Here’s a consolation prize to the millions who recoil in bafflement from cellphone companies’ labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don’t understand them, either.

“The whole pricing thing is weird,” said Barry Nalebuff, an economics professor at the Yale School of Management. “You pay $60 to make your first phone call. Your next 1,000 minutes are free. Then the minute after that costs 35 cents.”

To economists, it simply doesn’t make sense to make chatterboxes pay that penalty. After all, most businesses tend to give discounts to customers who buy more.

It would be easy to see the cellphone companies simply as avaricious oligopolists trying to gouge consumers for every penny they can. And in some senses they are aiming to maximize revenue, at least as much as the market will let them. (…)

Neither the cellphone companies nor their customers, as it turns out, always act in the rational way that economists might predict. Consumers often put immediate gratification and the avoidance of unpleasant surprises above their long-term interests.

{ NY Times | Continue reading }

illustration { Chris Ware }

The major fall art auctions may not have sold everything on offer, but collectors showed a renewed willingness to bid up top examples of artists’ work. (…) New York’s two chief auction houses, Sotheby’s and Christie’s International, brought in about $596 million combined from their semi annual sales of Impressionist, modern and contemporary art in the past two weeks. The total surpassed the houses’ $409 million spring sales in May, a gain that could signal a measure of returning confidence in high-end art values. (…)

For auction houses, these sales also marked the return of the guarantee, a financial mechanism in which an auction house promises to buy a work if it doesn’t sell at auction. Guarantees offer potential sellers a risk-free reason to part with their best pieces, but Sotheby’s and Christie’s stopped offering deal-sweeteners after suffering an estimated $63 million combined loss from unsold guaranteed artworks last November.

Now, auction houses are gingerly stepping back into such deals, but they’re mostly shifting the risk to third parties, typically dealers or collectors who agree to pay the seller a prearranged price for the work if it doesn’t ultimately fetch a higher price at auction.

{ Wall Street Journal | Continue reading }

artwork { Robert Gober, Untitled, 1993–94 | Beeswax, wood, glassine, and felt-tip pen }

Tonight I met the guy who once made a living designing the classic pinball machines.  And he designed the two pinball machines, Black Knight in 1980 and High Speed in 1986 that are bookends for a period when the most important stuff I was learning about life was learned within a few feet of at least one of these machines.

It turns out these were also major turning points in the history of pinball itself.  In 1980, pinball went digital, multi-ball, and multi-media starting with the game Black Knight.  Black Knight brought pinball to a new level, literally speaking because it was among the first games with ramps and elevated flippers, but even more importantly because it brought a new challenge that drew in and solidified a pinball crowd.  In doing so it also set the pinball market on a path that would eventually lead to its demise.

In 1986, Williams High Speed changed the economics of pinball forever.  Pinball developers began to see how they could take advantage of programmable software to monitor, incentivize, and ultimately exploit the players.  They had two instruments at their disposal:  the score required for a free game, and the match probability. (…)

…match probability: you win a free game if the last two digits of your score match an apparently random draw.  While adjustments to the high-score threshold is textbook price theory, the adjustments to the match probability is pure behavioral economics.  Let’s clear this up right away. No, the match probability is not uniform and yes, it is strategically manipulated depending on who is playing and when.  For example, if the machine has been idle for more than three minutes, the match probability is boosted upward.  You will never match if you won a free game by high score.  And it gets more complicated than that.  Any time there are two or more players and they finish a game with no credits left, one player (but only one) is very likely to match.

{ Cheep Talk | Continue reading }

The video game boom of the 1980s, however, signaled the end of the boom for pinball. Arcades quickly replaced rows of pinball machines with games like Asteroids and Pac-Man, which earned incredible amounts of money compared to the pinballs of the day. Bally, Williams, and Gottlieb continued to quietly make pinballs while they also manufactured video games in much higher numbers.

