My roommates and I do a decent job of keeping our apartment clean, but there’s definitely room for improvement in our systems.  The problem is that cleaning our apartment is a public good, and like any public good, there’s tons of room for free-riding.  Anyone who has ever had roommates has most likely dealt with dirty dishes in the sink, or papers on the table, or piles of unread mail.  Unfortunately,  my brilliant idea, described below, is something only an economist could love, and I live with lawyers.

The solution to our problem, of course, is to attach a price to the various household chores we want done and compensate the person who accomplishes the task by having the other two roommates pay him.  I struggled with how to set the optimum level of payment for each task.  We could have each person decide how much they’d pay for the task, but what if nobody wanted to work at that level?  An alternative is to say how much each person wants to charge, but what if nobody pays it?

Co-op housing attempts to solve this problem through a system of fines and penalties, but if the fines are too low, then it will be seen as a charge for the service and not a penalty (thanks behavioral economics!).  You can force compliance by making the charges too high, but then there’s an opportunity for trade - between people who want to clean or need money and those who don’t - that’s being missed.

The optimal solution goes back to game theory - which teaches us how to incent both action and truth-telling.  There’s a classic problem in game theory where two business partners are trying to split a pie, or their company, or something.  Anyways, two people are trying to split something - and the best way to find an equitable split is to have the first player propose how much the pie/company is worth to them, and the second player decides whether to buy them out at that price, or sell to them at that price.  Because Player One doesn’t know which option Player Two will choose, they want to be as honest as possible about their true value of the pie/company/something, and will be indifferent between the two options.

The same goes for cleaning the apartment.  Give one roommate the option of saying what they value the chore at.  The other roommate has the option of either completing the chore at that price, or they can pay to have it done.  Running through the register of household cleaning tasks should create an equitable outcome, or give one roommate some supplemental income as a maid.  Either way, everyone wins - we all get to live in a clean apartment.

How’s this for a long post, Mom?

Categories: Behavioral Economics, Crazy Theories, Governance, Incentive Centered Design, Information Economics, Strategy
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It used to be macho to go for it on the 4th down, now it’s what scientists tell you to do:

You don’t have to be particularly interested in sports to find Romer’s conclusion intriguing: His hunch about human behavior in general was that although people say they have a certain goal and are willing to do everything they can to achieve it, their actual behavior regularly departs from the optimal path to reach that goal.

From this Washington Post article.

Categories: Behavioral Economics, Business and Economics, Strategy
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From the Donor Power Blog:

You can’t go wrong if you think of your donors as your owners. They’ve invested in you, and demand some kind of return for their investment. Not money, but a better world. It’s something you need to deliver — and clearly let them know you’ve delivered.

I’d go one further - think of your donors as shareholders. They have lots of choices about where they can invest their donations, and they’ve chosen to invest it with you. That means you have to treat them like you would shareholders by delivering results, measuring them, and communicating information about your organization. At the same time, your service recipients are your customers, and you need to treat them as such by providing value for them, because that’s what your shareholders demand of you.

If you’re going to be responsive to your donors as shareholders, you need to run like a business, by determining what your objectives are, measuring performance and outcomes, and then communicating that information to your donors so they’re motivated to invest in you again.

Update: Duh! If I had read further in the post, I would have noticed he already advocated Donors as Shareholders. Donor Power Blog, you are so empowering!

Categories: Business and Economics, Marketing, Metrics, Philanthropy, Strategy
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Even after JetBlue screwed up big time, people are still going back:

Because JetBlue worked hard to acknowledge the importance of customer satisfaction early, the carrier has, in effect, built in a forgiveness contingency in it’s implied agreements with its customers.

Categories: Business and Economics, Incentive Centered Design, Marketing, Strategy, Travel
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The Headhunter (who commented on my blog here!) has a blog of his own, where his latest post outlines his interview strategy:

No one can fake a discussion about the work that needs to be done. Either you can demonstrate motivation, enthusiasm and smarts, or you can’t. To me, that’s what a job interview is all about.

Consulting firms have used these case interviews for years, though they often meander outside the realm of “can you do the job” and into the realm of brain teasers.  I’m not sure who ever came up with the behavioral interview, but it was one of the most annoying parts of my job search, to the point where I didn’t participate in a single one this past year.  The worst was when an unnamed manufacturing company started asking me questions about my experience doing something completely unrelated to the open position they had just described.

