Economics dispatch from the Comic Con – Some Superheroes wield pencils

Each year, I post an econ themed dispatch from the Bengaluru Comic Con, arguably India’s biggest pop culture convention. The issues we have addressed in the past have mostly been about the fans who visit and consume the wares on offer – from comic books to art to merchandise to hot dogs. But this time let’s return to something I talked about in the very first dispatch from the very first con – the independent artist and her travails – but hadn’t paid a lot of attention to since.

comic con general

Ars Gratia Artis?

The economics of art is usually complex, and frequently brutal. Superstar artists tend to earn disproportionately well, while many aspiring ones are eventually left in the dust. Such a phenomenon, seen often in creative industries (literature, movies, television etc.) and even sports (we have done a detailed post on tennis here), is called a ‘Winner Take All’ market in economics. The nature of such markets make competition skewed and unfair and what I discovered at the Comic Con this year was that rather than serving as a platform that could provide a level playing field, it only accentuated and amplified the problems that are a bane for the independent artist in the first place.

Independent artists are kind of like Batman. How? They are both independent contractors. Independent creators have to do it all themselves – from production of their merch to the logistics of transportation to other related administrative tasks. Then, to reach an audience and a market they need the equivalent of a bat signal. Gotham gladly pours tax dollars to set one up for the caped crusader. The artists usually have to pay an access fee. That fee allows them a small space in the market that is the convention where they will sell their wares.

And we have not even mentioned the opportunity cost of the amount of time and effort the individual artist has to spend to create the art she is selling. Practically, all of this cost needs to borne before even a single sale is guaranteed. In short, setting up as an independent artist at the Con has a huge fixed cost – the cost you bear regardless of your level of output. This creates a unique problem. Any other producer has significant avoidable costs they can wriggle out of in case they find the market doesn’t have demand for their product – they can run smaller production batches, for example. The artist has no such flexibility in such a scenario.

indie artist

An independent artist stall at the Comic Con in New Delhi last year. (2017)

Cost busters

I have met some brilliantly talented artists over the last six years where I have been to all the six cons organized here, and many of them are just starting out, fresh out of art school, or probably still enrolled there. Think of them as being similar to aspiring tennis pros playing in Challenger tournaments spending their own money. (Incidentally, about half of those who can call themselves professional tennis players make losses – they spend way more than they earn in match fees and prize money.) Artists, similarly, don’t all make bags of money. That’s why those fixed costs, which can easily run up to Rs. 50,000 ($700), tend to be almost prohibitively cost for a lot of them. Nonetheless, driven by a passion for their work, the chance to interact with a community and cultivate a network of fans and patrons, many take the leap, sometimes pooling together their costs (sharing stall space for example).

The problem is, at the convention, sales don’t just happen on talent alone. Any pop culture market has a huge degree of bandwagon demand involved and that in turn depends on visibility and at least some rudimentary publicity. The convention seems to failing in its objective to provide those.

I watched it first hand this year at two stalls that friends of mine had rented. Rather than being an organized or a predictable market with transparent information, the setting became chaotic to a level that would make The Joker blush and make the actions Mad Max: Fury Road sane by comparison. One of them, Varsha, penned a post down in measured and thorough detail the issues that plagued the set up for independent artists at the convention.

To point out just two – a tiny allocation of space (2mX2m is the standard) whose price has increased way more than inflation, and infrastructural snafus (from lack of basics such as drinking water to potentially lost sales because of poor connectivity to do online transactions). Competitive markets aren’t supposed to have frictions like these. Discovery is an independent artist’s lifeblood (think music and Spotify) but with mislabelled or misallocated stall numbers and very little information on official pamphlets and communication at the venue, the search costs were unreasonably high for anyone actually even looking for a specific artist.

Imagine independent filmmakers going to a festival and the event editing out half their film, or providing them terrible projection facilities. Or tennis players being asked to compete on broken down courts or with no access to water during a match. I should mention that I have watched some of these artists first hand at not just this year’s event but over the last 4-5 years, and looking back it is clear that the issue is a systemic problem and not a one off. So, why does this happen?

Because of the oldest problem in economics – mismatched incentives. The convention provides access to two crucial resources for an artist – a captive audience and precious real estate amidst that audience. It is organized by a for profit concern and naturally they tend to design its economics to suit their objective. After all, to quote the most recognizable economist of all time, Adam Smith, “It is not from the benevolence of the butcher…that we expect our dinner, but from their regard to their own interest.” The convention organizers lock their revenue in early by taking fixed payment for stall spaces, and with their revenue not tied to the fortune of the stall’s sales, have no incentive to provide any facilitation that would improve the revenues for these artists. They aren’t necessarily doing this out of malicious intent, but probably are guilty of avarice. They have no skin in the game.

thomas wayne

Thomas Wayne used privilege for good. Would the convention organizers do the same?

