anyone other than ourselves?

Have a ceteris paribus day!

Tuesday, September 11, 2012

Where is my turkey?

Good morning economists. Have you ever wished that you gave up smoking? Or that you gave up a bad habit in general? Why is breaking a habit so difficult?

Five years ago, an experiment was conducted in the United States where a company supplied its workers with a bonus turkey on thanksgiving. At first, the workers were excited. The following year, the company again provided a turkey for each worker. In the third year, the company repeated the same behavior, however, a few workers complained as to the size of their "bird". In the fourth year, the company due to cutbacks could not provide the relevant bonus and the workers almost went on strike.

So here is a situation where the workers formed an expected future utility or enjoyment after the second successive bonus year and as such they almost revolted in the fourth year due to the loss of this expected utility.
Unfortunately, bad habits create some expected utility that is forgone if we do not perform the particular action. As a result the best way to break a habit is to do it gradually. If the company did not provide any bonus in the second year, the workers would be unlikely to form the habit of demanding a bonus every year.

What is your bad habit?

Monday, September 10, 2012

What happens when you give a monkey a cucumber? (Video)

Good morning all. Have you ever found yourself in a situation where you were treated unfairly? What was your reaction? Did you get angry or did you walk away? The concept of "fairness" is very subjective and differs from person to person (or from monkey to monkey).

In economics, we consider the rational agent. Someone who is selfishly trying to maximize his/her enjoyment level. However the results of the dictator game as this was discussed in a previous post prove otherwise. In the dictator game, the dictator can choose to give the receiver any amount from the money allocated in the beginning of the game. The receiver does not have the ability to accept or reject. The logical course of action for a selfish dictator would be to give the receiver a big fat zero. However once the experiment is conducted, we observe that dictators give some positive amount to receivers.

The reason for this can be twofold. Either the dictator is worried how his/her actions are going to be perceived by the person who runs the experiment, or there is indeed a sense of fairness embedded in our personality.

For this reason an experiment involving two monkeys was run in a laboratory. In the video that follows each monkey had to give the experimenter a rock. The experimenter in turn rewarded the monkey on the left with a piece of cucumber. Cucumbers are acceptable to monkeys though they are not considered to be a treat. The monkey on the right was rewarded with a piece of grape, the most delicious treat for monkeys. Take a look at the reaction of the cucumber monkey,

It seems that although perceptions matter, people are born with some degree of fairness embedded in their character. Knowing what is considered to be fair though, does not cause a person to act in that way. But this is another topic that will be discussed in a future post.

In the meantime, have a fair day!

Sunday, September 9, 2012

How looking good can help your career

Good morning economists. A couple of days ago, my good friends over at "Trust me, I am an economist" posted a picture on facebook which got me thinking about the implications of the old saying "beauty is in the eye of the beholder".

Why do you dress up to look your best when you go for a job interview? (Or at least you should be doing that). It is because the first appearance matters more than you think. It does not matter how many degrees you hold or what your qualifications are, if you do not inspire confidence in the person who will hire you, chances are that your job application will be rejected.

This is because your interviewer or your boss, if you are hired, sees you as a potential money making unit which will provide him/her with some expected utility or satisfaction. Nobody wants to be around someone who dresses poorly and smells badly. That would imply some degree of disutility or discomfort and because of this you will not be given the same chances you would have if you dressed nicely and took daily showers.
Beauty is very subjective and so is utility. Forget about "beauty is in the eye of the beholder" and replace it with "utility is in the eye of the beholder".

So when you wake up to go to work or have a job interview, try to look your best. As funny as it sounds, it will cause people around you and especially your boss to appreciate your work more and you will have more opportunities for career advancement.

Have a looking good at work day!

Saturday, September 8, 2012

Do not miss on Monday: Looking good can help your career

Good afternoon all. The Everyday Economist will be back with you on Monday with an interesting topic of how you can look good and help your career at the same time.

Meanwhile you have more than 60 posts at your disposal to keep you company for today and tomorrow.

Have a nice relaxing weekend.

Thursday, September 6, 2012

How to lose weight the Everyday Economist way.

Good morning all. Yesterday I came across an article suggesting that the Mayor of New York, Mayor Bloomberg, will introduce a law which will ban serving soft drinks in large glasses in restaurants. I traveled to the US and more specifically to New York this past summer and I can attest that indeed the size of the glasses that soft drinks are served in restaurants is getting bigger by the year. This got me thinking about the implications on what we call in economics "the law of diminishing marginal utility".