Categories: Business and Economics, Careers, Matching Mechanisms, Strategy
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Googling around I found this Jewish Week article on why Jewish mega-philanthropists aren’t donating to Jewish causes:

Our annual research of mega-gifts — gifts above $1 million — turns up at least 50 people who could match or exceed Stanton’s generosity. Typically, these are wealthy Jewish business leaders who give only relatively modest gifts to Jewish causes.

It’s tempting to write these people off as uncommitted Jews, but it would be wrong.

If Jewish causes want to receive mega-gifts, they have to prove themselves worthy. They have to compete on equal ground with the secular hospitals, symphonies, museums and universities, all of which court and inspire Jewish donors.

The money-paragraph at the end:

Look at it this way: Today’s philanthropists think like investors, because that’s how they got wealthy. They want their money to achieve a return; they want results.

That means Jewish causes need to change the way they run their businesses.  Want to attract investment?  You need a clear definition of what you hope to accomplish, a strategy for accomplishing it, and clear metrics that demonstrate your progress.  Even more importantly, those metrics have to reflect your goals, not your activities.  Non-profits, especially in the Jewish community, need to treat their donors like corporations treat their shareholders, and start to demonstrate real, measurable results.

Categories: America, Community, Governance, Jewishness, Metrics, Philanthropy, Strategy
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Prizes stimulate innovation better than grants:

BACK in the 1700s, prizes were a fairly common way to reward innovation. Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea. Dava Sobel’s best-selling 1995 book “Longitude” told the story of the competition that ensued, and Mr. Hastings mentioned the longitude prize as a model at that meeting back in March.

Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

The internet is changing the economics of innovation and discovery.  Science is no longer expensive like it once was, it is within the realm of dedicated and educated hobbyists.  Robin Hanson, who the article discusses, is everywhere you find interesting information economics problems.

Categories: Business and Economics, Incentive Centered Design, Information Asymmetries, Information Economics, Information Markets, Matching Mechanisms, Science, Social Software, Strategy, Technology, Users as Partners
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Chris Anderson’s Long Tail Blog takes a look at how Anheuser-Busch is expanding into niche brands:

Earlier this month I got in touch with Anheuser-Busch to hear from the Clydesdale’s mouth why the shift from hits to niches was coming to suds, too. I mean, I get how the Internet lowers the costs of distribution in many markets to allow for more choice (the “infinite shelf space” effect), but how does that apply to real bottles on real shelves?

Categories: Business and Economics, Distribution, Information Economics, Marketing, Strategy
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Chris Anderson’s Long Tail Blog asks do artists who give their music away for free want to make money?

Many do, but they’re just smarter than most music industry execs. They understand the difference between abundance and scarcity economics. Music as a digital product enjoys near-zero costs of production and distribution–classic abundance economics. When costs are near zero, you might as well make the price zero, too, something thousands of bands have figured out.

Meanwhile, the one thing that you can’t digitize and distribute with full fidelity is a live show. That’s scarcity economics. No wonder the average price for a ticket was $61 last year, up 8%–in an era when digital products are commodities, there’s a premium on experience. No surprise that bands are increasingly giving away their recorded music as marketing for their concerts, which offer something no MP3 can match.

Categories: Business and Economics, Distribution, Entertainment Media, Incentive Centered Design, Information Economics, Marketing, Strategy
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Phoebe at Jewlicious bemoans that all Jewish events are Jewish singles events, taking her recent Birthright trip as the example:

The problem with Birthright (or at least the version I experienced) as it currently exists is the level of desperation. One can’t help but wonder, if Israel’s such a great country, then why do people have to pay us to go visit it? If Jewish women are so beautiful, as Momo keeps insisting, then why do Jewish men have to be told to notice this?

At some point, the leadership of the Jewish community has to wake up and end the forced mating program before Jews become like pandas, unwilling to breed in captivity to save the species. Instead, they need to go back to stating the value proposition of Judaism, the reasons that it’s worth saving.
Also, her post is one of the best I’ve ever read in the JBlogosphere.