Which brings us to the last and existential point. Should the organizers be bothered about this? The answer might seem a resounding ‘no’ from a business perspective, but art is not business as usual. Artists add unique value to society, something that doesn’t always get captured in terms of monetary measures. And across the world, they are usually given subsidies or subsidised platforms. Like Thomas Wayne says to little Bruce in Batman Begins;

“Gotham’s been good to our family. But the city’s been suffering. People less fortunate than us have been enduring very hard times. So we built a new, cheap, public transportation system to unite the city.”

The Wayne family stepped up to use their position of privilege for good.

This is a chance for the convention to step up for the cause of the little guy and restore that uniqueness they bring to the event. Or, at the very least, change the incentive structure by, for example, getting into some kind of a partial revenue sharing arrangement. Sports stadiums and food sellers inside them are slowly beginning to learn the benefits of that – better food and lower prices for fans.

Coda

Every independent artist I have seen over the years has been nothing short of heroic in terms of their talent, and the difficulties they have to endure. But they can’t remove every obstacle themselves. Even superheroes need to be bankrolled. Just ask Bruce Wayne and Tony Stark.

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With a little help from… (my) strangers?

The current levels of unprecedented flood damage in the Indian state of Kerala – its worst in almost a century – have triggered an equally unprecedented humanitarian effort that involves government and non government agencies and individuals alike to help the affected areas get back on to their feet. In the context of a broader human nature narrative, this is at the same time almost predictably routine yet startlingly remarkable.

In his book, The Company of Strangers, Paul Seabright, who looked at the economy through the lens of evolutionary biology, puts that paradox in perspective saying:

It is hard to believe that something as complex as a modern industrial society could possibly work at all without an overall guiding intelligence… [t]his coordination comes about simply because of a willingness of individuals to cooperate with strangers in a multitude of small but collectively very significant ways.

The current situation in Kerala is a somber reminder and a chance to examine this idea, its sources of resilience and fragility, and draw lessons in cooperation for the future. However an unfortunate byproduct of the polarised times we live in have been silly remarks that at best are uncharitable towards the relief and rescue efforts and at worst disparaging what we should all be taking for granted as basic decent human behaviour. This post is not about dissecting that argument (the remarks are so bad, they deconstruct themselves in effect). This is about taking a look at why we tend to react the way we do to natural disasters of this magnitude and why altruism should not be seen as an aberration in human behaviour in an economic context but as something that makes complete logical sense.

It’s a feature, not a bug.

Our lives are usually dependent on an economic system, a faceless, abstract framework that allocates resources. Individually, everyone is trying to meet their needs by being able to exchange, say, their labour for money, which in turn helps them transfer the goods they need to them. As Ha-Joon Chang puts it in ‘Economics: The User’s Guide’ “[money] is a symbol of…your claim on particular amounts of the society’s resources…” All of economics is about allocation of resources which usually have multiple uses and hence are scarce and thus should ideally be put to ‘efficient’ use. The economy in general around the world (regardless of how it is organised – through market forces or government intervention and planning) functions based on transfer of these resources and the output they produce.

Largely, those transfers are incentive based (the baker sells you cakes because she earns an income selling it not because she is a fan of The Great British Bake Off) and millions of these transfers through complex networks of marketplaces (both physical and abstract) make up the thing we call ‘the economy’, where you can go to the pharmacy and get that aspirin you wanted without having to worry about how it is made or who makes it, or get your skill set gainfully employed for which you get a fair compensation, or put your children in a good school that doesn’t require them to trek through two towns to get to. The system is almost a living breathing organism that functions largely smoothly thanks to strangers trusting each other (your employer may have done a background check on you, but in effect it is hiring a stranger, the same thing happens when you visit a new hairdresser or hop on to a plane where you personally know the crew, the pilot or the plane manufacturer) and continues its job of allocating and reallocating resources so that they find the best use for overall welfare.

However, during a natural disaster induced external shock, this system breaks down, primarily because the incentive structure that was generally driving it (profit) no longer works well. During a disaster a rapid reallocation of resources is required (floods may have submerged the highways so you need water transport; the village hospital may be underwater so you need alternative access to doctors, medicines and facilities) and the existing system cannot engineer an immediate readjustment. Which is why, during the Kerala floods, voluntary contributions (whether in the form of money or in kind – more on that in a minute) have taken centre stage. In terms of a system, a parallel one now needs to be set up which works on a different incentive structure and with different goals.

Natural disasters happen around the world and whether it is Puerto Rico or Palakkad, governments typically have disaster funds set aside (as well as emergency help to call on, from the defence and special forces, for example) to meet this need. The trouble is when once in a century kind of an event hits, those resources become woefully inadequate. That doesn’t necessarily signify a problem with governance, it is more likely a case of something that is impossible to anticipate and prepare for well in advance.