{ Wikipedia | Continue reading }

artwork { Edward Kienholz and Nancy Reddin Kienholz, The Bronze Pinball Machine with Woman Affixed Also (Version 1), 1980 | Bally’s Modified Playboy pinball machine }

Rupert Murdoch said recently that he’s planning to stop Google News from indexing his publications including the Times of London and the Wall Street Journal. Murdoch’s idea is that Google News and the like make it too easy for Internet users to sample news for free rather than paying for it as God and Rupert intended. Mark Cuban, who is very clever but with whom I rarely agree, thinks this is smart on Murdoch’s part, because Twitter is changing the way people find news, effectively disintermediating Google, but not the News Corp. publications, themselves.

It’s funny how Murdoch’s statement made Cuban think of Twitter while it made me think immediately of the A&P.

The Great Atlantic and Pacific Tea Company, or A&P, was America’s first national chain of food markets. Hell, it was America’s first self-serve market, first to have store brands, first to advertise nationally, first to have a customer loyalty program (in 1912!), first to publish its own magazine (Womens’ Day, which is still around, though no longer owned by the A&P), and for most of my childhood back in Ohio A&P was the big Kahuna of grocery chains. With $5.4 billion in sales in the mid-1960s, A&P was at least 20 percent bigger than any of its competitors.

But after 105 years of setting the pace for the grocery industry, A&P peaked in the mid-1960s and went into a decline that lasted for at least 15 years and, it can be argued, continues even to this day. A&P, which has had German owners (the Tengelman Group) since the 1970s, is more of a super-regional chain today and doesn’t particularly vie for industry leadership on any measure. What happened in the mid-1960s to hurt A&P was it opted out of being indexed by Google News.

Well not literally, but close enough. A&P management, which back in the mid-60’s was still chosen from the founding Hartford family, decided at that time to abandon shopping centers — retail aggregators as Google is a news aggregator. They reasoned that in most shopping centers the anchor store was an A&P. In their view their supermarket was the main draw for a shopping center and didn’t need any of those other shops or stores to provide traffic. The rest of the shopping center was seen by A&P management as being purely parasitic.

{ Robert Cringely | Continue reading }

related { Interview with Rupert Murdoch | video }

previously { For the next few decades, journalism will be made up of overlapping special cases. }

photox { The last days of Gourmet magazine }

What’s powering your home appliances? For about 10 percent of electricity in the United States, it’s fuel from dismantled nuclear bombs, including Russian ones.

“It’s a great, easy source” of fuel, said Marina V. Alekseyenkova, an analyst at Renaissance Capital and an expert in the Russian nuclear industry that has profited from the arrangement since the end of the cold war. (…)

In the last two decades, nuclear disarmament has become an integral part of the electricity industry, little known to most Americans. (…) Treaties at the end of the cold war led to the decommissioning of thousands of warheads. Their energy-rich cores are converted into civilian reactor fuel.

{ NY Times | Continue reading }

One of my many pet peeves is drug marketing. Even though Big Phama likes to tout how much it spends on R&D as a justification for high drug prices, it spends more on marketing as a percentage of revenues than it does on R&D. Think about it: in what other industry are the margins high enough to support in person selling to small businessmen? And I read once that over 88% of the so-called “new drug applications:” in the last 10 year have not been for new drugs, but new uses for existing drugs, and to extend the patent on existing drugs.

Drug companies are masters of this art. At Pfizer, which sets the gold standard for drug selling methods, each salesman markets only three drugs in his territory. So if a doctor is a candidate for more than three, he has more than one salesman calling on him. The scripts are highly refined, with a 15 second pitch that rolls into a one minute pitch that rolls into a longer chat if the drug detailman can get the time. All drug companies keep current records on how much each doctor is buying of each drug. Another tactic is “You aren’t prescribing as much of XXX as your peers are….”

They also give lots of little goodies (pens, notepads, desk toys). There is ample research that shows that giving even minor gifts is effective (doubters please read Robert Cialdini’s classic, Influence: The Art of Persuasion). And drug companies do all kinds of small scale research on existing drugs (as in this has no medical benefit, it’s just a sales tool, but those studies no doubt get lumped in the R&D total) to give the salesmen something fresh to talk about with existing drugs.

