Dan Ariely pointed out that the Economist had an odd pricing structure on its website. Its options were:

- Subscribe to a full year of online access to The Economist  for $59.

- Subscribe to a full year of the print edition of The Economist in print for $125.

- Subscribe to a full year of both the online print editions of The Economist for $125.

Now, if you were to come across this you might think they hadn’t put much thought into it at all, right. More importantly, however, if a magazine you enjoyed had this pricing structure, which option would you choose? Well, since online access costs $59 and the print edition costs $125, the smart money would decide to purchase both, where the entire cost of online access is done away with, right?

Now let’s assume the Economist earns more with the print edition (print always had higher margins than online content, which is why so many magazine and newspaper companies are in trouble now), so they would try to encourage more print subscriptions. Once the fixed costs of writing the article are taken into account, the variable costs of each new subscriber are minimal at best, so the more subscribers paying the most is the most beneficial option to the Economist (or any publication).

The two real options are:
- Online: $59
- Print: $125

But by offering their options the way they do, a majority of users purchase the latter, paying more than double for the same content.

In the 1950s and 60s the writings of Thomas Malthus were starting to be very very popular. This is because millions of people, in India, in Africa and in South America, were starving, and crop yields could not keep up with demand. Malthus famously said that “The power of population is indefinitely greater than the power in the earth to produce subsistence for man”, and in the late 1960′s people started thinking the unthinkable might be true: people would have to die off so other people could have enough to eat. Mass famines were deemed inevitable in certain parts of the world.

Paul Ehrlich wrote about this in his 1968 book “The population bomb”, wherein he stated that India would never be able to feed itself and: “”The battle to feed all of humanity is over … In the 1970s and 1980s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now.”

This is when Norman Borlaug, a scientist from Ohio, developed dwarf wheat.

Wheat is a top-heavy crop, which means it folds on itself and takes up quite a bit of space. The wheat developed by Borlaug’s team had short stalks but huge heads of grain. Suddenly the yield could be tripled and sometimes even quadrupled. Later, this same idea was applied to rice, one of the main staple foods across the world*.

The numbers can obviously never be precisely predicted, but this new form of growing crops saved many millions of lives, with some estimates putting it over one billion.

Norman Borlaug was awarded the Nobel Peace Prize in 1970, and would have been 98 years old today. We hope he is remembered for many years to come.



*As a side note, this wheat was obviously genetically modified. This is also why we have no patience for those who want to do away with genetic modification altogether. These people should probably be reminded that wheat itself is a genetic modification that humans developed around 7,000 years ago when they starting being agricultural.

Before all the “humans” out there choose to laugh at economists, however, it should be pointed out that many people fail to see the behavioral in all of us. We often think we’re being perfectly rational in our decision making, when in reality we’re just being plain old human.

Exhibit A: The Bread Maker
When Williams-Sonoma first released the bread maker in the US, very few customers were interested. No one had felt a particular need to make their own bread before, and merely adding another kitchen appliance seemed like a needless bother, especially at a price tag of $275. Marketing endeavors were made in order to show the fun of bread making, as well as the freshness of bread, but people still preferred to buy their fresh bread, bake it in the oven, or to be happy with their store bought bread. Williams Sonoma was about to ditch the personal bread making idea altogether, but decided to hire a consulting firm as a last ditch attempt to improve sales. The firm suggested they create a second, more expensive model. This model, at $429, was designed to be much too expensive and big for household purposes, but should be placed next to the original model. Suddenly, the choice consumers faced wasn’t whether or not to buy an expensive bread maker, but which bread maker to buy. Since they were “rational” consumers, they of course chose the bargain at $275 rather than the bigger $429 model. This is called Price-Anchoring in economics-speak.

