Tag Archives: Freakonomics

12.23.2012 | The Return of the McRib

The McRib is back.

People wonder though, why McDonald’s doesn’t just leave it on the menu. The reason might be how we perceive that extra bite.

Have you ever seen one of those newspaper devices where you put your money in and the top opens to reveal 10 or so NY Times? People, though, take only one and snap the lid shut. Logically, we take no more than a single paper because the second one has little usefulness. Or, as an economist would say, the marginal utility diminished. The second newspaper had much less usefulness than the first one.

For the McRib, one McDonald’s franchisee explains that when the McRib first returns, he sells close to 200 a day. However, by the end of the promotion, anticipation plummets and his daily McRib sales drop to fewer than 50. In other words, similar to that second copy of the NY Times, McRibs buyers are displaying diminishing marginal utility. After their first sandwich, they rarely return for more. Then though, if McDonald’s delays the McRib’s return, excitement again builds as consumers look forward to their first bite. This year, they said the McRib would return during October and then the date was postponed to December 17.

Sources and Resources: As Freakonomics economist Stephen Dubner explains it, McDonald’s just has to wait long enough for him to forget how bad it is. Here, a great analysis of McDonald’s strategy says it is all about arbitrage that is based on hog prices. Also, you might enjoy ths Businessinsider slide show of “11 Amazing McRib Facts” and this NPR interview of the McRib’s inventor. For example, the McRib sandwich contains 70 ingredients.

Posted by: adminEcon
Tags: arbitrage, demand curves, diminishing marginal utility, downward sloping demand, Freakonomics, McDonald's. McRib sandwich, NY Times dispensers, pork prices, Roger Mandigo
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12.18.2012 | Unexpected Economics: Hand Washing

Sometimes economics can involve a lot more than money.

My local hospital is engaged in a hand washing campaign. The problem is that physicians ignore the mandate, even more than nurses and other hospital personnel. Yes, a doctor is busy and a sink might not be nearby but studies show that even when hygiene is available, compliance is inadequate.

The economic problem? We have a negative externality. The doctor does not suffer. The parties from whom he acquired the bacteria on his hands were not affected. Instead, as with all negative externalities, uninvolved bystanders are experiencing the cost of the physicians’ behavior.

The economic solution: We have to increase the “cost” (defined economically as sacrifice) of the behavior.

At one LA hospital, it simply was a computer screen-saver on all hospital computers with petri dish pictures of bacteria cultures taken from physicians’ hands. The pictures were described as sufficiently disgusting that many more doctors complied.
A second solution at the LA hospital was to publicly identify non-washers during departmental meetings.
Elsewhere, a sign that read, “Hand Hygiene Prevents Patients from Catching Diseases” increased hand washing.

With all 3 approaches, the “cost” of non-compliance went up. People tend to do less of something when the cost is higher.

What did not work? When a hand washing “posse” randomly gave $10 Starbucks cards to doctors “caught” washing, they willingly accepted the reward but the impact was insufficient. Signs and emails, Purell hand disinfectant everywhere…little success.

Still though, getting people to wash their hands is only half of the hygiene problem. More tomorrow on why drying our hands also matters.

Sources and Resources: Freakonomics had a wonderful podcast on the hand washing problem, they also wrote about it here, and this NY Times article provides more details about relevant academic studies. In addition, I recommend this superb New Yorker article from Atul Gawande on using checklists in hospitals to minimize mistakes.

A Hand Washing Flash Mob

Note: The Title of this post was slightly edited.

Posted by: adminEcon
Tags: Atul Gawande, Cedars-Sinai Hospital, cost, Freakonomics, hand hygiene, hospital bacteria, negative externality, physician hand washing, regulation, sacrifice, The New Yorker
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10.19.2012 | An Economics Tool Kit: Unintended Consequences

Next to “no free lunch,” perhaps the most important idea in an economics tool kit is “unintended consequences.”

Our story starts in Bogota, Colombia and a visiting professor who tells the Freakonomics people that his friends picked him up with a different car each day. Why? To minimize pollution, the government mandated that car owners could not drive daily. The check-up system? Your license plate. So, many of those who drove daily just used a different car that had a different plate. Less pollution? Not at all. In fact, because those additional cars were old, there was more pollution.

Our next stop is Mexico and a story we have already told. To elevate air quality there, people were encouraged to upgrade refrigerators to newer, more energy efficient models. What happened? Cheaper electric bills let them use their appliances even more.

And this takes us to Cash For Clunkers (aka CARS: Cars Allowance Rebate System, 2009). The source of the idea, Princeton professor Alan Blinder said it would be “trifecta” legislation. By giving a $3500 or $4500 rebate to people who traded old less energy efficient vehicles for newer ones…

you helped the auto industry through new car purchases
you helped the environment with elevated mpg requirements
you helped the poor by making new cars cheaper.

What happened? The program was so popular that Congress had to add $2 billion because they ran out of rebate money.

Also though,…

After a massive sales burst during the 2 months of the program, purchases plummeted. The program’s incentives time shifted sales decisions.
The environmental perk did not materialize. Pick-up truck owners did not buy Priuses. Instead, they traded old gas-guzzling pick-ups for newer, lower gas guzzling trucks. In addition, fuel efficiency can lead to more driving and ultimately, any diminished emissions were a tiny proportion of the US total.
And finally, lower income individuals might not have benefited because the older cars they could have afforded were traded in and destroyed. Fewer used cars meant less supply and a supply curve shifting to the left. Used car prices increased.

