Tag Archives: finance

The ‘Bad Version’ and How to Tax the Rich

A ‘bad ver­sion’ is a tech­nique used by tele­vi­sion writers to inspire cre­ativ­ity when exper­i­en­cing a cre­at­ive block. The tech­nique involves writ­ing a pur­pose­fully awful sec­tion of plot as a way of help­ing the writer find cre­ativ­ity and, even­tu­ally, the ideal solu­tion: it’s a way of “nudging your ima­gin­a­tion to some­place bet­ter”.

In The Wall Street Journ­al, Scott Adams offers some “ima­gined solu­tions for the gov­ern­ment’s fisc­al dilemma” – bad ver­sions of ways to incentiv­ising the rich to will­fully pay more tax. Those incent­ives:

  • Time: Any­one who pays taxes at a rate above some set amount gets to use the car pool lane without a pas­sen­ger. Or per­haps the rich are allowed to park in han­di­capped-only spaces.
  • Grat­it­ude: The gov­ern­ment makes it a con­di­tion that any­one apply­ing for social ser­vices has to write a per­son­al thank-you note to a nearby rich per­son […] It’s easy to hate the gen­er­ic over­spend­ing of the gov­ern­ment. It’s harder to begrudge med­ic­al care to someone who thanks you per­son­ally.
  • Incent­ives: Sup­pose the tax code is redesigned so that the rich only pay taxes to fund social ser­vices, such as health care and social secur­ity. This gives the rich an incent­ive to find ways to reduce the need for those ser­vices.
    Mean­while, the middle class would be in charge of fund­ing the mil­it­ary. That feels right. The coun­try gen­er­ally does­n’t go to war unless the middle-class major­ity is on board.
  • Shared Pain: I doubt that the rich will agree to high­er taxes until some ser­i­ous budget cut­ting is hap­pen­ing at the same time. That makes the sac­ri­fice seem shared. […] Change the debate from arguing about which pro­grams and how much to cut, and instead to do what the private sec­tor has been doing for dec­ades: Pull a ran­dom yet round num­ber out of your ear, let’s say a 10% cut, just for argu­ment’s sake, and apply it across the board. No excep­tions.
  • Power: Give the rich two votes apiece in any elec­tion. That’s double the power of oth­er cit­izens. But don’t worry that it will dis­tort elec­tion res­ults. There aren’t that many rich people, and they are some­what divided in their opin­ions, just like the rest of the world.

Building a Brand In a Recession

The recent reces­sion saw sales of con­doms, guns and burg­lar alarms soar. This is because, when fear enters our mind in terms of los­ing our job or of not being able to pay bills, we focus on two of our most basic drives: fear and sex.

The key to selling and build­ing a brand dur­ing fin­an­cial crises, there­fore, is simple: man­age fear. Under­stand how it works and how it affects pur­chas­ing beha­viour. This advice on brand-build­ing dur­ing a reces­sion comes from Mar­tin Lind­strom, ex-advert­ising agency exec­ut­ive, author of Buy­ology, and one of TIME’s 100 Most Influ­en­tial People in the World, 2009.

First, there’s always good news in bad times. A stand­ard approach in this situ­ation is to address con­sumers’ prob­lems. And people always have prob­lems. The fact is we rarely know what we want, but we have no trouble point­ing out our dif­fi­culties. For example, no one knew they wanted an airbag, but every­one agreed they wanted safer cars.

It’s there­fore import­ant to ask your­self what sort of prob­lems are con­sumers facing dur­ing this eco­nom­ic reces­sion? There are many. […] Con­vert prob­lems into assets for your brand.

Second, add a prac­tic­al dimen­sion to an irra­tion­al decision. No mat­ter how much money you may have in the bank, or how secure your employ­ment may be, it’s now fash­ion­able to save your money and buy everything at a dis­count. What can a brand own­er do? Par­tic­u­larly in light of the fact that a dis­coun­ted brand typ­ic­ally takes sev­en years to recov­er!

