Something that immediately presents itself when you’re a tourist, especially in a poorer country and especially when you’re a tourist in a common tourist destination like Oaxaca, is the prevalence of scams and ripoffs. You’re always on guard for scams, you’re also aware that a certain amount of getting scammed is inevitable, and since the overall price level is low and the scam-runners are likely poor you perhaps don’t care too much if you get ripped off some.
But this all strikes me as an underexplored element of economic interactions. The great genius of capitalism is facilitating mutually beneficial exchanges. I want a can of Diet Coke more than I want 8 pesos, so I hand 8 pesos over to a shopkeeper and he hands me a can of Diet Coke. Win-win. Then there’s fraud where you outright lie about what’s happening. That we understand, and it’s generally illegal.
But there’s this whole other world where, to a greater or a lesser extent, one party to the transaction is getting ripped off. We know this stuff happens. People buy lottery tickets, people put tokens into slot machines, and people pay fortune tellers. You can model all this behavior as self-interested and mutually beneficial by simply asserting that the people buying tickets are obtaining some large quantity of subjective utility from the lottery, but I think examining lottery marketing tends to cut against this interpretation. And this can move up from the realm of pure gambling. I saw a TV ad the other day marketing life insurance to AARP members. The idea of life insurance is that average payouts are less than average premiums (hence profit), but this bad investment may still be a good idea for your family because the economic impact of the loss of a breadwinner will be so devastating. But the whole logic of life insurance completely fails to apply to retired people.
I thought of this all recently in terms of continuing discussions of the mysterious sky-high profitability of the financial sector.
We often have this conceit that ripoffs are an economically marginal phenomenon that applies to, sure, tourists and gambling addicts and maybe naive poor people going to see tarot card readers. But if you look at the price premium people are willing to pay for “organic”-labeled products and the dubious science behind the theory that these products are superior to conventional varieties, I think it’s clear that yuppies aren’t immune to getting ripped off, either. And I think we should be open to the possibility that this is happening in finance. How much do the sundry pension fund beneficiaries, 401(k) holders, endowed nonprofit managers, etc. of the world really know about the investment game? Are they really that much more savvy and sophisticated than their working class lottery ticket buying peers? Or does their self-image as savvy sophisticates make them that much more prone to being ripped off? After all, Bernie Madoff was able to swindle a bunch of very sophisticated investors out of a great deal of money. He did it through actual, prosecutable, criminal fraud. But not every scam and ripoff is a fraud, and not everything that’s legal is a mutually beneficial transaction.
The great genius of capitalism is, of course, its power to facilitate economic sin (greed, covetousness, indolence, usury, inequality, luxury, selfishness, pitiless contempt for the poor) on a hitherto unimaginable scale.
Of course, apparently Mr. Yglesias and the Manhattan elites think capitalism is a _good_ thing.
Bravo on the absurdity of the life insurance-for-seniors scam. It’s a travesty that AARP is endorsing/marketing this kind of nonsense to seniors, and they ought to be shamed publicly.
Absolutely. I think almost everyone buying commission (non-index) mutual funds are getting ripped off. You are gambling that your investment guy is one of the 10-20% who will beat the market indexes this year. Well, that makes 80-90% of fund investors losers on that gamble. But there are a zillion “financial advisers” out there who make their salary almost solely based on the commissions from selling these loaded (commissioned) mutual funds. Those people are running casinos, and they make their profit whether the investors win or lose. If you want to invest in the stock market, fine, but at least put your money in an index fund and refuse to pay the house their rake.
Full disclosure is the highest form of dishonesty. It’s right there on page seven of that booklet you waived your right to receive when you first swiped that card.
Matt,
The Financial industry ripping off unsophisticated investors is an old game. However, the Supreme Court recently took up a case that involved mutual fund advisers charging fees that were "so disproportionately large" that they "bear no reasonable relationship to the services rendered." than others.
http://www.scotuswiki.com/index.php?title=Jones%2C_et_al.%2C_v._Harris_Associates
http://marketplace.publicradio.org/display/web/2009/10/30/pm-businesses-in-court/
We often have this conceit that ripoffs are an economically marginal phenomenon that applies to, sure, tourists and gambling addicts and maybe naive poor people going to see tarot card readers.
Who is this “we”? I think you just spend too much time around economists and/or libertarians.
But if you look at the price premium people are willing to pay for "organic"-labeled products and the dubious science behind the theory that these products are superior to conventional varieties, I think it's clear that yuppies aren't immune to getting ripped off, either.
There’s no “dubious science” behind the theory that dumping vast quantities of pesticides into the environment is a bad idea. There’s also no “dubious science” behind the idea that routine application of antibiotics to industrially farmed animals is liable to create dangerous antibiotic resistance in various pathogens.
What the hell are you talking about?
Or when the car manufacturers sell that super extended mega warranty that’s only valid if your oil changed by the licensed dealer every 3,000 miles.
“But the whole logic of life insurance completely fails to apply to retired people.” True unless (1) there is such a thing as estate taxes and (2) life insurance proceeds don’t pass through the estate. Oh, wait….
The leverage arguments are interesting, but I’m much more likely to believe that the changing of investment banks from partnerships to corporations is responsible for most of the troubles with Wall Street and the financial sector in general. One is much more likely to pursue risky leverage vehicles when they are borrowing against _other_ people’s assets instead of their own. If the bet goes belly-up, I’m not losing my money, but rather other people’s. In general, banks always have to have some skin in their own investments for pension funds, 401ks, etc. to invest with them. The problem is that this money is no longer that of the partners in the bank but rather that of investors in the corporation. Just look at all the managers who still are rich even though they were party to buying some of the terrible CDOs that led to the need for bailouts. They were safe because once they got their money, they no longer had any skin in the game. Billionaires like the old Bear Stearns CEO losing hundreds of millions from the crisis are not usual in the world of Wall Street these days.