Exhibit B: Cheerios
When one shops at a store like Safeway, they have a choice between the Cheerios brand and the store brand (in this case, Safeway). The Cheerios brand will often cost twice as much as the store brand, yet many people prefer to buy it regardless. Why is this? Well, most will answer it is quality. Would you rather buy cereal from a company that specializes in quality cereal or from one that just makes it on the side on the cheap to make extra sales? But wait a minute, does this mean that Safeway has a factory making its own Cheerios brands and, if so, does it also make its own milk, coffee, frozen chicken and everything else that is a store brand? If so, where are all its factories and why is it spreading itself so thin? Is this really a viable business model?
The answer, of course, is no. Safeway doesn’t produce any of its own food, they merely distribute. So what are you buying when you buy the Safeway brand? Usually you’re buying Cheerios, or another expensive brand. The reasoning is that the cheapest and most expensive brands will not cannibalize each other, since they cater to different markets. This means it is profitable for Cheerios to sell a portion of its product on the cheap to Safeway and sell the rest at a high mark-up to consumers. Safeway, in the meantime, repackages the Cheerios and can sell them at a lower mark-up. Both firms end up making money, since they can use one product to cater to two very different consumer groups. The consumers, on the other hand, are being quite behavioral in their decision making when they buy cheerios.
Interestingly, even after knowing (and acknowledging) this fact many consumers will opt for the Cheerios brand. This is due to “signaling”, which is another topic for another post.

In what other ways do consumers behave irrationally?

Yes that’s right! Our new book still hasn’t been released!

So anyway, we figured the best way to keep every up to date would be to just shoot you an email once it is out. Then we thought, hey, if they’re really interested, we’ll let them know ahead of time so they can buy the book at a discount!

So that’s what we’re doing. Just go to www.BringingSexy.com and enter your email address, and we’ll give you early notice so you can buy our new book at a heavy discount*.

www.BringingSexy.com

* Selling or sharing email addresses is definitely NOT sexy, so we won’t engage in any of that sort of behavior.

What does this mean? Well, no one can deny the rise of the farmers’ market. From coast to coast and city to suburb, the farmers’ market is a phenomenon which has been attracting all walks of life in this country. After all, the food is local, fresh, from a friendly quasi-neighbor rather than a corporate logo, and the profits go back into the community. All of this, as anyone who has seen one too many Supply and Demand graphs can attest, will create a glut. Supply outstrips demand and the farmers earn less.

Taking Oregon as an example (avant guarde in the farmers’ market arena, as well as my new home): between 1998 and 2005 62 farmers’ markets opened and 32 of them failed. In Massachusetts, the opening of one farmers’ market caused profits at an established one just two miles away to drop 30%.

“So what?” You could say, “These are the laws of supply and demand that all economists talk about. Once the supply of farmer’s markets outstrips demand their profits will decrease and we’ll go back to equilibrium, right?” Well, yes, that’s how markets work. Except, of course, with Tulips in 17th century Holland, or the South Sea Bubble, or the British railway in the 1840′s, or the dotcom boom, or the housing mortgage crisis. Could Farmers’ markets be bubbles in the making?

Actually, probably not. While some local communities have a “Farmers’ market or bust” mentality (and this is quite literally what they might get if they do), most of the country enjoys them but not yet in an exaggerated manner. There are several reasons, however, for keeping a close eye on the rise of these markets:

1) Farms use 40% of our country’s water and have the worst reutilization rate (much worse than industry or households) of any category.
2) Along these lines, the water we divert and make available to these farms, especially in states like Arizona and Nevada, could go to other uses, like bringing water to the world.
3) Local farmers pollute. There is no getting around the fact that keeping production, distribution and operations local is worse for the environment than using economies of scale. Here, quite literally, costs tend to follow resources, so the fact that corporations find it cheaper to ship from other places is due to their using fewer resources (for more about this read Reason number 4 here).

So maybe, as unpopular as this may make us, we should be the first to say “Enough with the Farmers’ Markets!”. Both for their sake and for ours.

By the way, if you followed stats, you would see that LaShawn Merritt has won 9 gold medals, compared to Usain Bolt’s 13.

So anyway, why do we care? Well, an interesting phenomenon can start to appear. For example, let’s say you actually follow running more than the average reader, and you are familiar with LaShawn Merritt. You know he tends to run slightly longer races (400m) compared to Usain, and you remember he won 9 gold medals. You might think that Usain is the “David Beckham” of sprinting, while LaShawn is actually the better sprinter. In other words, if you do following running, there is much more chance you’d actually pick LaShawn Merritt over Usain Bolt than if you don’t. And you would be wrong.