Enter volunteers.

Altruism has often stumped neo classical economists who have tried to explain it in terms of rational cost versus benefit analysis but while it may not seem obvious at an individual level, as a collective it makes sense (remember Seabright’s ‘multitude of small but collectively significant ways’?).

The other question going around has been about whether donations should be in kind or in the form of money. There is a clear economic winner here – money is the ideal donation because it is the most fungible resource (it can buy what is needed whereas with in-kind donations sometimes the allocation is not as efficient – it will be unfortunate if say excess tins of baby formula reach a relief camp that has no babies whereas another teeming with babies is facing a shortage). Having said that, everyone may not have the ability to donate money and if they are in a position to offer other resources they have (labour, expertise, time, even knowledge) is perfectly valid.

Every one of you reading this who has donated either in kind or their time/effort and/or money in the Kerala floods rescue effort may have had different kinds of motivations (feeling good about yourself, a sense of national or humanitarian duty, empathy for the victims based on your own experiences etc) but all of them are usually driven by what psychologists call affect. But make no mistake, while those sentiments are perfectly valid and thoroughly admirable, the collective effort makes perfect rational sense too. The normal economic system has broken down and a parallel (and temporary) one needs to take its place because things are at risk. For example, if an epidemic were to break out as the flood waters recede, it could be a public health threat not just in the state but outside it too. The breakdown also means temporary disruptions to supply chains which have ripple effects on markets outside the state (your sea food dinner might become costlier for example) and so on. To battle this negative externality, helping the victims out even when it is a contribution you are making outside of your taxes actually becomes critical.

The Gulf states who have announced help for Kerala are not just doing it out of niceness, it is important for them that a key link in their value chain (migrant workers for an economy that desperately needs them) is not disrupted in the long term.

At its most basic an economic system should function where as many people as possible have their needs met fairly (welfare) and there is room for growth. A natural disaster is a spanner in those works. The machine can grind that spanner out over a long term but such a delay can be disastrous which is why intervention is needed to get the system up and running. In normal times, through the incentive of profit and self interest (Adam Smith style) a large number of strangers work together to make it function. But when times are unbelievably tough, those fragile links break down and we are down to another set of strangers who need to work under a new incentive system to put the pieces back together.

I’ll leave you with a hopeful and important reminder from Seabright’s The Company of Strangers:

As you are reading these words, somebody you have never met is working hard on your behalf. Almost certainly many people are working for you – an Indian farmer driving bullocks across his land so he can plant the cotton that will be made into the shirt you will buy sometime next year; a Brazilian farmer harvesting the coffee beans for your breakfast next month; a civil servant planning the road improvements close to that dangerous junction you pass on your way to work; a chemist synthesizing molecules to treat the illness that you still do not realize you have. These people do not know you, but they do not need to, even though your life, your health and your prosperity depend upon them. You have every reason to be grateful for the intimate links that tie them to you.

That is why you should be donating and/or helping in any way that you can. Because paying it forward is not a case of figuring out who precisely is being helped or what section of society has been impacted, it’s more universal than that.

Why is that the case? What is that driving force? It isn’t really clear cut; you could call it altruism, you could call it humanity, you could call it feeling good about oneself, but whatever it is, it is a feature worth preserving.


DONATE

If you are looking to donate towards the relief and rescue for Kerala, here are a couple of useful links:

The Chief Minister’s Distress Relief Fund: (direct contribution) 

Other avenues and details: PayTM, Relief collection centers, online portals, individual requirements etc. 

Z is for ZIP IT (The A2Z of Economics 26/26)

Z ZIP IT

thanos

Thanos demands your silence, but should you give in to the mad Titan’s demands…


WHAT

With Avengers-Infinity War playing in theaters right now, and tickets hard to come by, one challenge fans face is avoiding spoilers. In this connected age of social media, spoilers might seem like a scourge (for Infinity War, the directors put out a request on social media – pic below – for fans to refrain from discussing important plot points till the film releases and has been seen widely) and something that people attach a lot of value to.

zip it

You may remember the story of the teacher who disciplined his class by threatening to reveal Game Of Thrones spoilers each time they misbehaved. The incentive worked like economists dream they would. The class toed the line right away. But do spoilers really spoil anything?

Back in 2016, YouTube will begin scrubbing contents that contain spoilers for TV shows or movies citing that they hurt business and impinge on the copyright of the creators. YouTube’s move assumes that spoilers are a problem in the sense that they deter audiences who would have watched a movie or a show by revealing, say, what happened to Bruce Willis in The Sixth Sense or what Tyler Durden’s secret is in Fight Club or if the girl in Gone Girl is truly gone. The problem with that thinking is that the economics of spoilers is not as straightforward as it might seem.

