Price discrimination at the airport

30/07/2012 § 2 Comments

I’m flying today, so drove to the airport. The short-term parking at Wellington Airport is half-covered, half-uncovered. It used to be first-come, first served. The covered area filled up first, especially on a wet day.

Now, they have erected barriers around the covered area and installed an extra gate. If you want a covered spot, you have to pay. Judging from the number of cars inside versus outside, either people believe the weather won’t be too bad or the price isn’t right. The forecast isn’t very good, whatever that tells you.

I chose to park outside. My reason? I didn’t see what the price was when I entered the carpark. Since I didn’t know how much I’d have to pay, I opted for the known price of the outside park. I’ll have to discover the price so I can make a better decision next time (conditional on the weather, of course).

I hope the airport is keeping data on their experiment. It’ll be interesting to see how many people do pay for covered parks. The airport should make more revenue, unless it drives people away from parking altogether. They could even calculate the marginal prices by season and weather. Hmm — I wonder if they’d be interested in dynamic pricing for carparks?

I may just resort to taking a taxi.

Making those sales

27/07/2012 § Leave a comment

Consultants are salespeople. There’s no way around it. They are small business owners and, like most SMEs, need to spend 15% to 25% of their time on ‘business development’, a.k.a., sales.

In an earlier post, I showed the trade-off between paid time and sales time. The efficient way to improve revenues is to improve sales activities — as opposed to just working more hours.

How do you do that?

First, you have to realise what constitutes sales, and what’s just messing around. Sales skills involve getting from ‘it’s been a lovely chat’ to ‘sign here’. They are the tools you use to encourage people to give you money for your services. They include presenting your capabilities, finding where the work is, identifying the decision makers, and making a pitch (not necessarily in that order). If all you’re doing is talking about how great you are, or discussing interesting ideas with random people, you aren’t selling. That might be marketing or networking, but it isn’t sales. For sales, the other person has to have money and the willingness and authority to spend it. You also have to have a reasonable chance of getting the work.

The most important concept is the sales funnel. It looks like this:

Essentially, consulting is somewhat of a numbers game. You won’t get every project for which you bid; every person you meet won’t become a client. To have a certain flow of actual, paid work, you need to have an even larger volume under development — moving through the funnel.

The funnel idea recognises that sales is a process. Prospects go in the top, and sales come out. If you want the sales to come out, then you have to make sure something is going in the top. Also, it isn’t an instantaneous event. Each sale takes time. To keep a steady flow, you have to keep feeding the funnel.

This idea also helps with the practicalities of sales:

  • You can classify your activities — you’ve just had a friendly conversation with some guy over a beer about a great research idea. Can he fund it? Can his organisation fund it? Who is authorised to spend the money? Is this central to their business? Is it something they are likely to undertake? These questions all help you decide whether that conversation was at the top, middle, or bottom of the funnel — how serious is it?
  • You can see where you might have holes — So you’ve been flat-tack for the last three months. Have you talked to anybody new? Have you submitted any proposals? Are you developing any ideas further or discussion potential projects? If not, there is a potential for the flow of work to dry up. Time to fill the funnel.
  • You can find your weaknesses — Given that it’s a bit of a numbers game, it’s also about your conversion rates (or, if you like, transition probabilities). For every ten people you discuss research ideas with, how many lead to project proposals? Of those proposals, how many lead to actual work? Let’s say, for example, that you convert most conversations to proposals, but have a hard time turning proposals into work. That gives you something specific to work on — are the proposals themselves weak, or are they not getting to the right people, or is it something else?

None of this is new, by the way. There are lots of sales books and systems out there. I advocate the KISS principle in all this — Keep It Simple, Stupid. The idea is to make sales, not administer a sales system. That’s why I like the funnel — a simple concept with all the power I need.

Counterfactuals are the story

26/07/2012 § Leave a comment

The Dominion Post ran a story, picked up from the Telegraph, that showed the importance of c0unterfactuals. The story was about Mitt Romney’s son and his experience with the UK healthcare system, the NHS.

One day in Sheffield, however, a stomach complaint led him to a local doctor, who had terrible news: symptoms indicated that he might have colon cancer. Even worse, Mitt Romney later recalled, “the waiting time for a colonoscopy was six weeks – enough time to make an operable, curable cancer become an inoperable terminal condition”.

