Saturday, July 21, 2018

What happens when you pay excavators by the ton?


The Army Corps of Engineers found out when the paid contractors to tear down homes burned by the 2017 fires.  Not only were the sites four times as costly to excavate, as contractors over-excavated each home, removing concrete pads, and foundations that could have been re-used.  So now the Governor of California launched a program to refill the holes left by the contractors. 

HT: Marginal Revolution


Saturday, July 14, 2018

Adverse selection vs. Moral Hazard

President Trump has overhauled private health insurance, allowing businesses to offer cheaper plans that do not have as many benefits.  The Republicans applaud the change because they think it will lead to more coverage, and address the issue of moral hazard; Democrats criticize it because they think it will lead to adverse selection, raising costs for less healthy people who need more coverage. 

Proponents of the new rule argue that AHPs will provide lower cost coverage for an estimated 4 million small business workers over the next 5 years including approximately 400,000 individuals who currently do not have coverage. Critics counter that without regulations requiring the inclusion of essential health benefits, such as maternity care, mental health, or prescription drugs, new AHPs will exclude important benefits and ultimately create significant and costly gaps in health coverage. They further argue that young, healthy individuals will flee the individual market for lower-cost AHPs, thereby leaving the sickest in the individual and small-group market to further drive up premiums.

Thursday, July 12, 2018

Can Blockchain Tech. Resolve this Principal-Agent Conflict?

PROBLEM FACED BY ADVERTISERS:  how to figure out whether their ads are viewed by real people, not computer-generated bots, and how much of their spending is siphoned off by middlemen.

SOLUTION PROVIDED BY BLOCKCHAIN:  Marketers sometimes can manually audit digital ad campaigns, but proponents of blockchain say the technology offers a faster, more reliable way to track spending and reconcile discrepancies with suppliers...  The technology can also help track whether ads are running on websites with real traffic and on portions of them visible to ordinary users. That type of campaign information can be included in stored “blocks” along with pricing information.

SOURCE:  Article from WSJ

Wednesday, July 11, 2018

Netflix vs. HBO: a tale of two strategies

HBO’s current profit model is simple but effective. People pay a fee (something like $15 a month) to subscribe; HBO uses that money to license movies and produce TV for subscribers to watch. Because of the company’s longtime reputation for high-quality, Emmy-winning shows like Game of Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money. 
Netflix’s business approach, again, is about scale and is underwritten by investors. The company has focused on getting more worldwide users and hiking its subscription fee to increase revenues. But producing more original shows means Netflix burns through more money—a March 2017 report found Netflix had a negative free cash flow of $2.1 billion. A few months later, the company said in a letter to shareholders that it would remain in the negative for years, but that the investment would crucially help the company spread across the globe.

Now that HBO has been acquired by ATT, it is being pushed to mimic the Netflix strategy:

In this age, as Stankey made clear, “hours of engagement” are what matter most. Executives have long factored viewing data extracted from subscribers into their programming decisions, but online services can mine our viewing preferences much more minutely. The more data, the easier it is to understand what people want—at least that’s been Netflix’s guiding principle as it makes hits like House of Cards and Stranger Things, which are calibrated to play on audience nostalgia. But the idea that numbers alone will drive good or popular art is ludicrous; Netflix has made plenty of shows that haven’t hit the mark with audiences, like any other network.

Bubble-ology: "A Crisis of Beliefs"

Beliefs caused the credit bubble and subsequent bust (slides on the 2008 Financial Crisis)

  1. Excess optimism, excess lending and investment 
  2. Correction of expectations (due to bad news or waning of optimism) 
  3. Recession (impaired intermediation or excess pessimism) 

==>Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms.

Sunday, July 1, 2018

Prevalence bias

Here is the essence of the experiments that document it:
…When blue dots became rare, purple dots began to look blue; when threatening faces became rare, neutral faces began to appear threatening; and when unethical research proposals became rare, ambiguous research proposals began to seem unethical. This happened even when the change in the prevalence of instances was abrupt, even when participants were explicitly told that the prevalence of instances would change, and even when participants were instructed and paid to ignore these changes.

Here is a public policy implication:
… When strong sexism declines, for example, … what was once not considered sexism at all (e.g. “men and women have different preferences which might explain job choice“) now becomes violently sexist. 

I am thinking about how this kind of bias might appear in a business setting.   For example, as particular kinds of accidents become less prevalent (rarer), if consumers overestimate the probability of these accidents, then consumers will be willing to pay much more than the cost of the insurance [probability of an accident times the cost of an accident].