SO WHAT

While we generally see the sentiment all around that revealing spoilers are at best bad etiquette and at worst bad commerce, there is mounting evidence that the effect could be much more counter-intuitive. When I went out and bought Harry Potter and The Half Blood Prince on the day of its release and was getting back home with a friend in his car, he opened the book at a random page and started reading out aloud. I stopped him, annoyed that he might reveal something ahead of time. Yes, spoilers sound irritating and possible turn offs. But a fellow Harry Potter fan borrowed the same book from me two days later. When she came to collect it, she asked what had happened in the book. I told her to read it for herself. She looked at me and with a straight face said, [SPOILER ALERT!] “Dumbledore dies, no?” I was dumbfounded and didn’t confirm or deny her theory. After she’d read the book, I asked her if she liked it. She loved it. I was curious if the inadvertently revealed twist had lessened the reading experience. She claimed that it hadn’t. At that point I thought she was just being polite. This was 2006.

Five years later, there would actually be research to show that her behaviour was not all that uncommon.  At the University of California San Diego (UCSD), Nicholas Christenfeld and Jonathan Leavitt conducted a research to see how people react to spoilers. They gave people a set of mystery stories and/or stories with some twist in them (like Anton Chekov’s ‘The Bet’) – one group read a spoiler free version and another read one where there was an early spoiler about the ending or the twist. Interestingly, people who read the spoiler version rated their enjoyment of the stories slightly higher than those who read the spoiler free versions. The concerns of TV network executives or movie studios about spoilers and the YouTube move seem a bit much in this light.

WHY SHOULD I CARE

Recently, Netflix commissioned a study on spoilers and their effect on viewers. An overwhelming 94% of the people surveyed by Harris Poll for Netflix said that a spoiler doesn’t make them want to stop watching a show. Significantly, 13% actually said spoilers increase their interest in a show or movie they haven’t watched. The much derided spoiler, more than spoiling economic prospects of a TV show, book or movie seems actually to be acting as a teaser and a marketing tool that could lift interest and sales.

How the economics of a spoiler truly works is far from being completely clear, but to try to understand its effects we need to consider the product that it is associated with as a whole. A TV show or movie or a book or even a play is an experience the audience wants to subject themselves to and the twist is a small part of the payoff (that’s what the Netflix study and the UCSD research seem to suggest). They want to see how things got there even if they know where things got to. I can add my own experience as anecdotal evidence here. I knew about Game Of Thrones’ Red Wedding much before I watched the episode, but was just as shaken and shocked. Imagine going to the Globe Theater in the 16th Century to watch Romeo and Juliet and meeting someone on the street who yelled ‘They die in the end!’ Far from ruining your evening at the play, it would probably have heightened the sense of tragedy that the play is about.

Studios, TV Networks and authors rail against spoilers and often spend a lot of money and effort to keep their points and twists under wraps (Christopher Nolan – mind you, I am a fan – is an annoying example). But is all that effort and cost worth the benefit? The new evidence is beginning to suggest otherwise. Fascinatingly in the Netflix study, while 21% Americans were fine with sharing a spoiler immediately, only 4% of Brits thought it was the right thing to do. Spoilers seem to be more of a social etiquette problem than an economic one.

The real twist in the tale might be that conventional economic thinking about spoilers was wrong all along. Just like Bruce Willis was dead all along in The Sixth Sense. Oh, whoops, sorry.


QUOTE SMART

‘In this age of information, we’ve become mildly obsessed with avoiding spoilers, staying away from social media lest we learn about the…surprising twist in the latest blockbuster. But this is a new habit. After all, mass culture consisted for thousands of years of stories that were incredibly predictable, from the Greek tragedy to the Shakespearean wedding to the Hollywood happy ending.’

Jonah Lehrer, Wired magazine

Y is for YIKES (The A2Z of Economics 25/26)

Y : YIKES

YIKES

Courage is a good dog, because while he is often paranoid, in the end he somehow manages to not damage the herd because of his fear. 

WHAT

Economics has often been labelled the ‘dismal science’ for its original preponderances about poverty and in the modern context considered heartless and detached because it often attempts reducing everything down to solvable equations involving rational agents transacting with each other.

The problem is, however, that we are often irrational and during a crisis or potential panic doubly so. In his brilliant book ‘The Company Of Strangers’, Paul Seabright points out that the edifice of modern society and hence economies rests on rather fragile foundations:

Modern societies are fragile. There are rare but dangerous moments when a fresh wind blowing from an unexpected quarter suddenly brings apparently solid buildings crashing down. Such collapses are no less dangerous when they involve the intangible structures of our social life: the informal norms and formal institutions that ensure that trust takes the place of mutual suspicion.