The answer is simple. Add a prac­tic­al dimen­sion to the equa­tion. […]

Third, you have to sys­tem­at­ic­ally remove fear. Hyundai did it. And a stream of new banks are doing it. Both have suc­ceeded in identi­fy­ing why con­sumers are reluct­ant to spend. Once this is under­stood, then you can har­ness it and build a bet­ter product by address­ing the fear and find­ing a way to elim­in­ate it. Your sales may be down. But do you know why? People are cer­tainly buy­ing less, and explan­a­tions like, “Well, there’s a reces­sion going on out there,” are not help­ful. What’s import­ant is to under­stand the fun­da­ment­al role of fear, and then turn it around to strengthen your brand. Some of the world’s most endur­ing gro­cery brands were built on the back of the Great Depres­sion. Each one turned the threat into an oppor­tun­ity.

The Economically-(Im)Perfect World of Online Games

Kris­ti­an Segerstrale–owner of online games com­pany Play­fish (acquired by Elec­tron­ic Arts for $400m in Novem­ber 2009)–discusses why online game envir­on­ments are excit­ing places for eco­nom­ics research (and spe­cific­ally: “how social factors influ­ence eco­nom­ic decision mak­ing”):

When eco­nom­ists try to mod­el beha­vi­or in the real world, they’re always deal­ing with imper­fect inform­a­tion. “The data is always lim­ited, and once you get hold of it there are tons of reas­ons to mis­trust it,” Seger­strale says. In vir­tu­al worlds, on the oth­er hand, “the data set is per­fect. You know every data point with abso­lute cer­tainty. In social net­works you even know who the people are. You can slice and dice by gender, by age, by any­thing.”

Instead of deal­ing only with his­tor­ic­al data, in vir­tu­al worlds “you have the power to exper­i­ment in real time,” Seger­strale says. What hap­pens to demand if you add a 5 per­cent tax to a product? What if you apply a 5 per­cent tax to one half of a group and a 7 per­cent tax to the oth­er half? “You can con­duct any exper­i­ment you want,” he says. “You might dis­cov­er that women over 35 have a high­er tol­er­ance to a tax than males aged 15 to 20—stuff that’s just not pos­sible to dis­cov­er in the real world.”

Of course, there’s a fairly obvi­ous caveat:

One pos­sible flaw in this eco­nom­ic mod­el is that the kind of people who spend hours online tak­ing care of ima­gin­ary pets may not be rep­res­ent­at­ive of the rest of the pop­u­la­tion. The data might be “per­fect” and “com­plete,” but the world from which it’s gathered is any­thing but that.

Framing Financial Loses to Conservatives

In a series of nov­el fram­ing experiments, research­ers have shown that our self-iden­ti­fied polit­ic­al lean­ings cor­rel­ate with how we per­ceive fin­an­cial losses.

Hun­dreds of online par­ti­cipants chose between vari­ous flights, com­puters and so on. In each case they could plump for a cheap­er option or a more expens­ive, green­er option, the lat­ter includ­ing either a ‘tax’ to help reduce car­bon emis­sions, or an ‘off­set’ to do the same – depend­ing on how the choice was framed. Wheth­er the expens­ive option was framed as a tax or off­set made no dif­fer­ence to Demo­crat (left-wing) par­ti­cipants. By con­trast, Repub­lic­ans (right-wing) and Inde­pend­ents were much less likely to choose the more expens­ive option when it was labelled as a tax.

Financial and Public Incentives to Perform: What Works

Large bonuses and salar­ies are in place to attract prime tal­ent and as an incent­ive to improve per­form­ance, goes con­ven­tion­al wis­dom and the bankers’ rhetoric. How­ever recent research by Dan Ari­ely (author of Pre­dict­ably Irra­tion­al) and col­leagues sug­gests that while large pay will attract the best tal­ent, large per­form­ance-based bonuses may hinder super­i­or per­form­ance.

Inter­est­ingly big bonuses suc­ceeded in increas­ing per­form­ance only when the tasks under­taken were mech­an­ic­al in nature (e.g. tap­ping a key as fast as pos­sible) but not when they were cog­nit­ive. When tasks were con­duc­ted in pub­lic (pub­lic scru­tiny as a task motiv­at­or), per­form­ance did increase.

Like money, social pres­sure motiv­ates people, espe­cially when the tasks require only effort and not skill or think­ing. But at some point, too much of it over­whelms the motiv­at­ing influ­ence.

If our tests mim­ic the real world, then massive bonuses clearly don’t work. They may not only cost employ­ers more but also dis­cour­age exec­ut­ives from work­ing to the best of their abil­it­ies. The fin­an­cial crisis, per­haps, did­n’t hap­pen in spite of the bonuses, but because of them.