So does this mean it is better to be ignorant? Not at all (stay in school!). But this does mean that you might often get better answers about American sports by asking, say, Europeans, and vice versa. This is called collective recognition heuristic.

Once again though, why do we care? Well, let’s say you are wondering who will win the next presidential election. We’ve already waxed lyrical about prediction markets and their accuracy. What if we could find similar accuracy merely by asking a bunch of non-americans who they think will win, or at least, which candidate is most recognized?

This isn’t an exact science, and will not be until more studies are performed in this field, but it could be an interesting source for pollsters and bettors.

Ocean Gebhardt is based in Portland. He got his Masters in Finance and Fiscal Policy and wrote his thesis on the Dumb Agent Theory (whoa! That’s the name of this website!). He has been blabbering about economics ever since.

Rebecca Gebhardt is based in Atlanta with her husband Giuseppe. Having grown up in Switzerland in the 80′s (whoa! That’s where Ocean grew up too!), she was witness to the dichotomy between Western Europe and Soviet Eastern Europe, and has been an unapologetic free marketer ever since.

We both have other careers and dedicate our spare time to this blog, which is why we bother you from time to time for contributions, advice, or propose awesome swag and enlightening books.

Want to know more? Go here, or ask us anything by mailing us here: Questions@dumbagent.com

First of all, if the parents are paying for the education, the child will then be expected to earn enough to pay for his/her children’s education. Of course, by the time these children are in college, tuition will have climbed to at least $140’000 (if current rates continue). This is far above any inflation rate and is therefore like one big Ponzi scheme.
The second option would be student loans, which then means the students needs to pay back this $100’000 on top of all other life expenses, including a car, mortgage, family, etc. Chances are, more than 20 years will be spent paying this, at which point the child is getting ready to go through the same cycle. Here the loans will be for a greater amount (to cover higher tuition rates), since there is very little chance the parents were able to save enough since they’ve been paying off their loans*.
Well, could anything make this situation worse? Sure. It turns out many students in China, as well as many other countries in Asia, just have other people apply to college for them. This means someone else who can offer “ghostwritten essays in flawless English, fake awards, manipulated transcripts and even whiz kids for hire whoʼll pose as the applicant for SAT exams.” The price for this? Between $5,000 and $15,000.

And, lest you think it was purely a cultural matter, a certain Sam Eshaghoff from Emory University was recently convicted of taking the SAT for six other students, earning between $1,500 and $2,000 for each test.

In other words, families are paying extra, under the table money in order to have their children go to an institution where they will then pay exorbitant fees, and somehow hope that our economy will provide jobs to make it all worthwhile.

This does all sound a bit crazy, doesn’t it? So what are the alternatives? Some have been proposed, such as degree-based tuition in Florida (science students pay more than humanities students since their degree is technically worth more in legal currency), or just offering elite education for free. While we don’t disagree with the fact that certain degrees are worth more monetarily than others, an increase is certainly not what is needed. And unfortunately, even if MIT offers courses for free (as does Berkeley in the form of online lectures), people will still pay much more to actually have the degree.

Here is one likely scenario, however: A recession might occur, during which students decide to get more education so they can A) ride out the recession and B) be more qualified once it’s over. Unfortunately, if it’s a prolonged recession, this strategy won’t work. This means they will search and search for jobs, finally settling for being underpaid in a job they likely could have had without the extra education. In other words in two years they’ve only gained a degree and loans.

Suddenly people will look to who was able to weather the recession and come out on top. As happens with all recessions, creative destruction (as described by Schumpeter) will occur. This means that old, inefficient companies will die out, while new, more efficient ones will be born. The dot-com bust brought us Google et al. In fact, some people will even realize how 70% of the Forbes 500 started during downturns**. In other words, entrepreneurial activity is what is beneficial, not higher degrees. At first a few intrepid souls will start pushing their children towards entrepreneurship rather than more and more degrees (these will most likely be entrepreneur parents to begin with). Slowly but surely, other parents will catch on.

