Used Cars and Your Health

A big debate over the Presidents plan to reinvent America's sickly health care industry is taking place on a t.v, newspaper, or website near you.  His plan has been lovingly nicknamed Obamacare by its biggest fans and is an attempt to get you insured whether you like it or not.  The economic logic behind it all is that insurance always works better when risk can be spread over a large group.  Similar to economies, insurance structures depend on young healthy productive people, the kinds that places in demographic crises like Japan are running out of.  The U.S isn't as sprightly as it once was either.

When an insurance company decides to enter a market, they try to calculate what is basically a sick to healthy person ratio.  The best case scenario for a health insurance company would be a nation of hypochondriac marathon runners.  Our paranoid athletes would quickly buy the insurance polices because they think sickness is around the next turn but lead extremely healthy lives and never actually receive anything from the insurance company except bills and maybe some peace of mind (yup, you can buy that too).  This results in a happy health insurance company that gets plenty of premiums and never has to pay out. Unfortunately for health insurance companies most of us are more risk-tolerant and less fit than our hypothetical population so they have to deal with two major problems, namely adverse selection and asymmetrical information.

Lets look at another market as George Akerloff did in his seminal paper on "The Market for Lemons" to better understand what complicates health insurance and insurance in general.  The Market for Lemons is a story that anyone who has bought a used car can relate to.  It explains everything from the slimy connotation of a used car salesman to the existence of that darned car fox.

In Akerloff's assessment he points out that in the market for used cars an inherent problem exists between seller and buyer.  While the buyer might get to test drive the car and even have a mechanic check it out, the seller still knows the true value of the car with more clarity.  This is textbook asymmetrical information.  Websites like carfax.com attempt to minimize this problem for used cars as do companies like yelp for businesses, glassdoor for jobs and pretty much any other service that attempts to "reveal" the truth about a product.  When asymmetrical information exists, human beings tend to be shmucks, or what a more sophisticated, less honest, economist would call, commit "rent-seeking behavior".  This explains the image of the used car salesman.  They know more than their customers about the product and therefore are put into a position where they can manipulate the buyers perceived value of it (just so happens to always be in the up direction).

Akerloff establishes that in the hunt for a used car, the buyer is always at a disadvantage because he has to buy from a self-interested entity that can say more certainly than you what the car is worth.  Furthermore, no one out there is doing you any favors and telling you the car is worth less than it is.  So now we have a market (start to think in general, not just cars) of people basically over-stating the value of a product, and more importantly a consumer who knows it.  This leaves us with a bunch of people who need used cars but don't trust the ticket price.  In fact, not only do they not trust it but they know for a fact it definitely isn't a bargain because why would anyone sell something for less than its worth.  What they don't know is just how exaggerated the price is and that's why you should never pay the asking price, even for a hot dog in NYC.

The next step of the analysis is where it gets really interesting.  People smarten up and no one wants to buy used cars because at best they will get a fair deal and much more likely be scammed.  What Akerloff's paper is so famous for pointing out is that a very important, often over-looked victim of asymmetrical information are the honest sellers of good used cars.  Anyone who is trying to sell a good used car can't get what its worth because the buyers market is jaded; they just wont trust the price.  So if you had a used car and you knew it was worth $800 but because everyone you tried to sell it to figured you were lying like everyone else and would only pay $600, what do you do?  You keep the car and hopefully fall back in love with it or something like that.  This is the result of asymmetrical information that economists refer to as adverse selection.  Basically when a market is broken because one party has a knowledge advantage over the other, the parties who "play by the rules" will be forced out of the game.  This in turn increases the ratio of cheaters in the market, worsening the trust problem, and further removing more honest players, until the point where only "lemons" are left.  In Akerloff's analysis, literally no good (by good I mean accurately valued) used cars can be sold or bought even if everyone has good used cars and everyone wants to buy them for what they're worth.

What fun, back to Obamacare.  Just like a used car salesman knows his car better than you, you know how often you have cravings for Big Mac's or unprotected sex (asymmetrical information wink wink)  Insurance companies care very much about what or who you will put in your body because they pay for whatever it or they give you, whether it be diabetes or an STD.  Just like our jaded car-buyers, insurance companies know you have every reason to lie to them about how healthy you are (the value of the product).  Like yelp or carfax, preliminary screens and mountains of paperwork are a way for the insurance company to find out a little bit more about what they're getting into.