We are dependent on a system that depends on cooperation and trust among a bunch of strangers and when panic takes over, our reasonable fears (for example, the possibility of contracting ebola) meet poor logic (‘Oh my God! What a deadly virus! It kills 3/4th of its victims’) and misinformation (you can contract ebola by touching a bowling ball someone diagnosed with the disease used; you can’t by the way) and all the trust and these fragile bonds begin to break down or fray at the very least. Soon, a perfectly reasonable an orderly society descends into chaos and madness.

SO WHAT

Charles Mackay put it well in his well known book Extraordinary Popular Delusions And The Madness Of Crowds, “It will be seen that (men) go mad in herds, while they recover their senses slowly, and one by one.” Fear and paranoia take over suspending rational judgement and measured action that carefully considers costs and benefits. The result? An economic cost that becomes far greater and painful than it should be.

Fear is what usually causes stock market crashes or runs on banks. To put it more correctly, fear is what makes stock market crashes worse because everyone suddenly becomes a seller sending stock prices plummeting to unreasonable lows. That is not to say that stock market crashes happen just because someone screamed ‘Fire!’ but most certainly and on most occasions they are far more severe than the underlying cause warrants. It is the same mentality in a stampede. It may have been triggered by a small incident but suddenly, say, a horde of people make for a tiny exit at the same time and before you know it, a catastrophe develops. Unfortunately, there are unwitting victims who suffer collateral damage as a result. The case of epidemics is much the same.

Back in 2004/05 when SARS hit South East Asia the World Bank estimated the cost of the epidemic at $40 billion. In a recently released estimate on the ebola outbreak in West Africa the cost is pegged at $32.6 billion for 2015, when the disease broke out. The numbers in themselves are depressing because they will mean lower incomes for people in what are already low income countries – for example, the chocolate industry and the market for cacao, chocolate’s main ingredient, has been hit badly enough for confectioners like Nestle to contribute to a response to ebola initiative even though the main producer Ivory Coast had not reported any ebola cases. Then there is Gambia where there had hardly been any cases but hotel bookings were down 65%. And Gambia is an economy heavily dependent on tourism.

WHY SHOULD I CARE

But the really astonishing part is the fact that the World Bank report points out that during the SARS epidemic ‘behavioral effects are believed to have been responsible for as much as 80-90% of the total economic impact’. Thus the indirect economic costs of an epidemic, the kind caused by what the economists at the World Bank called ‘aversion behavior’ is nine times of the direct costs.

During SARS, people stopped taking flights into the affected and neighbouring countries thus hitting the airline industry hard; those tourists not turning up in Gambia is aversion behavior as well. Irrational fear which springs out when a reasonable fear is fanned by misinformation and paranoia can end up costing people dearly.

Fear amplifies the costs we are willing to bear to ridiculously high levels. As Joe Schwarz, the director of the Office for Science & Society at McGill University told The Guardian – ‘Fear tends to open people’s wallets and at the same time it closes people’s minds.’ It is hard to remain rational when faced with fear; we are evolutionarily programmed not to.

But that doesn’t mean we completely suspend all senses and run with the herd. In fact, we tend to hurt ourselves worse that way. Whether speculating on the stock market or gauging our chances at becoming the victim of a worldwide epidemic, panic and fear never really drive us to good decisions because they make our already existing cognitive biases worse. The result? Collectively, we end up paying a far higher cost than we should have.

So, how do we keep fear and the costs it induces at a reasonable level? There are no easy answers. Your mother will always worry when you call her up and she hears you sniffle from a cold at the other end. But it is possible to increase the sources you get your information from. Economics doesn’t quite have a neat solution but during a hazard or a crisis, the most important antidote to panic is reliable and solid information. Because fear rides the rumor train straight down to crazy town. It is critical to talk to people on terms of risk assessment they would understand.

As for you, dear reader, remember what is written in large, friendly letters on the back of The Hitchhikers Guide To The Galaxy – Don’t Panic.


QUOTE SMART

“Panic on the streets of London…
…I wonder to myself
Could life ever be sane again?”

The Smiths, “Panic”

X is for X-EFFICIENCY (The A2Z of Economics 24/26)

X: X-EFFICIENCY

XEFF


WHAT

In the 1960s Harvey Leibenstein [keen eyed readers may remember him from the bandwagon effect post] was teaching at Berkeley. He had a graduate student as an assistant and it struck him that the student’s effort and performance varied considerably from week to week. Leibenstein, an economist, who had been researching about efficiency had a bit of an epiphany from this experience. He realized that the student’s motivation and efforts were variable and classical economic theory does not usually assume that happens with rational agents. His point, which he made in his paper, Allocative efficiency vs x-efficiency, was that due to lack of motivation and competition, or poorly designed incentives, firms or individuals may not always look to make the most efficient use of their resources.

