Buying Power
Jim Wasserman | Mar 5, 2020
IF YOU TOOK AN economics class in high school or college, you might see its usefulness as limited to helping with your grade point average. But the basic ideas you learned can still be valuable. Take this introductory microeconomics question: In a typical transaction, who has more power, the buyer or the seller? When I started teaching economics many years ago, I gave the nod to buyers. Invoking the notion of “consumer sovereignty,” I’d explain to students that buyers have the power to vote with their feet—by walking to another store. Buyers can also change tastes quicker than sellers can change their wares. That was a long time ago, however, before the internet. Now the balance of power is more even and perhaps tipping the other way. If you don’t buy something, there’s somebody a thousand miles away who might, thanks to online shopping. That said, we consumers still have two powerful cards to play, as we strive for the upper hand in getting the goods and prices we want: Make yourself an elite customer. Think of it as a numbers game. When there are heaps of students seeking the services of a university, the university is free to pick and choose. That compels potential students to dress themselves up, participate in high school extracurriculars and do all sorts of primping to make themselves attractive customers. If students, however, are already prime potential customers—perhaps they’re at the top of their class or they’re star athletes—what they have to offer as a client is now scarcer than the university’s number of open spots. These students, in effect, join a sub-group of potential customers that the school will now court, offering scholarships and other inducements to get their business. This notion holds true beyond college. Offer to pay cash at the antique store and…
Read more » Chews Wisely
Jim Wasserman | Feb 26, 2021
THIS IS AN ARTICLE about not writing an article. It started with a Vox piece about the changes in society wrought by the 2007 introduction of the iPhone. One graph that caught my eye showed chewing gum sales steadily declining from 2007 to 2017, which was when the Vox article was published. No economist would ever tie an economic trend to any one factor, but the article proffered an interesting hypothesis. It suggested that, as more people looked at their iPhones while waiting in line at supermarkets, they were less prone to make spontaneous gum purchases at the checkout counter. Such sales are a substantial part of chewing gum sales. I thought the connection might be the basis of an interesting article about how our time and attention are limited resources, and when we connect with one thing, we unwittingly disconnect from another. Few would lament disconnecting from chewing gum in favor of the iPhone. But what about giving up a tried-and-true investment for the latest hot one? Or how about neglecting family time to get “just one more task” done at work? My gut saw the possible cause-and-effect connection. My heart liked the lesson that could be drawn from it. On top of all that, the article cited the generally reliable Euromonitor International as its data source. But to quote Ronald Reagan, who was quoting the Russian proverb “doveryai, no proveryai,” it’s important to “trust, but verify.” A little digging revealed some flaws. Aside from the probability of other contributing causes—such as the Great Recession making people cut out unnecessary purchases like chewing gum—it turns out that U.S. gum sales have been going up since the article was published, despite continued smartphone use. What’s more, there’s the issue of whether some gum chewers simply switched to a substitute good,…
Read more » Terms of the Trade
Jim Wasserman | Jul 10, 2019
CONSUMER ECONOMICS and media literacy have evolved to become important fields of study, analyzing the way consumers make decisions—and how those decisions can be nudged. Here are 20 of the tricks and techniques used by marketers and others: Aspirational buying. When consumers are encouraged to live like those they admire, even if they can’t afford it. Bandwagon appeal. The psychological nudge to do—or consume—something because others are doing it. Also known as FOMO, or fear of missing out. Bundling. The practice of offering multiple, usually related, goods and services at a lower price than if each item were purchased separately. This is great if you’ll use the entire bundle, but a waste of resources and money if you don’t. Dog whistle. An indirect or implied message meant to communicate with a particular group, often placed within a broader, more general message, thus allowing the messenger to deny meaning it. It can also reinforce a “you’re an insider” sense of affiliation. Saying something is only for “the right people” can make us want to be one of those “right people." Eye candy. Visual images that are superficially attractive and entertaining but are unnecessary or unrelated to the subject at hand, such as flashing lights and attractive spokespeople. False statistics. Using graphs, charts or statistics that sound precise—yet even the four out of five dentists who preferred Trident gum can find these numbers suspect. Feedback loop. A phenomenon whereby the media, reporting a purported “hot” trend, inspires consumers to follow the trend. This seemingly confirms the initial report. Flattery. A technique where the potential consumer is complimented as part of the sales pitch. "Because you're worth it." "Don't you deserve the best?" Such phrases induce consumers to feel good about the product, making them more likely to buy. Freemium. Giving away a base-level product for free,…
Read more » Spoonful of Advice
Jim Wasserman | Mar 7, 2019
