Are People Self-Interested or Altruistic?

Now, don't rush to judgment. Consider the real meaning of those words: "Self-interested" and "Altruistic". "Self-interested" doesn't mean lying, stealing, cheating, or beating people up for lunch money. It simply means that, given the option, you'd choose which one you like most. It is self-interested of you to order your favorite flavor of ice cream at Baskin Robbins. It is self-interested of you to accept a position that pays more than another position. And it is also self interest that motivates a burglar to steal your stuff. Clearly, self-interest is not synonymous with honest. You can be honest and self-interested.

Now consider "altruistic". Altruism means that you want other people to be happy more than you want yourself to be happy. In other words, you'd be "happier" if everyone else was happier. Altruistic people would be more concerned with finding ways to make other people happy, right? So do we observe any altruistic people that are honestly just trying to make other people happy? Every day I see people acting self-interestedly. Just the other day I was shopping at a fabric store, and I saw a woman use a coupon while paying for her purchases! The greed! Oh the insatiable greed of humankind! This woman actually preferred to pay the store LESS money and get the same amount of goods. Did she even stop to CONSIDER how the store FELT about that? I'm sure the store would have preferred that she pay full price for her purchases. And if that woman hadn't been so self-interested as to use a coupon, they would have received more money from her. The woman could have chosen to not use the coupon and just pay full price, and that would have demonstrated much greater altruism. In fact, the ultimate altruistic act would be for the woman to just donate her money without taking anything from the fabric store. (See what I'm getting at here?) People act self-interested all the time, and there's nothing wrong (criminally or morally) with that. So just accept it.

In economics, we assume everyone is self-interested. It's easier that way. It makes our little models and equations work (because I can find the maximum point on a curve quite easily) and it seems to most closely follow actual human behavior. I just wanted to clear that up before we get too involved in discussing the economics of everyday things. Because as I analyze situations, I automatically assume everyone is self-interested...and usually I'm right.

In a fun little mind-bender, consider this: Altruistic people set about doing things to make other people happy, because it makes themSELVES happy also. So, even altruistic people are self-interested! It just happens to be that they make themselves happy by making other people happy...but in the end, they're still doing it because it makes them happy to do so. Sounds like self-interest to me.

There's no such thing as a free lunch

Classic, I know. But still true. And now it's popping even more. Anytime you hear the word "Free", you should laugh. ESPECIALLY when it comes to credit card rewards. You can call it "sky miles", "cash back" or "points", but it all boils down to the same story: The credit card companies want you to think that you're getting something for nothing. They want you to think it's a bribe. "Use our card, and we'll give you free ____[miles, points, cashback]_..." I know all of you are too smart to fall for that. It definitely costs you to use that credit card and rack up those skymiles. And I am certainly not referring to any finance charges you may or may not pay each month. So, don't think that just because you pay off your whole bill each month that you aren't paying for those rewards. You are! They're hidden in a little thing I like to call: the merchant discount.

The merchant discount is the fee a merchant pays to a credit card company for the right to collect payment from you through their credit card system. Each time you swipe your card at Nordstrom's, they have to pay a percentage of your purchase to American Express. Then, American Express turns around and offers you a credit card that comes with "rewards" that are...amazingly!...a percentage of the dollar value you spend. Doesn't this sound like a transfer of wealth? American Express is taking from the rich (Nordstrom's) and giving to the poor (you!) through the system of credit card rewards.

Now here's the kicker...who pays for it? Well, think about it like this: Nordstrom KNOWS that you love to use your credit card, and that you really WANT to use your credit card, but it costs them the merchant discount each time you do. So? They increase the price of the goods. ALL the goods in their store (since American Express has mandated that no one can charge a surcharge for using their credit card). So, a person paying cash pays the same price for a pair of boots as a person using an American Express card. But the American Express cardholder turns around and collects "rewards" based on the amount of their purchase. This could be seen as a discount on the boots. (I.e. They get the boots, but they also get a small benefit from the rewards, so the net price of the boots is lower than someone who paid with cash).

The moral of this story is: As long as credit cards offer rewards, EVERYONE should be using a credit card! Otherwise, the cash payers are paying a higher price than the credit card buyers. So run out and find the card that comes with the best rewards at the lowest annual fee you can find, and once a year you can take a trip with a free airline ticket, or get $200 cash back, or get a gift card to Bed Bath & Beyond, or some other "free" lunch. Use your credit card as long as there are rewards! Because if you pay with cash, all you get is....lunch.

Education as a Way of Signaling

Tis the season for recruiting, interviewing, and hiring around my office. And I am reading the resumes and cover letters of these fresh-faced, over-eager, handshake harder-than-it-needs-to-be, discount power-suit wearing and too-much-gel-in-their-hairdo yuppies who use big words and timelessly lame phrases such as, "I can go anywhere and do anything" or "I know I would be an asset, and not a liability, to your company," I wonder why we are hiring these people who know absolutely NOTHING about what we do here, or the real working world at all.

In general, universities - especially top universities - do not teach job skills. Technical colleges do a much better job at teaching skills. So what exactly makes companies hire from universities where the students know how to derive mathematical proofs and can analyze Shakespeare, when they do not do ANY of those things that you learn in college in the actual workforce? Simple - education is a way of signaling.

