Monday, June 29, 2020

Which industries will be in the best shape when we return?

In the 2x2 table above from the Shrewd Samaratan, via MarginalRevolution, there are two dimensions:

  • Purchases
    • "Gone Forever," goods and services whose purchases were abandoned during the shutdown, vs.
    • "Snap-Back," purchases that were postponed by the shutdown.
  • Income Elasticity of Demand measures sensitivity of demand to income.
    • High Income Elasticity, goods whose demand falls as income falls, vs
    • Low Income Elasticity, goods whose demand is relatively insensitive to income.  

The colors correspond to the outlook for each industry: 

  • Orange box:  lost profits from abandoned purchases, and low future demand because income has fallen.
  • Green box: delayed profits from postponed purchases; and relatively high future demand.

The two off diagonal boxes are in-between these two extremes: 

  • Blue lower-left box: lost profit from abandoned purchases, but relatively high future demand
  • Blue upper-right box:  delayed profits from postponed purchases, but relatively high future demand.

Monday, June 8, 2020

Allowance teaches kids about opportunity cost

[This essay was written more than a decade ago by the late Steve Dalton to teach kids the purpose of an allowance.  Its lesson could have come straight out of Chapter 3.]

"We cannot always build the future for our youth, but we can build our youth for the future." Franklin Delano Roosevelt

Why give an allowance?
For one big reason: To help your youngsters learn how to manage money. An allowance is not to relieve you of paying for some of your children's wants or needs. It is the best and most hands-on method of teaching your children how to spend and save. By using their own funds, their limit becomes real and tangible to them- -they only get a certain amount each week, rather than having your seemingly infinite wallet--and it will quickly become obvious that they can't have everything they want. Picture your child as an adult (18) and how do you want them to view and handle money- now is the time to start.

One of the biggest misconceptions about an allowance is that some parents cannot afford to give their children "extra" money. However, if you look at an allowance from a different angle, every parent can afford it. An "allowance" is basically money that you're going to spend on your child anyway, just given in a different form. Instead of paying for things at the time your children want them, you pay them an allowance and let them decide how to spend the money. The ultimate goal of an allowance is to teach children to distinguish between needs and wants and to prioritize and save--a difficult lesson that will be needed throughout life.

1. It's never too early to start.
If you've hesitated because you don't think your child is old enough to handle money, keep in mind that recent studies have shown that most 3 year-olds are ready and eager to learn about money and how things are bought and sold. By the time they're 5, many already have started to save.

2. Establish who gets what.
Develop a consistent system that pays more to older children. But keep it flexible until you hit on the right formula. In general, your plan should be more generous with older children because their needs tend to be greater. Many parents seem to favor a plan that increases at the start of each new school year. It's a good idea to present your proposed plan in written form and seek input from all members of the family. Then, make adjustments accordingly.

3. Describe the rules.
Each child should understand why she is receiving an allowance and what expenditures it's supposed to cover. If you've decided to pay an allowance to your children because they are members of the family tell them so. But also remind them of the general responsibilities they have as members of the family. If the allowance is tied to household chores, describe those assignments in detail.

4. Pay on time.
Paying on schedule will subtly teach your children the value of honoring one's obligations.

5. Allowance is not a control device.
Unless the allowance is tied to specific work assignments, you should avoid threatening the withhold payments. If the allowance is related to work, from the beginning of the program be sure to indicate in writing that the allowance may be withheld if the related jobs aren't completed.

6. Develop accountability.
Some parents require their child to account for how the money was used. This kind of activity can prepare a child to handle larger sums and manage a checkbook. As a rule, you should avoid questioning the purchasing decisions of the child. However, you many want to offer helpful advice on how the money can be spent more productively

 There are several approaches:

1. Hands Off. Once you've given an allowance, walk away from it. The money is no longer yours, therefore you no longer control it. It is now up to your child to decide how it should be spent or saved. Kids will learn from their mistakes at a younger age and at a time when the costs are substantially less. ($5.00 mistake versus $50,000) We give our children parameters on what they can buy.

2. Chores for Pay. Many parents believe that their kids should complete chores in order to receive their allowances--they don't want their youngsters to view an allowance as an entitlement. However, some experts don’t buy that. They feel that children should understand that doing chores is part of membership in a family. In healthy families, all members contribute and all contributions are valued. The grownups don't get paid for doing family chores--why should the kids? And a share of the family income is an entitlement, just as food, clothing, and shelter are entitlements to any family member.

3. Compromise: Hands Off/Chores. With this approach you give children a basic allowance, but attach no responsibility for household chores. Instead, make sure you provide regular employment that will allow your kids to earn additional money: raking leaves, washing windows, mowing the lawn, washing the car, or doing heavy-duty cleaning in the cellar or garage.
Only you can decide which approach--hands-off, chores for pay, or compromise-is the best for your children and your family. But whatever you decide, it is important to remain consistent.

Keep in mind the fact that kids have three uses for their money - spending, saving and sharing. We do $5.00/week[$3.00 spending, $1.50 savings-goes to the bank and not touched, $.50 to Church]
How much should I give?

When coming up with the amount, try this:
  • Determine how much money you already give them. If your kids don't get allowances, you are managing their money for them by deciding what they will buy and what they will do. Their role is salesperson and manipulator. Let them learn to manage their own money. Stop doing all the work. Total up the amount you are giving them now. Give that to them as an allowance and let them make their own decisions. You'll save money and avoid some of life's major battles.
  • Make a list of what they are expected to pay for with their allowance. Once you have the amount, sit down with your child and make a list of everything they are expected to pay for. This solves the conflicts that may come up in stores and as they walk out the door to go to the movies. The total required becomes their allowance. As their needs change, so can the amount. Be open to reviewing it when appropriate.

Early Lesson: styrofoam airplane purchase at Target purchased for $8-10. flown once and it crashed and broke.  The wing would not stay in place.  Donna gave child choice, live with it or take it back.  The child took it back and got his money back.  

Recent Purchase: spending money for snacks, “like- Mike” CD used at Blockbuster for $15($20-25 new), Michael Jordan Wizards jersey for $33 at Sports Seasons.

Monday, June 1, 2020

Sharing advertising risk

In general, if one party is less risk averse than another, contracts can create wealth by moving risk from a lower-value use to a higher-value one.  The classic example is insurance which moves a lottery from consumers who doesn't want it, to a risk-neutral insurance company who doesn't mind it.

Now Google is sharing cancellation risk with hotels through its pay-per-stay program that charges hotels for advertising (Ads) only after a guest has finished a stay.  If guests cancel, e.g., due to a pandemic, then the hotel does not have to pay Google for the ad that lead to the booking. Along with risk-sharing, there are other benefits as well:
  •  It allows the hotel to decentralize decisionmaking over Ad campaigns on Google. Lower-level employees, who may have better information about whether an Ad will work, do not need permission from sales managers or finance managers to initiate a new Ad campaign. If the campaign doesn't work, the hotel is not charged.
  •  It allows the hotel to better manage its cash flow, a crucial point for many hotels, especially seasonal ones. Previously Ad costs were incurred before the resulting Ad revenues were realized. Now Ad costs are incurred after the Ad revenue is realized.
  • I would add that it solves a potential moral hazard problem, e.g., under the pay per click model, web pages that host ads can click on the link to earn Ad revenue for themselves.
All of these benefits make Google Ads more attractive to advertisers. However, one can expect to see more failed or low quality Ad campaigns on Google because the cost of initiating a bad Ad campaign has gone way down.