The process might take a while, but the longer the economic downturn lasts, the more it will be sped up. At this point the bubble that is higher education will finally burst, and parents will stop blindly and mindlessly throwing money at these institutions for unworthy degrees.

* For more precise calculation check out “The proud parents”.
** Including Texas Instruments, HP, 20th Century Fox, Eli Lilly, IBM, Lexis Nexis, Merck, Burger King, IHOP, Hershey’s, Gillette, GM, Alcoa, J&J, Hyatt, Chevron, CNN, GE, AT&T, Fedex, Abbott, Procter & Gamble, Lilly, MTV, Coors, Trader Joe’s, Bristol-Myers, Microsoft, Apple, Sun, Adobe and many others.

Well, it turns out it’s neither of these. It is cars. By far. And this isn’t because I’ve recently relocated to Portland. Freakonomics recently had a podcast entitled “Where have all the Hitchhikers gone?“, which brings up an interesting point. Hitchhikers, despite their reputation for being dangerous serial killers, were great at increasing the efficiency of cars.

Think about it, around 80% of car seats go unused. When you are looking at rush hour traffic, remember that 80% of that space is just that: space. It is not being occupied by anyone. Needless to say, if any other form of transport, like planes or trains, operated at only 20% occupancy, it would be deemed a huge failure. So how can we change this?

Well, hitchhiking has all but disappeared. This is due not only to safety concerns, although those are quite big (thanks to safety campaigns and various serial killer headlines). This is also because cars have become much cheaper recently, gas is very cheap as well (at least in the US), and interstates make driving from A to B very easy. In other words, convenience. So one might as well use his or her own car, or rent one, or use a service like Zipcar, right? Except, none of these solve the problem of 80% vacancy, and the relative traffic, congestion, pollution, etc. that come with that.

So how do we solve this? Well, cheap cars, gas and interstates should not be deterrents to hitchhiking per se, but of course safety is (although the serial killer aspect sensationalized the whole ordeal quite a bit). An easy solution is to car pool, which is done mainly among coworkers when convenient. Although, if you have a dinner or drinks after work, you’re just as quick to use your own car so as to be independent.

So how about an Airbnb (or Couchsurfing if you will) for cars? Users have to register, so we can be pretty sure they’re not serial killers. Ideally an app on your phone can show you which options are close by and, if need be, you can schedule regular pick ups, etc. Maybe a payment system can even be arranged, where members pay a nominal fee, and those who offer rides are paid something via the website.

A cursory Google search turns up a few companies that perform carpool and rideshare services, and yet this doesn’t seem to have picked up very much. Well, if safety isn’t a primary concern anymore, it must be due to convenience. It seems that inconvenience might be the best way to encourage filling up the 80% vacancy rate.

Empty car seats are currently a tremendous resource. If sharing seats can be more convenient, not linked to status and considered safe, this could bring overall driving times and costs down (suddenly driving down the coast becomes an option when you find a website full of other people doing it). As a consequence, airlines and public transport will have more competition and will therefore have to upgrade their service, which would be a nice thing indeed.

Enter a model used by the Dutch, wherein a whole postcode will win each month’s lottery. The winnings are divided up between all residents within that postcode, meaning all winners receive around $13,000. So everyone in the community can be that much better off.

So how can these two ideas be combined? Well theoretically, the 40% of winnings taken by the government should be used to benefit its citizens, correct? What if these citizens received the winnings themselves? Could this allow the government to decrease (or eliminate) the amount of taxes taken out of the savings’ winnings?

As an explanation, people would be able to open bank accounts, knowing the interest they earned would be directed toward a pool of money. This money would then be doled out in a monthly lottery but, rather than have one individual win the full amount, a whole postal code could win it. Of course, this probably means winnings will be in the $10,000 range rather than the $1,000,000 range, but it also means 40% wouldn’t be taken out as taxes, since these would constitute a form of payment to citizens regardless.

The devil, as always, is in the details. Would the bank accounts still be private or state owned? And exact amounts of earnings, winnings and (eventual) tax payments would have to be calculated. But if it encourages people to save and not to spend their own earnings on lottery tickets, might it not be worth checking out?