They had it checked out in a private clinic, and everything was fine.

What Romney concluded from this experience was that socialised medicine was worse that the private system in the US. This conclusion is driven specifically by the counterfactual that he chose for evaluating the experience. That choice then determined the outcome.

We can put this in a 2×2 grid:

What the Romneys had experienced in the US was great healthcare, because they could pay for it. When they tried to use the NHS, they found that it was only okay — they could get treatment, but it wasn’t timely enough for them. Since great > okay, then private > public.

They neglected to take into account that this assessment is conditional on being rich. They chose a counterfactual that applied to their own situation, and extrapolated it to everyone. However, everyone is not rich. For poor people, a public system at least provides some healthcare. For people in the middle (not shown), the solution is indeterminate, and likely to be driven by genetics and preferences. For that reason, a mixed system is likely to be best.

The Romneys could have chosen a different counterfactual. They could have said, this experience tells us what it is like not to be rich. Then, the logic is great > okay –> rich > poor. The type of healthcare system doesn’t come into it.

The example also shows another human tendency — making sense of the world by telling stories. It isn’t enough to relate the actual events. We also make sense of those events by putting them into larger contexts or wider narratives. Thus, a scary episode in England becomes proof that public healthcare doesn’t work. McCloskey tells us that economics is like story-telling (pdf),  while Cowen looks at it from the other direction and says that novels are like models (pdf).

Stories are implicitly or explicitly based on some counterfactual. In the counterfactual, another nail was used to secure the horseshoe and the kingdom was saved. In the counterfactual, Oedipus wasn’t filled with hubris and let his father have the right of way. And in the counterfactual, everybody is rich and has good private health insurance.

In economics, as in real life, we should remember that these are just fables.

Scientific freedom

25/07/2012 § Leave a comment

The Committee on Freedom and Responsibility of the International Council for Science is asking various organisations about scientific freedom. They are concerned about the overt muzzling of scientists and reprisals against whistleblowers.

I want to start by saying that this sort of overt censorship is deplorable. It is bad for the muddling-through groping-towards-understanding that we call science. It makes us unnecessarily stupider, and can only serve people with power (else how could it be maintained?).

But in the rush to condemn the silencers, we shouldn’t forget the more pervasive and subtle pressures on researchers. Their ability to conduct research freely and report results openly are also constrained by competitive funding mechanisms and limited career options. It starts at the beginning of the research process. When deciding whether an area of research is ‘worthwhile’, scientists are weighing up effort, risk, and reward. If an area is too risky and doesn’t present enough promise, they will not investigate it. It continues through to publication, when scientists decide what papers to write, submit, and resubmit.

The peer review system is an algorithm for moving most efficiently from our current ignorance toward greater understanding. By subjecting findings to intelligent scrutiny, scientists are trying to remove errors as quickly as possible and direct efforts to best effect. The algorithm does not work as well in practice as in theory, because of three things:

  • the stakes: if the stakes are merely one’s reputation as a researcher/scientist, then the goal is to get the results right and relevant. Once the stakes are career and research funding, then one’s continued existence as a researcher is constantly under threat. It becomes a fight for survival. Survival strategies include running with the herd, camouflage, becoming an alpha and keeping the betas in check, and finding an uncontested niche.
  • the mistakes: the research process includes a lot of mistakes. It is about pushing out into the unknown, so it necessarily involves getting things wrong. The individual researcher can maximise the risk-return ratio by reducing risk — doing uncontroversial work. Some unconventional work will pay off — it will be spetacularly successful. Most unconventional work will not pay off handsomely, but it can nevertheless advance science. As the stakes for mistakes grow, the appetite for risk falls. In addition, the peer review system — based on the opinion of established experts — can perpetuate both accurate knowledge and mistakes.
  • the multiple goals: if the science process is supposed to produce greater knowledge, then the goal (the objective function in economic terms) is clear. However, by expressly funding science for economic growth or commercial gain, government introduces additional goals. The scientist is then seeking a solution to a complex objective function. It includes funding levels, publication counts, economic impacts, some abstract idea of knowledge produced, or even the reputation of the organisation. Publishing and generating knowledge are less important where funding must be obtained for survival or if scientists are tasked with producing economic growth.