{ Naked Capitalism | Continue reading }

photo { Dr. Jeffrey F. Caren, a cardiologist in Los Angeles, created a display of the hundreds of pens given to him by the drug industry. | J. Emilio Flores for The New York Times }

Anyone who has been trained as a physician – or is close to someone who has been – is aware that the dissection of a cadaver is an integral part of the physician’s learning and socialization. The first incision is something few physicians forget. That procedure is reproduced time after time, in country after country, and provides a seminal building block of medical education. (…) Dissecting a cadaver also gives young doctors “an appreciation for the wonders of the human body”. Students often give their first “patient” affectionate names; however, much less attention is paid to where the cadaver came from.

Supplying human cadavers is left to the responsibility of others, most notably the anatomy course instructors or school administrators. These individuals are not alone in trying to secure specimens. Alongside primary medical education providers, a large number and wide range of other users are also trying to secure cadavers for their own needs. The continuing training of medical doctors, for instance, relies on cadavers. In addition, allied health professionals, emergency medical workers, and medical researchers all demand cadavers or cadaver parts. As an illustration, orthopedic surgeons use human joints to fine-tune their skills to learn new procedures. Similarly, some researchers studying Alzheimer’s disease might require human brains. Also, government agencies and automotive manufacturers that try to improve automotive safety benefit from research using cadavers.

It does not help that many users seek the same “good” type of cadavers. A good specimen, in this context, means a young cadaver, one not overly obese or too evidently diseased. Such a description is generally the antithesis of cadavers made typically available through donations, so the supply is further strained. Not surprisingly, both in the United States and other countries, those who require cadavers often question the adequacy of the supply and regularly voice their fear of shortages of cadavers.

However, trying to address the question of a shortage of cadavers often means facing the taboo on trading human anatomical goods. Blood, organs, and cadavers are generally thought to be better left untouched by market dynamics. (…) In essence, many would argue that blood, organs, and cadavers should not be considered goods.

That said, the demand for cadavers remains strong, and numerous ideas have been voiced to augment the supply. As an illustration, there is an ongoing debate about the impact of using financial incentives for donors or their families to encourage anatomical donations. Similarly, surveys of potential whole-body donors seek to gain insight into the reluctance to donate and how better to educate potential donors. By understanding the reluctance to donate, the hope is that the root causes of such reluctance might be addressed.

Another novel solution to the cadaver shortage lies in securing specimens from a new set of actors in the commerce in cadavers. These actors are legal entrepreneurial ventures that have been operating for more than a decade in the United States; they cater to domestic users and international ones alike. (The procurement of cadavers is regulated, but the export of cadavers much less so.) For medical schools in countries with strong societal norms against donating one’s body to science, such a supply route can prove quite practical. In those and other instances, medical schools can purchase for a fee the entrepreneurial ventures’ services and help medical students learn their craft. Like corn, wheat, and civilian aircrafts, cadavers sent abroad can be seen as another U.S. export product, although one dwarfed by these other export categories. The notion of human cadavers as a thriving export industry is obviously far away; however, I want to suggest that its legality and limited occurrence underline crucial new developments in markets for anatomical goods. While the international organ trade is almost unanimously condemned, human cadavers can legally freely flow across the globe.

{ A Market for Human Cadavers in All but Name by Michel Anteby | Economic Sociology, November 2009 | PDF | Continue reading }

photo { Ruth Bernhard, In the Box - Horizontal, 1962 }

A shrunken head is a human head that has been prepared for ritual use or trade.

Most known shrunken heads were manufactured either by indigenous peoples in Melanesia and the Amazon Basin, or by European or Euro-Americans attempting to recreate the practice. In Amazonia, the only people known to have shrunk human heads are the Shuar, Achuar, Huambisa and Aguaruna, collectively classified as the Jivaroan peoples of Ecuador and Peru. Among the Shuar, a shrunken head is known as a tsantsa.