The sources of such inefficiency could be many he said, including motivation and incentives, but he coined the X-efficiency to describe this situation where a firm may not be producing goods at the lowest possible cost or individuals not performing to the best of their ability, which leads to wastage of productive time and resources. Something classical economics tends to assume away. In the real world, however, we have to deal with x-efficiency on a daily basis when dealing with colleagues [someone doesn’t turn work in on time, someone like the graduate student assistant of Leibenstein is super productive one day, mentally AWOL the next], businesses [the bank employee is out to extended lunch and doesn’t care much about your urgency] and even our favourite sports teams [as Arsenal fans would attest, maybe Arsene Wenger should have stepped down as manager 5 years ago].

SO WHAT

The basketball team Chicago Bulls were what you call in American sports a dynasty in the 1990s when in his heyday, the peerless Michael Jordan led them to six NBA titles along with coach Phil Jackson. What is often lost in the spotlight of adulation that shines on Jordan and the other legends such as Scottie Pippen is the contribution of a player like Dennis Rodman.

Rodman is a Hall of Fame basketball player who was an ace rebounder (one who collects rebounds from shots that are missed) and played with the Bulls between 1995 and 1998, winning the title with the Bulls thrice in a row – 1996, 1997 and 1998. He was the rebounding champion (highest number of rebounds collected) for 7 (!) consecutive seasons between 1992-1998. But for all his achievements and a mind boggling 11.954 career rebounds Rodman had a patchy disciplinary record. Nicknamed the ‘worm’, his 1996 autobiography’s title captures the bad boy image that he projected through his tattoos, piercings, hairstyle, legal troubles and his often abrasive on court behavior. The book was called ‘Bad As I Wanna Be’. (Oh, btw, he dated Madonna for a short while too!)

In the 1996-97 season when the Bulls had offered him a contract, it guaranteed him a certain payment, regardless of number of games played. Rodman played in only 55 of the Bulls’ 82 regular season games, effectively getting around $3 million for stuff he didn’t do!

Naturally the Bulls tread carefully in 1997, and to get over this problem of x-efficiency, negotiated what Max H Bazerman and James J Gillespie in a 1999 Harvard Business Review article called ‘Contingent Contract’. Bazerman and Gillespie pointed out that “many negotiations collapse over differences of opinion about how the future will unfold” and go on to suggest that companies and negotiators whether in the world of sports or elsewhere “need to realize it’s often better to bet on uncertain events than to argue about them.”

The Bulls, as cited by Bazerman and Gillespie in their article, went on to ink a ‘contingent contract’ with Rodman – a contract whose terms are not finalized until an uncertain event takes place. In this case, Rodman’s contract was worth $10.5 million but with only $4.5 million of it was guaranteed. The rest of the payments were dependent on certain ‘uncertain’ events (because Rodman’s behavior had been unpredictable) happening – Rodman would get $185,000 for each game he played after the 59th game of the season (usually the time he started to slump off – it was like offering engineering students an incentive to show up for classes in the Seventh semester!), $1 million for playing all the games in the playoffs and $500,000 for winning the rebound title. And lo and behold, Rodman achieved all three finally netting $10.1 million of the potential $10.5 million offered to him.

WHY SHOULD I CARE

There is a very important lesson in this for anyone who designs such contracts or similar arrangements. The lesson is the four word maxim that Stephen Dubner and Steven Levitt wrote down in their path-breaking book ‘Freakonomics’ – People respond to incentives. It is the easiest lesson in economics, yet people lose sight of it often shaping contracts and arrangements that give people the incentive to do the opposite. When the right incentives are offered, people react to it.

In Bollywood, the recent trend, pioneered by Aamir Khan, has been of actors sometimes accepting a reduced fee in exchange of profits from the collection of the movie at the box office. It is a perfect example of a contingent contract where the actor is putting his money where his mouth is. The incentives suddenly change and the actor will be keener for the movie to do genuinely well. And the risk of a movie studio paying a hefty amount for a superstar and ending up with a dud is reduced or at least shared in a sense.


QUOTE SMART

People are people, and they respond to incentives. They can nearly always be manipulated–for good or ill–if only you find the right levers.

Steven D. Levitt, SuperFreakonomics

BONUS STORY

[Oh hey you made it to the end of this post! As a reward, here, have this cool Leo Messi story.]

