Motivating workers with emotion – Dan Ariely interview on PBS

January 22, 2017 Leave a comment

Below is a recent clip from Paul Solman of PBS who interviewed Behavioural Economist Dan Ariely. Ariely states that behaviour is driven by emotion not rewards like money; the ability to help other people, feel that we’re useful, feel that we’re getting better or living up to our potential are much stronger motivators than cash. The interview discusses an experiment that he at a computer chip production line in Israel. Workers who made their chip quota got either

  • $30
  • Voucher for pizza to take home to the family
  • A“well-done” text from the boss.

In the actual experiment, workers who made the quota and received the $30 and those that got a pizza voucher and the group that got a compliment were all more productive than workers who received nothing.

But, on the second day, when the workers who got the $30 were not paid a bonus, regardless of how many chips they turned out, their productivity actually dropped below those who got nothing.

In total, by giving people $30 bonus, Intel lost almost 5 percent of productivity. That’s a lot. Now, think about it. You give money because you think this would increase motivation. It actually decreases motivation.

 

International migration – what about developing to developing countries?

January 21, 2017 Leave a comment

When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:

Developing Countries Migration.png

The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.

Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.

Why is developing to developing becoming more prominent?

  • Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
  • Poorer people cannot afford travel to the West or the Gulf
  • The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
  • Neighboring countries often share a language
  • Tribes often span borders of developing countries
  • In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
  • More less-skilled work is available in developing countries.
  • The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.

Sources: McKinsey Global Institute, The Economist.

Sunk Costs, Market Structure and Football Clubs

January 19, 2017 Leave a comment

Over the holidays I read Stefan Szymanski’s book “Money and Football – A Soccernomics Guide”. Szymanski also co-authored “Soccernomics” with Simon Kuper. There were various references to economic theory through the book which I will refer to on this blog.

Market Dominance

Dominance in a market is often associated with the lack of competition whether it be due to monopoly power, predatory pricing, the scale of investment etc. However this is not the case when it comes to football. Szymanski mentions the fact that there are 27 professional teams withn a 50 mile radius of Manchester Utd. If fans don’t like United, there are plenty of alternatives as there are in Madrid which has 5 professional clubs. In some countries football rivals play in the same stadium:

  • In Germany: Bayern Munich and TSV 1860 Munich,
  • In Italy: Inter Milan and AC Milan,
  • In Switzerland: FC Zurich and FC Grasshopper
  • In Brazil: Botafogo, Flamengo and Fluminense

Football Clubs.jpgDominance in markets usually occurs because of the initial investment required to compete in the first place – set-up costs. If you look at the railway industry (which could be said to be a natural monopoly) the cost of putting down new train tracks by the existing ones or a new line would be excessive and the ability to cover these costs would very difficult. Any benefit that may arise from competition would be diminished by the cost of duplication.

Dominance is easy to explain if there are very large set-up costs, which, once spent, cannot be recovered other than by operating in the industry. Economist refers to these costs as Sunk Costs.

Dominance in a market can also occur in markets where there are less sunk costs. Take for instance the soft drinks industry as an example. It remains relatively inexpensive to set-up a production plant to bottle soft drinks but Coca-Cola dominates the world market with 42% market share, followed by Pepsi with 28%. Their dominance is through advertising which makes up the majority of the sunk costs. Advertising is an example of ‘endogenous’ sunk costs which are determined by the firm as opposed to ‘exogenous’ sunk costs which are determined by technological requirements.
Premier League Players.jpgIn professional football the focus is on player investment rather than advertising, where the big clubs are those that spend heavily on players and win league championships. Teams that win are more likely to attract a larger fan base and greater revenue. Szymanski states that the big difference between football and soft drinks is that the pattern of dominance looks the same in small markets. For instance clubs in the English Division 2 (Division 4 in the old days) still stay in existence mainly because they operate in a different market than the Premiership teams. Of the 88 clubs in the English Football League in 1923, 85 still exist, and most of them still play in the 4 English Divisions. Also those clubs in the lower Division do benefit from intense local loyalty especially through tough times with performance. When clubs get relegated to the Championship from the Premier League, although they lose revenue from TV rights their fan base remains fairly constant. However a lot of these clubs will find it hard breaking into the dominant group – Manchester City, Manchester Utd, Liverpool, Arsenal, Chelsea, Spurs – unless they receive significant funding from an investor who doesn’t expect to see a financial return or have an exceptional season without high profile players like Leicester City who won the Premiership in 2015/16.