{ Wikipedia | Continue reading }

By the end of the nineteenth century, little was still known about the Jivaro Indian clans in South America, except for their macabre practices of taking the heads of their enemies. This practice intrigued travelers and collectors and compelled them to visit these tribes to satisfy their curiosity.

The visits of the white man helped revolutionize the Jivaro’s methods of warfare, as they began trading firearms and ammunition for shrunken human heads. (…)

In the 1930s heads were made to order and sold for approximately $25.00.

{ The History of the Shuar | Continue reading | via Cracked }

When is the best time to stop renting and buy a house?
When it costs less to buy than to rent. And how do you figure that out? Find two similar houses — one for sale and one for rent — and divide the asking price by the annual rent. (…)

Which is the best day of the year to make an offer on a house?
Christmas Day. Huh? Not all real estate agents agree, but those who do offer three reasons. (…)

Which is the best day of the month to make an offer on a house?
The first Tuesday. Why early in the month? Because the homeowner just wrote a mortgage check for a house he no longer wants, and he doesn’t want to write another one.

When is the best time to buy life insurance?
As soon as you become a parent.

{ Excerpted from Mark Di Vincenzo’s Buy Ketchup In May And Fly At Noon | NPR | Continue reading }

The innovators behind Ace Hotel know nothing says full service like a good gay porn selection, which is why the hipster hotel turned to BUTT magazine to curate its new gay porn on demand service, and the editors at BUTT were more than happy to put their talents as connoisseurs of vintage porn to use.

Starting Nov. 1, guests in the hotel’s New York City and Palm Springs locals can pay for the pleasuring of tuning in and, well, you knowing, to the carefully crafted series BUTT  editor Adam Baran calls “the best that porn has to offer.”

“Other times we tried to take a look at the historical angle of films like The Bigger, The Better, probably one of the best gay porn films of all times.”

{ NY Press | Continue reading }

Don Boudreaux had an oped in Saturday’s WSJ, on “Learning to Love Insider Trading.” The economic case against banning insider trading seems strong, yet the public overwhelmingly wants bans. (…)

Even with laws against insider trading, the speculation game is and must remain ridiculously uneven. Today most inside info gets into prices before official announcements, and well-connected well-organized investment groups are vastly better equipped to find and exploit pricing errors than almost all amateurs.

{ Overcoming Bias | Continue reading }

One of the nice aspects of trying to solve investment puzzles is recognizing that even though I am not always going to be right, I don’t have to be. Decent portfolio management allows for some bad luck and some bad decisions. When something does go wrong, I like to think about the bad decisions and learn from them so that hopefully I don’t repeat the same mistakes. This leaves me plenty of room to make fresh mistakes going forward. I’d like to start today by reviewing a bad decision I made and share with you what I’ve learned from that error and how I am attempting to apply the lessons to improve our funds’ prospects.

At the May 2005 Ira Sohn Investment Research Conference in New York, I recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky than its peers and would hold-up better in a down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about forty percent of his investment, instead of the seventy percent that the homebuilding sector lost.

I want to revisit this because the loss was not bad luck; it was bad analysis.

{ David Einhorn | Continue reading }

related { Glossary of Trading Terms and Phrases. }

From L to R { Adam Cvijanovic | Ellen Altfest | Marc Swanson }

It has been a tumultuous year for Rebecca Smith, 43, who owned a well-known contemporary art gallery until last June.

The recession delivered an economic shock to the art market, and Becky’s New York City gallery struggled for months before she decided to shutter it. In the process, she came into conflict with some of the artists she worked with — she owes them money, they owe her. She moved out of her apartment and borrowed cash from her parents. She was too poor to visit her family in Pittsburgh for Christmas. (…)

Shortly after she founded the Bellwether Gallery in Brooklyn, in 1999, Becky, was the subject of a profile, in The New York Times Magazine, titled “How to Become an Instant Art Star,” and she did, indeed, become a star.