Signaling is a specific concept: It is the idea that you are trying to communicate to someone, and make them really believe you're telling the truth. Since we all know that everyone is self-interested, we cannot trust what people say, but what they do. Signaling is whatever method you find to show your commitment to what you're saying.

Think of it in more simple terms: Companies want to hire smart people. They can then teach smart people the job skills they will need to perform the job well. Okay, so how do you find smart people? EVERYONE you interview will proclaim they are smart. Even the highschool dropouts can claim that they dropped out because they were bored with the curriculum because it was too easy. So if you can't trust what candidates SAY, then observe what they DO. Specifically, do they put their money where their mouth is?

Smart people, who realize they are smarter than the average dumbskull, will apply to college and pay lots of money in tuition, in exchange for nothing but a degree. They will - for the most part - not learn technical skills. But at the end of the 4 year program, they can emerge and apply for jobs and say, "Look at me! I really AM smart! I KNEW I was smart, and so I spent all this money and time and went to college because I knew it would pay off for me in the end." And the prospective employer realizes that nobody knows the candidate better than the candidate themselves, and if they were willing to invest in themselves, it must be because they believe they are smart.

The REALLY smart people go on to graduate programs and get fancy "signals" called "MBAs". MBAs do not learn anything in an MBA program. It is purely networking. Some of the top MBA programs do not even issue grades to their students. It is entirely "pass/fail". Which means that it really doesn't matter how well you learned anything, because an MBA is merely a signal.

Now that you know that signals are ways of committing to something, which you cannot back out of and which depends on other people's responses, you will see signaling everywhere. What is an expensive engagement ring, really, but an irreversible signal of a potential husband's intentions? And when companies spend billions on advertising a product that is purchased repeatedly (such as Mr. Clean's Magic Erasers) you'll realize that they must really believe their product will sell well - repeatedly! - or else they wouldn't be able to recoup their investment.

Anyone else out there seen any signaling recently?

The Best Time to Buy

While "timing the market" is highly frowned upon and all financial analysts tell us over and over and over that we can't do it right, and we'll only lose more money by trying to do it, blah blah blah...but I did it! Not in the stock market, (I just invest, diversify, and leave it alone) - but in car shopping.

The automobile industry was really hurting over the summer in the large truck/suv area, because gas prices were so high and everyone freaked out and tried to sell their big suv, and nobody wanted to buy one. Well, I decided that since I knew that oil prices would have to come down eventually, I wanted to buy a truck when the truck prices were low - and then sit around and wait for gas prices to come down...which they did, as they always do. (We have a winner!)

With the economic turndown lately, you may not have too much extra cash to go buying things, - unfortunately, there's the irony. The best time to buy is usually when you don't have the money. But retailers are really hurting right now, so the discounts are deep. Walk through your nearest mall and just notice how many "50% off" signs you see.

The U.S. Postal Service Postage Rates and What the Future May Hold

Let me ask you a rhetorical question: How many emails do you send out each day, and how many letters? (That's the traditional, hard-copy, snail mail things that go in envelopes that get stamps put on them and dropped in boxes, for you email afficionados that don't use the U.S. Postal Service.)

Anybody here think that U.S. Postal Service rates are going to come down? Didn't think so. And how do you know that they will keep going up? Well, if you just look at historical trends, and realize that objects in motion tend to stay in motion, you'd conclude that the cost to mail a letter is probably going to keep increasing the rest of your life.

And why is this, you ask? Reasons could be due to rising fuel costs, general inflation, better/faster service, etc. But another reason may be: Elasticity.

Elasticity is quite a complicated theory to introduce in just one bite, so let's simplify it to an idea. Basically, it is your "Willingness to do something else". I, for example, have a high elasticity in purchasing bread. I do not care what kind of bread it is, exactly. Wonderbread is fine, but if that got too expensive for me, I would just switch to Eddy's or Grandma's Delight. I have a very low elasticity for Dove chocolate. Dove is delicious, but Hershey's is vicious. :) Got the idea?

Now, apply elasticity to the U.S. Postal Service. As the cost of stamps rises, how easy is it for you to do something else? If you're just sending a note to a friend, and maybe a picture or two, you could very easily send them an email instead. If you're mailing a check to the power company, you could do that instead through their online payment system. So, when it comes to some types of communication/transactions, you could very easily switch from mailing it to doing it online. That means that as the cost of mailing something rises, more and more things will switch to do it online. As that happens, the things that are left to be mailed are the really "inelastic" uses of snail mail. Such as: wedding announcements, checks to relatives, thank-you cards, jury duty, eviction notices, etc. :) Soon, the only mail sent via the USPS will be those that canNOT be sent over the internet. Those mail patrons have a letter that MUST be delivered as a hard copy. Well, what does that mean for the price of mail?

It will go up, of course! When the only uses left are inelastic, then even if they up the price significantly, there is no switching, because you HAVE to mail it. (This is, of course, limited to the lowest price FedEx or UPS or DHL charge to deliver a letter, since they are competitors at a high-enough price level).

So, the moral of the story is: don't expect USPS rates to come down (ever). Only the inelastic uses are left, so the price can go up and no one will switch.

Econ Bits - One bite at a time

This blog will attempt to open your eyes to the economic interactions going on all around you. Economics is not just about the stock market, or Federal Reserve interest rates, or even money. In fact, the most interesting economic ideas - at least, I think - are found in some surprising places...