Diminishing marginal utility can be explained using any consumable product but for the sake of consistency I will use the example of soda. Suppose that on a warm sunny summer day you find yourself walking in your favorite town on a busy street with lots of restaurants and bars. You decide have lunch at a restaurant of your liking and you order a glass of soda. Once the soda arrives you drink it almost immediately because you are extremely thirsty. You enjoy the glass of soda so much that you then proceed to order another glass.
 The second glass provides some enjoyment but not as much as the first, because you have already quenched your thirst with the first glass and you also start wondering whether you will have any room left for lunch. Ordering a third glass of soda is out of the question because this would cause you great discomfort.

What do we learn from this? The first glass of soda gives the highest additional utility or enjoyment. The second provides less additional enjoyment and the third will cause you stomach ache.

How is this law of diminishing marginal returns affected by the SIZE of the glass of soda? If the marginal utility or enjoyment stays the same for each additional glass, no matter its size, then we have an explanation for the obesity problem that so many people around the world face. I too, caught myself consuming larger quantities of soda when visiting the US because of the glass size.

Given the argument above, decreasing the size of the soda glass and extending the same principle to the size of meals that people eat, can have a positive effect on losing weight and healthier living.

Have a nice small meal day.

Wednesday, September 5, 2012

Blame the fool in the shower!

Good morning everyone. A lot of people ask me on a daily basis to explain the meaning of a recession and provide reasons as to why the economy cannot bounce back. The reason is simple. We blame the fool in the shower. Allow me to explain.

A recession as I have already mentioned in a previous post, is a persistent decrease in the total production of a country resulting to higher unemployment, lower wages and decreased total (aggregate) demand. As a result we observe longer lines at the unemployment office and there is a sense of insecurity in the economy. In other words this is what we are experiencing around the world today.

Whose fault is it that the economy cannot bounce back? Well it is this guy's fault.
Have you ever taken a shower and got "burned" while trying to adjust for hot water? What did you do next? You turned the cold water up and as a result you felt as if you were standing naked in the middle of Alaska. This is what Milton Friedman, the father of monetary economics, described as the "fool in the shower".

The analogy to economics is that when employing economic policy to battle a recession, governments are usually met with 3 types of time lags. The recognition lag is the time it takes for the policy makers to identify that the economy is in a recession. The decision lag is the time it takes to decide on an appropriate economic policy to battle the recession and the implementation lag is the time it takes for a policy to be implemented once it is decided upon.

As a result of these time lags, the economy is no longer in the same state that it was initially when the process was initiated. The outcome in the end may not be the desirable one and in contrast it may even have the adverse effect and make the situation even worse.

Have a nice day and be careful when taking a shower!

Tuesday, September 4, 2012

Should your lend money to your best friend?

Good morning all. Yesterday, I took a peek at the most popular keyword search results in Google and noticed that the question of lending money to one's best friend was coming up regularly. It seems that people are torn between the rational thing to do, namely, holding onto their money in times of crisis, and lending some of that money to their best friend. I will attempt to provide a solution using two games from Game Theory Economics.

There are two popular games that are played between two players in economics. The Dictator game and the Ultimatum game. In the Dictator game one player is labeled as the dictator and the other player as the receiver. The dictator is given some amount of money (let's say 10 Euros) and is asked to give any amount of that money to the receiver. The receiver has no ability to accept or reject the dictator's offer. He can only accept. Economic Theory, labeled as the "Nash equilibrium" predicts that the dictator will keep the money and make an offer of 0 to the receiver who is unable to influence the offer. This is the optimum behavior for the dictator to maximize enjoyment (keeping all the money). However, in real experiments we notice that dictators usually allocate some positive amount to the receiver. They are in other words altruistic.
When a friend asks to borrow money, this is exactly the game that is played. All of the power lies in the lender and the borrower does not have the option of rejecting a money offer. I realize that this does not answer the question of whether to lend money to your best friend or not. You should wonder though, what would your friend do if YOU had the need for a loan.

Examining the Ultimatum game could shed some light to answering this question. The Ultimatum game is very similar to the Dictator game, however, the receiver is now given the option of rejecting an offer from the person that makes the offer. If the receiver rejects, the game states that no money is given to neither the offeree or the receiver. Theoretically the receiver should accept any positive amount, and indeed the Nash equilibrium is a 9:1 split between the offeree and the receiver. However, in real life receivers tend to reject any offers below 20%. That is, they prefer to punish themselves and the offerees for not making a more fair split.