In Colombia, in Mexico, in the US, legislators had rational, valid objectives. But the consequences were unintended.

How can government get the best out of us? Your answers?

Sources and Resources: My reading for today was fascinating. I returned to the Michael Grabell book, Money Well Spent? and his chapter, “Cash For Clunkers.” More scholarly but very readable, a paper on the impact of Cash For Clunkers, written by economists Atif R. Mian (Princeton) and Amir Sufi (University of Chicago) was excellent. I got the idea for the post and my information on Colombia from this Freakonomics podcast and Alan Blinder suggests Cash For Clunkers (as “the best stimulus idea you’ve never heard of”) in 2008, here, in the NY Times.

Posted by: adminEcon
Tags: 2009 American Recovery and Reinvestment Act, Alan Blinder, Amir Sufi, ARRA, Atif Mian, cash for clunkers, Colombia, Freakonomics, Keynesian economics, Mexican refrigeration, Michael Grabell, Money Well Spent?, stimulus spending, time shifting
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09.19.2012 | Playing Chicken With China?

Yesterday’s headlines about the US taking China to the World Trade Organization (WTO) for unfair auto and auto parts subsidies took me to chicken feet and The Economist’s Sinodependency Index. Knowing the major firms that depend on China for revenue might help us further assess our relationship.

Approximately 20 years ago, chicken paws, used primarily for animal feed, were worthless. Now though, with Perdue producing more than a billion chicken feet a year, paw exports annually return $40 million in revenue. The reason is China.

A delicacy in China, chicken feet are a perfect U.S. export. US chickens are fat and juicy because we grow big chickens. In addition, their “natural scarcity” (only 2 per chicken) bestows some prestige on diners who order them.

Similarly, Intel, Apple, IBM and GE generate considerable revenue from China. Called a Sinodependency Index, The Economist displayed the relative revenue dependence on China of 135 firms in the S&P 500. Their goal was to show the extent to which China has woven its presence within the fabric of world trade.

Although some of their statistics were rough because of each firm’s revenue breakdown, The Economist believed that their Index conveyed the information effectively. In a copy of their chart below (interactive with percents if you visit their site here), you can see their color coding for industry and size coding for how a firm’s revenue compared to the other 134 in the index. The top 10 in their list, in size order, are: Intel, Apple, IBM, GE, Caterpillar, Procter & Gamble, Johnson & Johnson, Yum Brands, Philip Morris, Boeing.

As economists, we could not conclude without mentioning comparative advantage. First explained by 19th century economist David Ricardo, comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make. But, what to do when a nation employs unfair trade practices like subsidizing their exports to make them cheaper and adding duties to imports to make them more expensive?

My Sources and Resources: A wonderful podcast and post from Freakonomics was the source of my chicken feet facts while you can look directly at The Economist’s Sinodependency chart, their article and a link to the math behind the Index here. For more on the current trade dispute in the World Trade Organization (WTO), here is one article from Bloomberg. And here, this EconLife post presents more on a past trade dispute with China that involved chicken paws and is the source of 2 sentences in this entry.

Trade Dependency on China From the Economist

135 Firms From S&P 500: Revenue From China from the Economist

Posted by: adminEcon
Tags: apple, Bloomberg, chicken paws, China, comparative advantage, David Ricardo, duties, Freakonomics, GE, IBM, Intel, J&J, opportunity cost, S&P 500, Sinodependency Index, subsidies, tariffs, The Economist, trade disputes, unfair trade practices, world trade, World Trade Organization (WTO)
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07.02.2012 | Are You a Follower?

This sign in Arizona’s Petrified Forest was having little impact:

“Your heritage is being vandalized every day by theft losses of petrified wood of 14 tons a year, mostly a small piece at a time.”

However, after some sign experimentation, they understood why. Researchers tried out 2 kinds of signs.

Paired with a picture of visitors admiring and photographing a piece of wood, the sign asked people to leave wood in the forest.
Paired with a picture of a person taking wood, the sign asked people not to remove wood.

Their conclusion? Because the signs conveyed different social norms, the first one was more successful than the second in generating desirable behavior.

Similarly, the same researchers looked into why a group of homeowners had not reduced energy usage when asked either 1) to reduce resource use, 2) help future generations, or 3) save money. However, they did respond more proactively when told, “The majority of your neighbors are regularly undertaking efforts to reduce energy. Please do it too.”

Again, the same conclusion. The key is establishing a social norm. People seem to engage in a requested behavior when they find out that everyone else is doing the same thing.

Where does all of this take us? Flip an issue to the positive side to get the behavior you want. Say that most people pay taxes, a lot of us conserve energy, and many individuals vote to get more people to do the “right” thing. Also, econlife looks at how a health insurance mandate and social norms could be connected.

In “Following the Herd,” Chapter 3 from Nudge and in this Freakonomics podcast, you can hear more about how social norms shape our behavior. And, for a more academic discussion about the Petrified Forest experiment and others, you might enjoy this paper written by a group led by Robert Cialdini.

Finally, are you a follower? When asked, participants in social norm experiments emphatically said no. And yet, the data in the experiments indicated the opposite.

Posted by: adminEcon
Tags: Freakonomics, herd behavior, Nudge, peer pressure, Petrified Forest National Park, regulation, Robert Cialdini, signage, social norm, taxes
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