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.