She moved her gallery to Chelsea in 2004, and maintained a frenetic pace on the international art fair circuit. She hired a gallery director, a manager and an art handler. “I felt like I was one of the members of my generation who could become one of the next representatives to major artists,” Becky said.

She specialized in emerging art, finding and cultivating cutting-edge new artists like Adam Cvijanovic, Ellen Altfest and Marc Swanson, building their careers up through gallery shows, and selling their pieces for increasingly large sums of money, mostly to rich financier-collectors. Buying the work of unknown young artists was especially appealing to Wall Streeters, because it was an accessible way to start building an art collection and it offered the possibility of “discovering” artists and making a fortune as their work shot up in value — not unlike the thrills of the stock market.

Becky ran through some numbers for me: her gallery’s rent was about $10,000 a month. Her highest overhead, when she had four full-time employees and was maintaining a hectic pace of exhibitions, ran to $75,000 — in a lean month it might have been closer to $50,000. The revenue came through the sale of art; a gallery usually takes 50 percent of the sale price.

Once sales dried up by the fall of 2008, Becky called three of her largest collectors, pleading for some business — “I tried playing it cool, and then I tried playing it direct,” she said. She recounted a typical conversation: “I need to sell you something to continue to be here,” she would tell a collector.

“I’m just not buying,” was the reply.

{ NY Times | Continue reading }

{ A Dallas woman has filed a lawsuit seeking six figures from a former neighbor and landlord for damage she says was caused by cigarette smoke wafting through adjoining walls of her high-end townhome. Cary Daniel and her mother Chris Daniel no longer live in the townhome, and said they need to wear respirators and goggles when they return to the townhome to retreive their belongings. | Dallas News | full story }

There are many, many things to be upset about regarding the financial sector — but bonuses are not one of them. Or, at least not the most important thing to be enraged over.

We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is. (…) What should you be upset about?

• Paying people in year one for risks that last years or decades;

• The “privatized gains, socialized losses” of the current system;

• Dramatically reduced competition in the Banking sector;

• The idea that “Too Big To Fail” is now an official policy of the United States;

• The “gifting” of $100s of billions of dollars to mismanaged banks that should have been allowed to fail in a controlled fashion;

• Bank lobbyists preventing any sort of credible regulation from passing…

{ Barry Ritholtz | Continue reading }

YouTube may pay less to be online than you do, a new report on internet connectivity suggests, calling into question a recent analysis arguing Google’s popular video service is bleeding money and demonstrating how the internet has continued to morph to fit user’s behavior.

In fact, with YouTube’s help, Google is now responsible for at least 6 percent of the internet’s traffic, and likely more — and may not be paying an ISP at all to serve up all that content and attached ads.

Credit Suisse made headlines this summer when it estimated that YouTube was binging on bandwidth, losing Google a half a billion dollars in 2009 as it streams 75 billion videos. But a new report from Arbor Networks suggests that Google’s traffic is approaching 10 percent of the net’s traffic, and that it’s got so much fiber optic cable, it is simply trading traffic, with no payment involved, with the net’s largest ISPs.