Categories: Community, Dating, Israel, Jewishness, Matching Mechanisms, Strategy
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From BusinessWeek:

Now that the merger with BellSouth merger is complete, the new AT&T may be trying to change the basis of rivalry in telecom. Providers have long competed on which can offer the biggest bundle of services such as wireless, landline, and TV. Now the competition may shift to who can offer free access to the largest community of users. “Before, it was about, ‘My bundle of services is bigger than yours,’ ” says Winther. “Now, they will say, ‘My community is bigger than yours.’ “

To move beyond bundling their low marginal cost services together, AT&T is trying to attract users by increasing the network effects of AT&T service.  It’s like an Information Rules case example.  Info-Econ students pay attention.

Categories: Business and Economics, Distribution, Information Economics, Marketing, Strategy, Technology
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The cool kids in the Jewblogosphere , which I’m just starting to navigate into (thanks mom for the advance recon!), are debating whether social justice is central to Judaism. It starts here, they’re going all week, and Canonist has already chimed in a bit. They raise different points that I might take on later this week, but I’m going to tackle something else today.

The entire debate makes the same mistake that the Jewish community always does by confusing social justice with Tikkun Olam (repairing the world). Tikkun Olam is making the world a better place, very broadly defined. It influences everyday interactions like how you perform at work, how you treat your neighbors, what you do with your empty beer can, and whether or not it’s OK to cheat on your taxes, just to name a few.

In contrast, social justice is still very narrow, and usually means leftist/progressive/liberal/socialist political leanings. Income redistribution is seen as social justice, but it doesn’t usually make the world a better place (see, Zimbabwe). If you count equal rights in the picture, you get another amorphous concept. Should we treat everyone equal, or make everyone equal? Because social justice is so narrowly defined, and because there’s real philosophical differences that usually emerge from the popular definitions, it’s really tough to make it a viable central theme for the Jewish community.

Making the world a better place, in contrast, is simple to understand and gives powerful meaning to peoples lives. Contrary to what you may think, nobody else in the marketplace of religions is selling it, and it has wide appeal.

Here’s an anecdote to illustrate the difference. An recent college graduate becomes an engineer and figures out how to make a manufacturing process 7% more efficient. He has just made the world a better place, because now you can make 7% more product for the same amount of money, but he probably hasn’t made society any more just (and he may have even made it less just). For his efforts, he is rightfully compensated by the company he works for, and he takes $5000 of that money and donates it to a charity which uses local labor, and therefore can build and stock an entire library for his contribution.

Another graduate strongly believes in social justice, and decides that education in the developing world is important to them. Because of this, they forsake the salary and benefits of a first job, and instead travel to the developing world to build a school. They want to get their hands dirty. Though they’ve never worked in construction, jointly with a group of 20 other recent graduates, they spend 8 months in Ethopia helping a Western project manager to construct a rudimentary building that a village can then use as a schoolhouse. Of course, they couldn’t get paid to do this - they’re making the world more just, so they borrow money from their parents to pay the organization supporting them about $4000 to cover food and lodging, as well as another $1000 for transportation to get to Ethiopia. Remember it took 20 kids to do this.

I don’t mean to criticize the graduate who spent time volunteering abroad (OK, I do). More than that, I mean to criticize the communal values that define Tikkun Olam in such a way that the volunteer is somehow seen as helping the world more than the engineer. Whether or not Tikkun Olam was central to ancient Judaism doesn’t matter, it’s certainly central to modern Judaism, and it’s what Judaism brings to the table better than any other religion (or non-religion) competing for people’s attentions.

Judaism offers a lot. It is a culture rooted in laws for every day life, a revolution at its time, that are based around values that are still relevant today. What Judaism offers that gives meaning to peoples lives is an end state not of another world, but of this one. I don’t mean to get too theological in this (maybe another day), but I see Judaism as a partnership with God to make the world a better place. Does campaigning for equal rights do this? Absolutely, but it’s not the only way. Does buying only fair trade coffee? I’d argue not so much. But that argument - about how we’re going to make the world a better place - is another example of the richness of Jewish culture. It’s just one for another post.