The core of the problem is understanding what we mean by ‘scientist’. If by that, we understand a person whose main function is producing and communicating new knowledge, then muzzling scientists and punishing whistleblowers is inherently wrong. More than that, funding and career arrangements that increase rewards for safe and conventional are just as wrong and destructive. If, on the other hand, we think that ‘scientists’ are people who work with knowledge to produce economic returns, then it makes business sense that the unprofitable ones — the ones who hurt the bottom line by their actions or inaction — should be removed.

The more that scientists tout their role in economic development, the more they trigger that second logic.

Last rites for Grecian euro?

24/07/2012 § Leave a comment

An observation striking in its simplicity is this: something that cannot continue indefinitely, won’t.

This has been my frame of reference for Greece’s troubles. The size of the debt is unsustainable; payments on the debt cannot continue to be made. Something has to give.

All the activity of the last months (years?) hasn’t affected the underlying conditions or the key ratios. As Bloomberg reports:

“Nothing is really fixed in Europe,” John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York, said in a telephone interview.

Now, we have reports that the IMF is washing its hands of Greece:

In an article published on its website, Spiegel cites unnamed senior European Union sources in Brussels who told the news magazine that the International Monetary Fund (IMF) had signaled it would not contribute to any further aid for Greece.

Months ago, when it looked like Greece might fall over and leave the euro, the problem was that no plans for exit were in place. The experts said it would take months to organise. Well, we’ve had  months, now. We also have plans.

Who decides when to pull the plug?

Comparing violence

23/07/2012 § 3 Comments

Kieran Healy posted an amazing graph over the weekend*. It showed the assault deaths per 100,000 people in several OECD countries. He also helpfully posted the individual countries’ series; I’ve cropped out the ones from the United States and New Zealand:

The scales on both graphs are the same, so the peak on the US graph is nearly 10, while the NZ peak brushes 2. Both have fallen in the last couple of decades. They confirm something I’ve noticed about living in New Zealand.

I was a teenager and young adult in the US in the 1980s, just after the peak and while rates were still high. That’s when I moved from being mainly at school and at home to being out in the world. Washington, DC at the time was the murder capital of the nation, and Richmond, VA was having its own spike in violent crime. That’s the environment in which I learned to judge situations and strangers, when I calibrated my danger sensors.

Those sensors are badly mis-calibrated for New Zealand. As a whole, people here are less pushy and aggressive than the US. It is one of those things I’ve had to learn about living here — situations that might spiral into shouting, chest thumping, shoving and worse over there just seem to sort themselves out here.

It also appears from these graphs like people in both countries might be less aggressive than they used to be. My mis-calibration may not be just the place but also the time.

Do I have any theories? Two come to mind. First, Kiwis are proud of their ‘she’ll be right’ attitude. Most of the time, things do work out. So, the feedback loop reinforces that perspective. Any potential trouble can be brushed aside with the idea that things will work out alright. A second theory is that the US is more competitive. As a result, it is more important to ‘win’ any given encounter — the other guy is an opponent and must be bested. This is true whether it is a parking space, a customer service issue, contract negotiations, or an actual competition. New Zealand tends to be more egalitarian. In any encounter, you give a little and get a little, and everyone comes out alright.

I do realise that the graphs are just for one specific statistic, and that there are many factors affecting the level of assault deaths (availability of weapons, demographics, health care). Nevertheless, this one statistic does seem to confirm my more general experiences with the two countries.

*Healy’s post was prompted by the mass shooting in Colorado over the weekend. I haven’t commented on the event, because I don’t have anything helpful to say.

We’ve opted out — wish us luck!

20/07/2012 § 2 Comments

We decided to go to the opt-out route for our quake-damaged Christchurch house. Each event caused in the region of $10,000 to $50,000, which put us in the $10,000 to $100,000 bracket. The total may come to more that $100,000, but because it’s spread over multiple events, we were still in the Fletcher programme.

I’m quite wary of the EQC assessments. It really comes down to two instances with them. The first instance came after the September earthquake. The team of two assessors examined our property. One assessor noted the hairline crack in the roughcast on the brick chimney and said it needed further assessment. The other said, ‘She’ll be right.’ Well, February came around and she wasn’t right. No, the chimney crashed through the roof and came to rest on the ceiling of the lounge, right above the tenant.