Back to our question. Should you lend money to your best friend? From the Ultimatum game we can see that if your friend had some power in the transaction, he/she would most probably punish you in some way. The answer is clear. If you have plenty of money lying around, you could entertain the idea of lending some small amount to your friend. If you are searching for an answer on the internet, then you are most probably NOT in a position to provide the loan. Politely reject the proposal and provide other alternatives to your friend, like applying for a loan from a financial institution. And explain that you are in no financial position to grant them their favor.

Always remember that a true friendship is not one based on financial rewards. Have a nice day!

Monday, September 3, 2012

The secret to getting out of bed in the morning.

Good morning economists. Do you remember the feeling when you purchased your new car? Remember how happy that made you? Chances are that you were very excited for the first few months but after a while that excitement subsided. You got used to driving your car around and it lost that "new" feeling that you had when you first bought it. Chances are that after a while, you started searching for the next purchase or change in your life that would restore the feeling of excitement and happiness.

The example above is what we call the Hedonic Treadmill, namely, people are looking for some drastic change in their lives in order to boost their utility levels or satisfaction. The same principal applies for unpleasant tasks as well. People tend to avoid unpleasant tasks that may reduce their utility levels. How many of you in the morning have hit the snooze button on your alarm clocks to delay the process of getting to work or school?

Human nature forces us to procrastinate when performing unpleasant tasks and rushing into consuming items or services that bring us enjoyment. In order to be relatively happier we need to overcome this Hedonic Treadmill.

A study by Leif Nelson and Tom Meyvis showed that people can increase their utility levels of a pleasant change in their lives by extending the consumption of the good or service. Referring back to the new car feeling, their studies revealed that taking breaks from driving it can extend the feeling of excitement. Similarly, relatively unpleasant tasks, such as getting out of bed in the morning must be preferably performed without breaks. In other words, do not put yourself in the position of hitting the snooze button ten times before you finally get up. You are just maximizing the unpleasantness and decreasing your utility. Better set the alarm clock at an appropriate time and force yourself out of bed once it rings. Believe me, you will start your day in a much better mood.

How many times did you hit your snooze button today?

Sunday, September 2, 2012

"So what does she want?"

Good morning everyone! After a month's worth of vacationing the Everyday Economist is back to discuss events from our everyday lives with an economic twist. Today, I would like to focus on what we label in economics as the principal agent problem.

Have you ever been to a restaurant where the service was absolutely awful? Of course you have. Just take a look at websites like travelocity with its restaurant customer feedbacks. Chances are that you have also warned your friends to stay away from such a place.

In August, me and my significant other visited the good ol' USA. One night we decided to have dinner at a well known restaurant in Miami. The restaurant hostess was quick to show us to our table and promised that the waitress would be with us in a couple of minutes.

Fifteen minutes later, we were still waiting. When I tried calling on a random waiter, I was told in a rather strict tone that I should be patient. A couple of minutes later, our waitress appeared to inquire what we would like to drink. It was clear to her at that time that we were foreigners because despite living there for a good 10 years I can still not get the accent right.

I figured, since she was already there, we could go ahead and order our dinner as well. After placing my order, the waitress turned to my significant, other took one look at her, looked at me and asked..."so what does she want?" How unprofessional, how rude! We were extremely hungry, otherwise we would get up and leave.

I remember thinking at the time that this is a classic example of the principal agent problem. In this case the principal (the restaurant owner) hires an agent (the waitress) to perform a task on his behalf. The waitress should, in theory, have the best interest of the owner in mind. In other words she should tend to the restaurant patrons in such a way so as they become returning customers.

However, the waitress has her own agenda, namely the wage that she receives every month, despite the impression that she makes to the clients. In the end, the waitress has HER best interest at heart, NOT the restaurant owner's.

This problem is evident in our everyday lives in any situation where a person is hired to perform a task. It arises because of asymmetric information. In other words, the agent has more information about the task than the principal. In our example, the waitress has direct contact with the customers, where the restaurant owner does not.

So next time you come across bad service, think about the principal agent problem, turn around and run away!

Have a principal agent problem free day.

The Everyday Economist will be back from tomorrow.

As the Summer vacation is over, it is now time again to talk Economics. There are are literally thousands of topics to talk about starting from tomorrow.