Unlike most business in which loss-making firms shut down or merge into other businesses, football clubs almost always survive. This does not prevent dominance, but unlike most industries, it does mean that the pattern of dominance tends to look the same everywhere. Source: Szymanski

‘Trading Places’ movie – short-selling explained

January 18, 2017 Leave a comment

The 1983 movie ‘Trading Places’, staring Eddie Murphy and Dan Aykroyd tells the story of an upper class commodities broker Louis Winthorpe III (Aykroyd) and a homeless street hustler Billy Ray Valentine (Murphy) whose lives cross paths when they are unknowingly made part of an elaborate bet.

There is a great part in the movie when they are on the commodities trading floor that explains price and scarcity. Winthorpe and Valentine are up against the Duke Brothers in the Frozen Concentrated Orange Juice (FCOJ) futures market.

How a futures market works
As opposed to traditional stock/shares futures contracts can be sold even when the seller doesn’t hold any of the commodity. For instance a contract of $1.30 per pound for a 1000 pounds of FCOJ in February indicates that the seller is compelled to provide the produce at that time and the buyer is compelled to buy the produce.

Here’s how it worked in the movie

The Duke Brothers believe they have inside knowledge about the crop report for the orange harvest over the coming year. They are under the impression that the report will state the harvest will be down on expectations which will necessitate greater demand for stockpiling FCOJ – this will mean more demand and a higher price. Therefore at the start of trading the Dukes representative keeps buying FCOJ futures. Others saw they were only buying and wanted in on the action, those that had futures were not willing to sell so the price kept rising. However the report was fake and Winthorpe and Valentine had access to the genuine report which stated that the orange harvest had not been affected by adverse weather conditions. Knowing this they wait till the the price of FCOJ reaches $1.42 and start to sell future contracts.

Then when the crop report is announced and it indiates a good harvest investors sell their contracts and the price drops very quickly. The Dukes are unable to sell their overpriced contracts and are therefore obliged to buy millions of units of FCOJ at a price which exceeds greatly the price which they can sell them for. In the meantime Winthorpe and Valentine for every unit they sold at $1.42 they only have to pay $0.29 to buy it back to fulfill their obligation. This results in a profit of $1.13 per unit.

The economic legacy of Obama

January 16, 2017 Leave a comment

Here is a good overview of President Obama’s economic legacy from PBS’s Paul Solman. Did his efforts to turn the country around after the 2008 financial crisis constitute a robust recovery, or too little, too late? Economics correspondent Paul Solman assembled a panel of economic experts to discuss employment across racial groups, the types of jobs created and the obstacles the president faced in enacting his economic agenda. Some of the comments are as follows:

  • He saved us from a great depression.
  • Over 15 million jobs have been added; 22 million more people have health insurance coverage than they did before.
  • If we characterise an economy as being in a catastrophe at unemployment rates greater than 8 percent, the black unemployment rate is still above 8 percent. So, frankly, black Americans are still in a great depression, or great recession at the very least.
  • The failure by the Obama administration to focus on economic growth.
  • A long-term infrastructure program would have made a great deal of sense, and frankly still does today. But that’s not what the Obama administration proposed. I think we need to have a more holistic structural agenda for lower-income Americans, rather than just treating it as a problem of recession and recovery.
  • We needed bolder, stronger, more fundamental, not tinkering, ideas to really structurally change the U.S. economy.

Social Progress Index v GDP per capita

January 14, 2017 Leave a comment

Although GDP has lifted millions of people out of poverty there have been numerous articles/books written on how economic growth alone is not enough to indicate how economies are developing – see previous posts on this topic. An economy that doesn’t account for basic human needs, address educational opportunity, protect the environment, personal freedom etc isn’t achieving success. Therefore understanding the success of countries beyond GDP means inclusion of social progress.

The Social Progress Index aims to meet this pressing need and incorporates four key design principles:

  1. Exclusively social and environmental indicators: The aim is to measure social progress directly, rather than relying on economic indicators.
  2. Outcomes not inputs: Measuring a country’s health and wellness achieved, not how much effort is expended nor how much the country spends on healthcare.
  3. Holistic and relevant to all countries: Creating a holistic measure of social progress that encompasses the many aspects of the health of societies. Knowing what constitutes a successful society for any country, including higher-income countries, is imperative
  4. Actionable: The Index aims to be a practical tool that will help leaders and practitioners in government, business, and civil society to implement policies and programs that will drive faster social progress.