Widespread abuse of the term organic. The specific examples you listed – disuse of pesticides and antibiotics – are examples of proper practices that deserve the term organic. But it has become common practice for companies to slap the label “organic” on products that have done little to deserve the title. But we, as consumers, see the word and assume it is appropriate to pay a premium for the product anyway.
Anyone who wants to understand just where the Obama administration stands on protection of the public from ripoffs need look no further than the performance of the CFTC.
The CFTC can control speculation in the oil futures market by setting limits on how many contracts speculators can buy. The CFTC already has that authority. There was a lot of congressional activity re the CFTC in 2008 and many expected Obama to restore speculation to the level prior to Bush.
The CFTC has not acted in two years and just announced that they needed yet more time to study the issue:
http://www.huffingtonpost.com/raymond-j-learsy/oil-over-90barrel–time-t_b_801451.html
Obama clearly loves his plutocrat buddies more than he loves you.
The life insurance comment is just odd. Life insurers typically make money off of the float, not the underwriting.
That has nothing to do with dubious science. Matt specifically discussed fraud earlier in the post.
But this all strikes me as an underexplored element of economic interactions.
Maybe. But isn’t this the main topic of that whole relatively new, but very successful area of economic theory concerned with “information asymmetry”?
Yeah, I see your point, and I think I gave him more credit initially than he deserved. His statement does seem to be undermining the organic movement in general, rather than specific abuses. He really should clarify that.
Theory aside, it has long been understood by those who sell things for a living that among the participants in the marketplace are a relatively high proportion of “suckers” and “pigeons”.
Which applies to how many of those who are going to be buying life insurance that late in life? Oh, right…that’s NONE. Stop pretending estate taxes hit ordinary people.
Without disputing the comment about where the primary source of income is, does it make sense for a life insurance company to have its underwriting division operating at a loss? Probably not. A more sensible plan is to have the underwriting operate at or very near profitability. So, point to Matt.
Don’t forget “marks.”
AARP life insurance policies are designed mainly to cover funeral expenses. Typically they have low face values, $10,000 or thereabouts. From a customer’s standpoint they are basically a no-lose proposition. If the customer dies within two years of the policy date, the beneficiary gets back all of the premiums paid, plus interest. After two years, the full face amount is payable upon death.
Term life insurance is the real gamble. It’s inexpensive and provides vital benefits if the policyholder dies. For that reason it makes very good sense for breadwinners with family responsibilities. The dirty little secret, however, is more than 98% of term life insurance policies terminate without payment of any benefits.
This. What MattY calls “rip offs” is what economists call information asymmetry. There are solutions to these problems, typically called screening, which could be applied to the financial industry. But it takes a lot of work on the part of the consumer. Part of financial regulation should be to make that screening easier and more effective.
But I think even screening kind of falls apart in many cases in the financial industry because the seller is selling snake oil. Even the most honest brokerages still sell funds with high commissions bragging about their high return last year. But they always have to include the well-known caveat “past returns are not indicative of future performance”. Because they are not! At all! These guys are really just selling different numbers on a roulette wheel, so in a way no level of information transfer will help consumers avoid that fact if they choose to buy funds.
I’m not sure how much “science” is actually involved, but I do think it’s fair to say that a lot of consumer decisions in this area are based on rather suspect reasoning.
For one thing, there’s not much evidence that [most] organic produce has any particular consumer health benefits vs. an equivalent diet of non-organic produce. Such residues of pesticide or whatnot as might remain on a product by the time it reaches a store are basically non-existent (certainly there are some exceptions – but the popularity of the “organic” label is hardly confined to only the genuinely risky products).
And yet, my guess is that personal health concerns are exactly what is driving a large fraction of “organic” purchases. If you add that to the fact that “organic” has become synonymous with higher quality/upmarket products and other various signalling/lifestyle factors, I think you end up without much room for much genuine abstract concern for the environment or concern for agricultural workers facing genuinely dangerous levels of pesticide exposure.
And that’s on top of the fact that “organic” (at least if conventionally understood as “no use of chemical fertilizers or pesticides”) is not at all synonymous with “good for the environment”.
Excessively zealous adherence to “organic” practices can be quite harmful if it prevents adoption of genuinely sustainable techniques. For example, erosion reducing no-till techniques often require the use of herbicide (e.g., Roundup) to replace tilling in clearing off the previous crop. It’s not “organic”, but using a safe, rapidly decomposing herbicide is a thousand times less polluting than any “organic” practice that involves tilling and the attendant soil erosion and destruction of soil structure and culture.
We should probably have a label for products that are actually produced using the safest and most sustainable practices available – but “organic” isn’t it.
Yuppies buying organic food raises the comic possibility of a rip-off merry-go-round, but is there a neumann-morgenstern agent subclass of market participants that aren’t getting ripped off? Or are we all individuals paid by organizations that make their income in part by ripping off the individuals in other organizations? I’m guessing a partial ripoff equilibrium, with tails on both ends of agents on the ripped-off/ripping-off continuum.
Yuppies buying organic food raises the comic possibility of a rip-off merry-go-round, but is there a neumann-morgenstern agent subclass of market participants that aren’t getting ripped off? Or are we all individuals paid by organizations that make their income in part by ripping off the individuals in other organizations? I’m guessing a partial ripoff equilibrium, with tails on both ends of agents on the ripped-off/ripping-off continuum.
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