MORE THAN 100 YEARS ago, Thorstein Veblen, the father of behavioral economics, explained the thinking behind most of our purchases and investments with the help of two spoons. In his seminal 1899 book, The Theory of the Leisure Class, Veblen compared a handmade silver spoon, which back then could cost up to $20 ($600 in today’s money) with a machine-made aluminum spoon that cost about 20 cents ($6 today). Based on strict utility of purpose, there would seem no reason to spend one hundred times more for the silver one—and yet many people did it then and still do it today. There must be some other benefit to owning an expensive spoon, one that does the same job as a spoon with 1/100th of the cost. Veblen reckoned that the silver spoon’s added “benefit” for the owner derived from the personal joy of spending so much for such an expensive item and the consequent admiration the owner would garner from others. Veblen called this excessive spending “conspicuous waste.” He went on to give other examples of how wealthy people flaunt their money for personal validation and public envy, but the simple spoon dichotomy summarizes the concept well. The spoon comparison also allowed Veblen to point out the riskiness, and potential cost-benefit imbalance, in using luxury possessions to gain internal and external validation. In the case of the silver spoon, the 100-times outlay is only worth it if others know of the silver spoon. If the silver spoon turns out to be a forgery, all is wasted. If the aluminum spoon is made to resemble the silver one, the admiration might be lost. Above all, the entire process depends on others sharing the same values—that owning a silver spoon is admirable—and, if not, the flaunter runs the risk of receiving scorn rather than…
Read more » When in Rome
Jim Wasserman | Jul 3, 2019
WE DON’T NORMALLY think of classical philosophy as relevant to modern money management. Perhaps it’s the perception that philosophers live humble, financially insecure lives ruminating on ethereal matters. Or, as my businessman father said when he saw I was taking a philosophy course, “That will make you interesting at parties, but how will you eat with it?” Meet Marcus Aurelius. If you aren’t a classics person, Marcus was born to a powerful and rich Roman family, spending the greater part of his life being trained for leadership. He became emperor in 161 A.D., ruling or co-ruling for some 20 years. His legacy from his time as the richest, most powerful man on earth: He’s considered one of the “five good emperors” and one of Rome’s greatest leaders. He was also the philosopher emperor, specifically writing about stoicism, which was very popular among Rome’s wealthy and powerful. Marcus thought there was a natural flow to the universe in which we all operate. One of the keys to a “good life” is to recognize that flow and our place in it, specifically identifying which parts we have control over and which we don’t. For the parts that we can’t control, we should “assent” and accept them, rather than fruitlessly fighting against them. For Marcus, the happy life comes from leading a virtuous life of right actions, which in turn is derived from using logic and reasoning to decide where best to focus our efforts, so we can positively influence matters. This might seem like old school commonsense, yet consider some modern dilemmas: We feel insecure about our worth, so we spend lavishly to impress others—which may or may not work. Parents feel guilty that they don’t spend enough time with their children, so they buy the kids cars and take them on…
Read more » Training the Mind
Jim Wasserman | Dec 19, 2021
WITH THE SURGE of urbanization in the 19th century, many folks became concerned by the seeming rise in bad behavior. This behavior could be illegal—such as theft—or legal but undesirable, like alcohol abuse. Nascent social sciences, including sociology and psychology, developed two alternative theories. “Moral Deficit” theorists said people engaged in bad behavior because they were internally “weak.” You might have seen a movie scene where a hysterical person is slapped with the admonition to “get a hold of yourself.” Or you might be familiar with the approaches of The Salvation Army and YMCA, both of which use Christian principles to teach people how to strengthen their mind, body and spirit. On the other side was “Moral Purity,” or the belief that temptation could bring down even the strongest person. These theorists advocated attacking supply rather than demand, most famously by initiating Prohibition. Over a century later, our debates seem all too familiar. For the “war on drugs”—or any other “war on…”—what’s the best approach? Do we address demand through education or, instead, should we attack supply by going after its purveyors? Or do we just conclude that the behavior is innate and not worth resisting? Like many social concepts, these same principles can be applied to microeconomics and even personal finance. Why do we overspend? Are we weak, with an uncontrollable desire for admiration that impels us to buy all the trappings of success? Or are we simply inundated with too many nudges to spend, and can’t resist the siren call of consumerism? Even more confusing, what’s the solution? Perhaps a better approach is that of another early reformer, Jane Addams. As part of the settlement house movement, Addams avoided focusing just on the isolated bad behavior. She advocated looking at the whole person, even the whole society, to see…
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Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
Ed is a semi-retired physical therapist who lives and works in a small community near Atlanta. When he's not spending time with his church, family or friends, you may find him tending his garden and wondering if he will ever fully retire. Check out Ed’s earlier articles.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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