SPI - 12 components.png

Each of the twelve components of the framework (see above) comprises between three and five specific outcome indicators. Indicators are selected because they are measured appropriately with a consistent methodology by the same organisation across all of the countries.

The 2016 Social Progress Index includes 133 countries covering 94 percent of the world’s population. An additional 27 countries are included with results for 9 to 11 of the total 12 components. This brings total coverage to 99 percent of the world’s population.

SPI v GDP per capita

Despite the overall correlation between economic progress and social progress, the variability of performance among countries for comparable levels of GDP per capita is considerable – see graph below. Hence, economic performance alone does not fully explain social progress. The Social Progress Index findings reveal that countries achieve widely divergent levels of social progress at similar levels of GDP per capita. You will notice that Kuwait and the United Arab Emirates have relatively high levels of GDP per capita but don’t rate as well on the SPI. By contrast although Costa Rica’s GDP per capita is below $20,000 the country does rate highly on the SPI.

SPI v GDP.png

SPI - Very High Social Progress.pngThe top 12 countries have tightly clustered overall scores between 90.09 and 87.94. Five of the 12 countries in this group are from the Nordic region, confirming that this model of development delivers social progress. More striking is the finding that the majority of countries in this group do not correspond to the Nordic model. The top performers show that there is more than one path to world-class social progress. New Zealand and Australia are the top two performers, respectively, on Personal Rights. New Zealand achieves strong relative social progress, despite its high GDP per capita. This is a significant achievement given that it is harder for countries with higher GDP per capita to over-perform.

Social progress is about meeting everyone’s basic needs for food, clean water, shelter, and security. It is about living healthy, long lives and protecting the environment. It means education, freedom, and opportunity. Social progress goes far beyond crossing a dollar-denominated threshold. We need a much more holistic view of development.

Source: Social Progress Index Report 2016

India and Venezuela’s battle to purge the shadow economy.

January 12, 2017 1 comment

India Ruppee notes.jpgOn the 8th November last year India’s Prime Minister, Narendra Modi, announced that all 500 and 1000 rupee notes could no longer be used as a medium of exchange – this accounts for 86% of cash in circulation. These notes could be exchanged for new ones by the end of the 2016.

Why did they outlaw the use of 500 and 1000 rupee notes?

  • The main motivation was to remove the country of shadow economy millionaires hoarding of illegal cash. It is estimated that the shadow economy accounts for 20% of India’s GDP.
  • Demonetisation increases the use of electronic banking allowing better tracking by tax authorities.
  • The printing of new denomination money would hopefully inflate away the value of illegal cash in the shadow economy.
  • Encourage people to deposit cash in the bank where it would earn interest
  • Greater tax revenue for the government by firms declaring their earnings. This additional money could be used for infrastructure projects as well as tax incentives for companies.

What have been the problems?

  • The Reserve Bank of India hasn’t been able to print the new money fast enough to replace the $207bn in rupees. There has been almost no new cash in rural banks and therefore keeping millions of farmers deposits that total $46bn. With limited cash in rural areas prices have collapsed.
  • Factories in some cities have closed as employers can’t pay their workers although some have resorted to giving supermarket coupons to keep workers on the job.
  • A dentist in an affluent part of Delhi has found a 70% fall in business since the cash ban.
  • Outside the major cities cash transactions are very common and not recognising 500 and 1000 rupee notes provides a significant monetary shock for those areas
  • Not all the shadow economy can move to a more legal environment with demonetisation and this represents a potential loss of economic activity.
  • A shortage of cash has led to small businesses having to shut down.

In the long-run the forced priming of bank accounts and the switch to electronic payments will mobilize more money for lending and taxes.

Demonetisation.pngVenezuela

Venezuela also became a country mostly without cash on December 16, sparking scattered protests and looting around the country as people fumed at having their already limited purchasing power cut off almost entirely.

As the nation’s most widely used banknote went out of circulation, the higher-denomination bills that were supposed to replace the 100-bolivar note had not yet arrived at banks or ATMs. That forced people to rely on credit cards and bank transfers or to try to make purchases with bundles of hard-to-find smaller bills often worth less than a penny each. The government was forced to delay the withdrawal of the 100-bolivar banknote until January 2. The graphic shows the volume of bank notes that are required to make $10m – Venezuela needs 14 sizable trucks to carry the 100-bolivar banknotes.

Source: The Economist – December 3rd 2016

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