Categories: America, Jewishness, Marketing, Philanthropy, Strategy
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Jane Galt has some interesting posts on the war in Iraq (start here, revisited here, again here), the debate leading up to it, and how everyone has 20/20 hindsight. Before the war, my opinion was that it was a bad idea because we didn’t have a clear goal, and more importantly, I didn’t think we could pull it off. I admit I wasn’t very vocal about it, because it was tough to find a place on the anti-war “fighting is wrong” left, and you couldn’t really get away with saying “the military is great, just not that great.” What I don’t get, though, is why so many otherwise rational people, who are usually so skeptical of government’s ability to solve huge problems, actually thought that the military could accomplish all of its goals in Iraq: find Weapons of Mass Destruction, dismantle the government, create a new one, and keep the peace. That’s still my biggest issue: why did people actually think this would work, given all the prior evidence from American military experience.

Unlike most anti-war activists, I don’t really question the motivations for going to war. I think that most supporters were genuinely afraid or genuinely wanted to overthrow the government. What I don’t get is why they were so cocky they thought they could pull it off without thousands of people dying and things getting worse before they got better. Making democracy is really, really hard. We’ve been at it for over 230 years, and we’re still figuring a lot of things out. And we started from scratch. By the way, that is not an argument for staying the course.

Somewhere in Yithak Rabin’s memoirs, he talked about a meeting with Henry Kissinger where he said that the only way you could win a war was if you had a clear objective and ended it once that was accomplished. The Powell Doctrine was pretty similar - you need to have an exit strategy. We never had a clear objective, a clear measure of when it was accomplished, and we never had an exit strategy, all things that we needed at the beginning. This isn’t hindsight, this is foresight that we should have had from the 70’s, 80’s, and 90’s, but that we keep forgetting.

The lesson everyone learns from prolonged military engagements or occupations is that they don’t work, that you can’t beat an entrenched indigenous insurgency, and that conventional militaries are bad at unconventional warfare. So why, every decade or two, does someone roll around and forget all this?

—Update, like 5 minutes later—

Robin Hanson says it might be due to an overconfidence bias among hawks.

Categories: America, Governance, Politics, Strategy
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Nick Corcodilos of Ask the Headhunter has published his newsletter from last week which discusses why using a site like CareerBuilder is a bad idea.

He gives three reasons, here are a few more of mine.

1. Signal to Noise Ratio: Look at the number of resumes on sites like CareerBuilder, then look at the number of jobs. There’s a huge difference. On top of that, there are people who will spam job postings with their resume hoping somebody bites, whether or not they’re qualified. This makes it miserable for job-posters, and a lot less likely that they’ll get anyone useful. For the same reason, the search function is useless to them, so don’t hope someone will find you through it.
2. Most Postings Aren’t for Specific Openings: Lots of companies with a high churn rate will keep a continuous posting up on a website to keep a long pipeline of incoming candidates for the even longer pipeline of people leaving. Do you really want to work for the company that everyone else is quitting?
3. Even the Real Postings Are Bad: If CareerBuilder is so bad, what kind of companies are using it? Usually, the postings to a site like CareerBuilder that are genuine are made by smaller organizations whose HR person doesn’t have the knowledge, network, or wherewithal to use more effective methods. Again, is this the company you want to be working for?

For active job searchers, I highly recommend subscribing to the Ask The Headhunter newsletter, and although I never read the book, if it’s similar to the webpage, which I assume it is, it could also be a wise buy. While there are those who disagree, I think one of the most important things about a job search is to have a strategy, regardless of what that strategy is.

Categories: Business and Economics, Careers, Matching Mechanisms, Strategy
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Suppose that two retailers, East Side Tires and West Side Tires, are advertising the same tire for $50.

If East Side Tires cuts its advertised price to $45 while the West Side price stays at $50, we would expect that some of those customers on the west side of town would be willing to travel a few extra minutes to save the $5.

East Side Tires would then sell more tires at a lower price. If the increase in sales was large enough, its profits would rise.

Hal Varian discusses whether price-matching or price beating guarantees help reduce prices.

Over the summer, I used a similar argument in a discussion about why gas stations accross the street from each other can charge different prices and still be competitive.

(Via Greg Mankiw)

Categories: Business and Economics, Incentive Centered Design, Marketing, Strategy
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