{ Wired | Continue reading }

It began March 17 when Bear Stearns was forced into a marriage with J.P. Morgan Chase, with the Fed and Treasury as matchmaker. Basics: Bear Stearns complicated creature. What does an investment bank like that do? How does it make its money and where does it get its funding from? Investment banks are in a surprising number of businesses, like most complicated, big companies. Asset management business–managing people’s wealth; small brokerage business; investment banking business, meaning they raised capital for corporate clients, debt or equity capital; provided advice on mergers and acquisitions (M&A). Had very large business called fixed income sales and trading business, trade, underwrite, and sell securities, debt securities, among them being mortgage-backed securities–aggregation of people’s home mortgages. Wall Street innovation in the middle 1980s that in the past decade became huge and profitable. Hedge funds. Added up to a 14,000 person firm, fifth largest on Wall Street. Mysterious: market clearing; role as intermediary for other firms. Opacity, complicated world, a lot of argot, language; disclosure minimal; can’t figure out how they make money; not like selling soap and toothpaste. Other Wall Street firms enmeshed in long term trades on their books, firms on a global basis, interconnected. At the end, Bear Stearns was very short-term oriented in their financing of themselves–the very nature of banking in general. Banks borrow short, depositors’ money which costs nothing to accumulate; risk for the bank is that when you want it, you can go to the ATM machine and get it. They count on the fact that not everybody does that at once. Occasionally everybody does want their money at once. In effect that’s what happened to Bear Stearns, except at an institutional level, borrow short and lend long. They are not a commercial bank, so they borrow in the commercial paper market; but in the end because of their own credit problems, couldn’t do that; so they borrowed in the secured lending market. Needed to borrow about $75 billion a night from firms like Federated Investments, Fidelity Investments, etc.–about 25 firms. In the end they said they weren’t going to make those loans to Bear Stearns any more. Securing those overnight loans with the mortgage backed securities they were manufacturing and in the business of trying to sell, but by March of 2008, they could no longer sell those securities and had to keep them as inventory on its own balance sheet; and then in turn use those assets to secure the overnight lending it needed. Cycle fell apart.

{ William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Steet, talks with EconTalk host Russ Roberts about the life and death of Bear Stearns. | EconTalk | Continue reading | mp3 }

If you were a woman reading this magazine 40 years ago, the odds were good that your husband provided the money to buy it. That you voted the same way he did. That if you got breast cancer, he might be asked to sign the form authorizing a mastectomy. That your son was heading to college but not your daughter. That your boss, if you had a job, could explain that he was paying you less because, after all, you were probably working just for pocket money.

It’s funny how things change slowly, until the day we realize they’ve changed completely. It’s expected that by the end of the year, for the first time in history the majority of workers in the U.S. will be women — largely because the downturn has hit men so hard. This is an extraordinary change in a single generation, and it is gathering speed: the growth prospects, according to the Bureau of Labor Statistics, are in typically female jobs like nursing, retail and customer service. More and more women are the primary breadwinner in their household (almost 40%) or are providing essential income for the family’s bottom line. Their buying power has never been greater — and their choices have seldom been harder.

{ Time | Continue reading }

Adelphia Communications, Barings Bank, Enron, HealthSouth, HIH Insurance, Hollinger International, Tyco International, WorldCom/MCI, Xerox…the white collar crime list goes on. But, did the executives at these companies start out as criminals or did they head down the slippery slope to criminality one misplaced step at a time? According to research to be published in the International Journal of Business Governance and Ethics, there are twelve steps to white-collar crime. (…)

The researchers have broken down the process of white-collar crime into 12 steps, with steps one to four explaining how the “players” first encounter and support each other and begin to spot the opportunity for illegal activity.

These first four steps are: The perpetrator is hired into a position of power. Second step, personality and life circumstances affect the perpetrator in such a way that they recognise their power. In the third step “drivers” who turn a blind eye or condone certain activities come into view. The fourth step sees passive participants recognizing an opportunity.

In steps 5 to 8 the truth of escalating illegal activity is hidden.

In step 5 reluctant participants are drawn into the web of deceit by the “leader”. In step 6 distrust of the other people involved emerges. In step 7, the perpetrator recognizes they have their accomplices in a vulnerable position and begin to exploit that position. In step 8 bullying tactics become increasingly common as illegal goals are aimed for.

In steps 9 through 12 the perpetrator’s actions are challenged and publicised revealing the white-collar crime.

In step 9, the crime continues, but the perpetrators, trapped in their insatiable addiction, become more blaze, taking bigger risks, and seeking more lucrative exploits.

In step 10, an undeniable paradox becomes apparent, as the participants’ values and their behavior are now obviously in conflict.

In step 11, a whistleblower steps up to the mark and the leader loses control.

Finally in step 12, blame is laid at the feet of the perpetrator at which point they either deny everything or admit their guilt and seek forgiveness by laying bare their activities.

{ Inderscience/EurekAlert | Continue reading }

photo { Finlay MacKay }

{ The Gervais Principle and Its Consequences }