Jeff Himmelman writes in The New York Times about the time when a certain Lionel Messi was setting the football field on fire as a young boy:

“One of his early youth coaches in Rosario, a man named Carlos Marconi, discovered that Messi also enjoyed alfajores, a kind of chocolate cookie. According to an old TV interview with Marconi, they struck a deal: a cookie for each goal. The trouble was that Messi routinely scored four or five goals a game for his club, Newell’s Old Boys, and so, to motivate him, Marconi had to make it harder. Messi was tiny at the time, the best player on the field with the ball at his feet but shorter than everybody else by a long shot. To push him, Marconi announced a new regime: two alfajores for every goal Messi scored with his head. The next game, Messi dribbled through the entire opposing team, including the goalkeeper, then stopped at the goal line to flick the ball up into the air with his foot so that he could head it into the empty net. When he found Marconi’s eye in the stands, Messi smiled and held up two fingers.”

Every decision we make involves incentives. We have to think of whether they will get people to act in the way that is right.

 

W is for WAGON, Bandwagon (The A2Z of Economics 23/26)

W : [BAND]WAGON

wagon

‘Kitne aadmi the?’ ‘Pehle pehle zyaada nahi sarkar lekin phir bandwagon effect ki wajah se…’


WHAT

On August 15, 1975, Sippy Films released ‘Sholay’, the most successful Bollywood film of all time. It was a story of Jai and Veeru, two… oh, who am I kidding, ALL OF YOU know what Sholay was about. It is a huge landmark in Indian pop culture, having spawned spoofs and references in the thousands and a Gabbar Singh dialogue is still the go to line for many a mimicry artist. The interesting thing about the film is that it wasn’t exactly a critical darling when it was released (reviews were lukewarm at best, it initially had a limited release, confined only to major cities and at the Filmfare awards it picked up only one award – best editing) and showed no signs of becoming the pop culture behemoth it would go on to become.

Today, it tops lists of all time great hindi films (much like the originally critically derided and commercially disastrous Alfred Hitchcock’s Vertigo has become a latter day classic and tops all time critics’ lists with alarming regularity) and it is almost heresy to diss the Amitabh Bachchan-Darmendra starrer that gave us one of filmdom’s greatest villains in Amjad Khan’s Gabbar Singh. So, how did Sholay go from lukewarm to legendary? The explanation might lie in what we call in economics as the bandwagon effect.

Back in 2015, I saw a twitter update from somebody complaining that they were being branded uncool at office for being the only one who hadn’t seen Bahubali. Other than their inherent entertainment quality, the idea of the bandwagon effect and the concept of rational herding go a long way in explaining why we see so many 100-Crore plus blockbusters and why movies like Bahubali become 300 crore grossers.

SO WHAT

In a paper in 1992, Abhijit V. Banerjee of MIT proposed ‘A Simple Model Of Herd Behavior’ where he described herd behavior as the phenomenon where “people will be doing what others are doing rather than using their information”. This applies to a lot of areas from making decisions about what restaurant to go to, what University to attend to what movie to go to. Which brings us back to Sholay. Despite Sholay’s initial humdrum start and poor reviews, as more people watched it they tended to like it and spread the word. In the 70s, there were no multiplexes or the intense competition from television, thus many must have decided to watch the movie because their friends or neighbours or someone they know suggested they watch it. There was no IMDb or internet either, so these moviegoers took their decision based on the previous decision taken by that friend/neighbor/acquaintance rather than use their own information, partly because it was hard to get and partly because it is an easy shortcut.

As Banerjee writes in his paper there are many situations where we are “influenced in our decision making by what others around us are doing”. In today’s hyperconnected world it is even more relevant. In 2008, Mathew Salganik of Princeton University and Duncan Watts from Columbia published a paper titled “Leading the Herd Astray: An Experimental Study of Self-fulfilling Prophecies in an Artificial Cultural Market” where they ran a clever little experiment. They wanted to see how other people’s ratings and approval impacted choices “by artificially inverting the true popularity of songs in an online “music market””. They noticed that even when songs had been randomly shown as downloaded more times, users tended to download those songs more even though in terms of quality and appeal they might be inferior to the other choices. Supposed popularity seemed to feed a positive loop of more popularity and it became a vicious (or virtuous depending on your vantage point) and self perpetrating cycle. Today’s 100 crore movies work on similar lines – initial fandom frenzy drives early numbers and then box office reports are hyped to say what an epic weekend the film had (regardless of what the critical reception is) and soon other decision makers are falling into that ‘rational herding’ trap and following the crowd.

It is great news for business but can also be bad news for taste.

WHY SHOULD I CARE

The original idea of the bandwagon effect was introduced by Leibenstein in 1950 in his paper “Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand”. He formalized the theory after Oskar Morgenstern observed something wrong with the classical demand theory. Generally speaking the market demand curve was considered a simple summation of individual demand curves and assumed everyone made independent decisions. But Morgenstern challenged the theory saying this simple additive idea did not hold in a market like fashion “where one person buys because another is buying the same thing, or vice versa”. Leibenstein called this kind of demand ‘non functional’ demand.