The other instance also happened at the assessment for the September quake. They used a laser level to see whether the concrete slab had moved. If it was out more than 10mm, then it was considered a problem. The first measurement indicated that it was, in fact, out by 10mm-11mm. They rechecked it and, mirabile dictu, it was fine. Since I don’t happen to have my own laser level, I couldn’t verify any of this. It just reminded me of a casino: the house — EQC — always won.

Then, there have been the rule changes. This isn’t an insurance contract, in which the terms are set at the time of the event. EQC keeps changing the rules and they don’t even necessarily tell you. We had a devil of a time being reimbursed for getting the chimney removed. We figured it wouldn’t be a problem, because the removal cost less than the $10,000 cap for emergency work. It turned out that they reduced the cap to $2,000 between September and February, but didn’t make it widely known. So what would have been a simple reimbursement turned into months of proving that, yes, a chimney crushing a collapsed roof does rather constitute an emergency.

The latest rule change to verify that the house always wins is also about reimbursements. From the start, you’ve been able to opt out of the Fletcher programme. If you were in our damage bracket, you could wait in line for Fletcher or get another contractor. EQC would then pay the contractor. Now, the new rule is that EQC won’t release any money until the work is done. Then, they will reimburse you off the contractor’s invoices. That is, you now need a cash float of up to $100,000 (or more) if you don’t want to use Fletcher.

Mostly, it looks like a way to keep people in the Fletcher programme. Were too many people opting out?

Perhaps they were, and for good reason. We had already lowered our expectations after the stories we’ve heard of slap-dash repair work. Then, we heard that the rates for painters have been lowered. The explanation sounds good — rates were above market rates, and we can’t let the painters gouge the government. But — news flash — there was a catastrophe. Prices for lots of things are above normal market rates. Is it any wonder that just when demand increases, so does the price? We’ve heard from several people that the quality of painting wasn’t great. This should drive it down even further.

The other problem concerns rental properties. Fletcher just tells you when your number comes up, and you have three days to three weeks to clear out. Apparently, landlords may be on the hook for finding alternative accommodation for tenants. There were also some other legal issues listed in a long letter we received.

At least one contractor sees this as an opportunity. We were referred to one who is working with landlords and timing repairs around the rental contracts and vacancies. It may ending up costing a little more, but the Fletcher option was also going to have hidden costs. Of course, the new reimbursement rules are making it harder, but we are working through those issues.

The next step is verifying the scope of work. That should happen over the next week. Then, hopefully, they can start work in a few weeks and the house will be repaired by the end of September. I’ll let you know how it goes.

*Other people wrestling with these issues and writing about it are Eric CramptonIslay McLeod, and folks in Avonside.

Interesting economic facts

19/07/2012 § 1 Comment

The Motley Fool website posted 100 Mind-Blowing Facts About the Economy (YMMV). Lots of good little economic facts, the kinds of things I try to keep in mind when thinking about the economy. Because of the source, it’s weighted towards the US. I should do some similar numbers for New Zealand (there I am, shoulding all over myself).

The numbers on the growth of the Chinese workforce and its expected slowdown were pretty eye-opening. I’ve heard the growth numbers before, but I didn’t realise that the decline was expected so soon. I remember an OECD bureaucrat explaining the five-generations issue — China will have five generations of people supported by two generations of workers.

New Zealand is just a bobbing cork in that demographic sea.

The unemployment numbers were visualised really well by the New York Times. Statschat (highly recommended) linked to a talk by Amanda Cox. The differences in unemployment rates by demographic groups were amazing. It’s not that the factors affecting rates are surprising — highly educated, middle-aged, white males (hi!) have lower rates than young African-Americans with less than a high school education, for example. It’s the scale of the differences that surprised me. Well, surprised isn’t quite the right word. Reminded with a shock of remembrance? Or is that too Proust?


Water erodes asset sales

18/07/2012 § 3 Comments

I feel a bit sorry for National. They made asset sales a central issue in the last election, they won, and now they want to go ahead with their plans. It was all clear and above board. See where that got them.

On the other hand, the Maori Party, Winston Peters, and assorted other people and organisations have a point. How can you sell hydropower companies if you haven’t first worked out who owns the water?