Remember the person tweeting she was uncool in office because she hasn’t seen Bahubali? If she decides to go and watch it now, she isn’t watching it to just fulfill a functional requirement (entertainment that is reasonable to her at the price the movie is being offered at) but also dealing with the non-functional part of it that is peer pressure. (Leibenstein wrote – “By nonfunctional demand is meant that portion of the demand for a consumers’ good which is due to factors other than the qualities inherent in the commodity.) The sellers are obviously on to that idea. [How else do you think Chetan Bhagat books invariably end up selling big numbers?] Bandwagon effects upend the basic law of demand and there are many buyers now willing to pay a higher price.

But this is why the Sholay lesson is important. Sholay, no matter how you slice the pie, was a hugely entertaining movie with the whole shebang you can hope for in a Bollywood epic – comedy, romance, action, great songs, Helen item number, revenge plot – and the word of mouth was not manufactured. Its inherent value made it the juggernaut it was helped by the bandwagon effect in the latter stages. The good news from Salganik and Watts’ paper is that even though some ‘not-so-good’ songs became popular, the songs which were really quality eventually did become popular as more and more people listened to it and judged for themselves. Sholay had a similar trajectory, starting sleepily and then becoming a juggernaut by late1975 as its craze swept the nation and propelled Amitabh Bachchan and Amjad Khan to super stardom (Dharmendra and Sanjeev Kumar were already established stars).

The lesson from the bandwagon effect is that it exists and it is being manipulated by marketers or ‘tastemakers’. But like good won over evil in Sholay, the genuine hits do win out in the long run. Just like Sholay eventually did.


QUOTE SMART

Fools have a habit of believing that everything written by a famous author is admirable. For my part I read only to please myself and like only what suits my taste.

Voltaire

V is for VEBLEN Goods (The A2Z of Economics 22/26)

V: VEBLEN

veblen

Image courtesy – Rolling Alpha

WHAT

In introductory economics texts, Thorston Veblen is mostly a footnote, showing up in the term Veblen Goods which are usually cited as exceptions to the universal law of demand which says that price and demand are inversely related. A typical entry would look like this one from Monash University of Australia

Abnormal market behavior where consumers purchase the higher-priced goods whereas similar low-priced (but not identical) substitutes are available. It is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption (to be seen as buying an expensive, prestige item). Named after its discoverer, the US social-critic Thorstein Bunde Veblen

But is the behaviour really ‘abnormal’? In the modern world such behaviour is key for many industries’ business models, prime among them being the world of fashion. Have you heard of the legendary Birkin bag? It is the ultimate prestige accessory one can buy and it is sold so exclusively that not everyone even gets invited to get one. Veblen’s contribution to modern economics was his seminal text The Theory of the Leisure Class, a book that laid out a vision of the materially oriented society we have become today.

SO WHAT

As Robert Heilbroner succinctly puts it in The Worldly Philosophers,

‘Man, said Veblen, is not to be comprehended in terms of sophisticated ‘economic laws’ in which both his innate ferocity  and creativity are smothered under a cloak of rationalization. He is better dealt with in the less flattering but more fundamental vocabulary of the anthropologist or the psychologist: a creature of strong and irrational drives, credulous, untutored, ritualistic. Leave aside flattering fictions, he asked of the economists, and find out why man behaves as he does.’

In effect, Veblen laid out the contours of modern behavioural economics.

Years later, John Kenneth Galbraith would write The Affluent Society to present similar ideas about modern, prosperous society which was a departure from most of history, as nations ‘nearly all, throughout all history, have been very poor.’His point was that economics, a discipline that was ‘born in a world of poverty and privation’ has been slow to recognize the difference that abundance and wealth have made in terms of what is truly valued by society.

WHY SHOULD I CARE

The modern capitalist society’s obsession with keeping up with the Joneses has made a large majority of developed nations the kind of ‘leisure class’ that Veblen was talking about – those whose sole objective seems to be ‘in order to stand well in the eyes of the community it is necessary to come up to a certain, somewhat indefinite conventional standard of wealth’.

As Heilbroner interpreted it ‘everyone, workman and middle-class citizen as well as capitalist, sought through the conspicuous expenditure of money – indeed through its conspicuous waste – to demonstrate his predatory prowess.’ This is much more damning assessment of society than the ‘self interest’ sugarcoat that Adam Smith had provided. And if you have ever been tempted to jettison your very much in shape smartphone for the latest model, you know that feeling far too well.

QUOTE SMART

‘Production depends on the creation of demand by producers and that demand proceeds from the emulative tendencies of a culture that accords consumption great social value.’

John Kenneth Galbraith, The Affluent Society