At first, the question seems daft. The State Owned Enterprises have reservoirs and dams, these are used to generate power, and the power produces a revenue stream. The Government wants to sell shares in the company, that is, shares in the future potential net revenues. They aren’t selling water; they are selling company shares.

A little more reflection, and the Maori objection to selling the companies because of the water is very clever. The SOEs might own dams and turbines and whatnot, but they are of no value if they can’t use the water. That’s a spanner in the Government’s plan to sell SOE shares.

The Government could tell prospective buyers that existing water practices will be recognised and grandfathered and everything will tick along as before. But that course means that the national discussions over water policies have been superseded by the asset sales: some existing water rights are been assured, while others will be contested. Alternatively, the Government could sell the shares while acknowledging that there’s a bit of uncertainty over water. That puts the future revenue at risk, which means the shares will sell at a discount.

The issue about water rights, by the way, is this. Well-specified water rights include the amount, quality, timing, and location of the water. Now imagine that a farmer has rights to extract a certain amount of water from a river in January. A power company might need to hold that water in its dam until January to meet that obligation. Let’s say water levels are a bit low in December. The company has a choice: let the water turn the turbines in December, or release the water in January for the farmer. Is it going to look after its revenues, or after the farmer’s water rights?

So the various Maori organisations have put National in a bind:

  • it sells the shares, with a pledge to protect the SOEs’ water allocations, undermining the water talks (including with the rural base)
  • it sells the shares, but takes a discount because it doesn’t pledge to protect the allocations; the asset sales generate less revenue than expected, vindicating the opposition
  • it holds off selling the shares until the water issue is sorted, halting one of its second term’s signature intiatives and handing its political opponents a victory.

Of course, the sale doesn’t have to be all or nothing. The Government could have a partial partial asset sale, only selling those shares that aren’t at risk from the water controversy. That’s a halfway measure that won’t appease anyone.

Which means it’s probably perfect politics.

Practicing economics without a licence

17/07/2012 § 19 Comments

In the June issue of AgScience, Prof Shaun Hendy has an article entitled, ‘New Zealand’s voyage of economic self-discovery’. He also has a post with the same title over a Sciblogs. Before I get too wound up, I should give Prof Hendy his dues. He does do fieldwork amongst economists in their native habitat. But in the end, it is dilettantism.

The article sounds impressive — we have a new approach! we have pretty pictures! Nokia! But really, what he is able to tell us is:

  • New Zealand is small and distant
  • its economy is based on what has worked in the past
  • scale is important
  • we should be more productive.

He isn’t telling us anything new. No, really, there is nothing new there. And what is there is either useless or confused.

Let’s start with useless. A large part of the article is about connections, about the networks that drive patenting and thus invention and innovation. The article points to several firms and countries where we see economic performance, innovation, and networks. Okay, great. Now, can you tell us why it worked in those places? Is there some description of how our situation is different? What can we generalise from these findings?

But that’s not what we get. Instead, we hear that networks are important and drive scale, so we should have networks. This sounds like the Underpants Gnomes theory of economic development:

  1. Build networks
  2. ???
  3. Growth!

But even worse than useless is confused. See, Prof Hendy argues both sides, and doesn’t even realise it. First, he states:

Economic development is path-dependent. The investment decisions we make now will lead to specialisations that determine the types of products we can invent and produce later.

Then, he goes on to maintain that, rather than picking winners, we need to fund all science:

Because of the variety and unpredictable nature of the science we will need, we must subsidise the generation of new knowledge across the board and not pick winners.

The problem is that path dependence and product space analysis point in exactly the other direction. Roger Procter has done the heavy lifting to explain the economics. The logical conclusion is that certain innovations are more likely to be successful, only certain types of science should be funded, and focusing efforts on those areas is more likely to produce economic returns.

I’m a knowledge fanboy. Let’s have more, let’s make as much as we can. But let’s not fool ourselves that activity = productivity. If the point of science is knowledge, then yay! let’s have as much as our budget constraint will allow. If the point is economic growth, well, that’s different. Then we need to think about playing the odds that are in our favour.

But then I’m just an economist. Maybe Prof Hendy would like to hear my thoughts on the Higgs boson. After all, I’ve been watching The Big Bang Theory.

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