Next up insurance companies look at their policy holders as a whole, or the market they intend on serving, and determine their pricing structures.  Like our used car debacle, health care companies don't believe you and for their own safety have to err on the side of expensive coverage.  Can you guess what happens next?  Healthy people no longer are getting a fair deal for their insurance so they opt out of it.  In order to have a viable business, insurance companies need a large base of healthy people who won't be collecting anytime soon.  The elderly, sick, or your extremely lazy pizza loving college roomate, realize that at almost any cost insurance will be worth it to them so they aren't budging.  This is the equivalent of all the "lemons" staying on the market because there's a lot of leeway when selling a piece of garbage.  As healthy people drop out, and the not-so-healthy stay in, the ever important sick:healthy ratio churns out higher and higher premiums.  Now even moderately healthy people are like screw it, ill go to webmd.com.  All you're left with is sick people, and since sick people don't make any money for insurance companies, all the insurance CEO's decide to chase their true passions of basket weaving and interpretive dance.  Now you have a bunch of people who want to sell insurance, a bunch of people who want to buy it, but no market for it!

The biggest difference between used cars and health insurance is that many countries feel some obligation to provide for their people and even argue health care is a basic human right.  While that might be a stretch, in the end, its in everyone's interest to see that our population stays relatively healthy if not to enjoy life, at least to produce.  Obama wants to make insurance mandatory to salvage a shrinking market that is essential to the prosperity of our nation. Opponents of Obamacare want American citizens to maintain the right to spend their money how they choose.  Both sides are pro-consumer, and both sides make sense.  What everyone can agree on is that the current system is unsustainable and malfunctioning.  The evidence is in America's ranking on health indices as well as our high number of uninsured.  It's frightening to see more and more American companies take on more of their employee's health insurance risks to avoid premiums, only to be crippled by a catastrophic health event (think premature baby, chronic illness, organ transplants).  In economic times like these, the last thing we want is our small businesses gambling their existence on their employee's lifestyles.

Of course it isn't black and white, that's just the politics talking.  Technology has a huge part to play in the solution through lowering medical costs, allowing insurance companies to better assess peoples health, and reducing administrative costs across the board through electronic file sharing and the likes.  A lot of progress is yet to be made with employee incentives, like credits to go to the gym, quit smoking, and who knows what else in the future.  The health problem is so interesting because it's so obvious, and the paths to improvement are as plentiful as the glaring deficiencies.  I'm not sure what Akerloff would say but I know he wouldn't be to proud of us if we didn't take his findings and run with them.  Then run some more.

Can You Hear Me Now?

Collecting data never sounded so sweet.  And it still doesn't.  The extraction of information from people for business purposes is reminiscent of a trip to the dentist.  The difference being the dentist comes to get you, and it's while you're eating dinner.  Marketing is in our eyes, stomachs, and most importantly our hearts. Yet we don't want it in our ears.  American consumers respond with hostility when they hear "it'll just take a second", especially by telephone, a contraption that's been pushed aside in favor of texts and emails, but still does the trick best for surveying .  This puts those who are genuinely trying to get some valuable information in a serious pickle, the sour kind.

The charm of telephone for collecting information is the amazing amount of information made available not in peoples words but in their voices.  While a picture may be worth a thousand words, a voice may be worth something there are no words for.  As a recently hired research associate who operates strictly over the phone, I've heard it loud and clear.  Peoples voices, and the tones they use, let a phone surveyor get what they want better than a filled in bubble ever could.  When someone cautiously answers a question and then finishes their sentence by making their voices higher, I don't dare let my pen hit the paper.  Confusion is one of the many things a voice can reveal that are worth knowing about someone you're collecting data from (especially when its the backbone of the product your selling).  Certainty, cooperativeness, authority, and attention are other natural byproducts of a vocal exchange, and a savvy surveyor knows how to leverage them.

From umm's to huh's, a live exchange is filled with signals that might make a surveyor repeat, skip, or rephrase a question.  Sometimes a surveyor will use his discretion and not even include certain results, suspicious the source was carelessly estimating or filling in for someone more in the know.  Unfortunately the revealing nature of the phone survey is not only its greatest strength but also its biggest weakness.  People may say that they believe in the importance of research and take pride in the information age, but often that attitude stops at the caller ID.  Some incentives to side step the panhandler like reputation of a phone surveyor include cash rewards.  However, with such an offer comes a biased sample of people attracted to cash rewards.  Randomness is important in statistics. Any time incentives are introduced to a sample, the results lose a sense of validity and genuineness.

The more we learn with our eyes and tell with our fingers, the less we can be sure we're hearing what's being said.  As the available amount of information increases exponentially, much of it is being lost between the lines. Voice communication will prove ever more valuable as we see the likes of social networking and search engine optimization crowd it out of the marketing game.  Information that comes from a persons mouth and not their keyboards is going to become as precious as ever.  Numbers and letters get the point across, but voices amplify the meaning.  Listen up.

Debt, all the cool kids are doing it.

Great summary of global debt
World Debt Guide : Owe Dear

It seems like everyone owes a lot of money.  Coupled with the fact that most of the first world is not growing as fast as it would like (or was projected to),  debt is the word of the day and it's here with interest.  Debt is often shown as % of GDP, and you wouldn't believe how popular triple digits are.  All the cool kids are doing it.

Greece's spending problems made it ask all its friends for help, but then it found out they weren't doing too good either.  Germany was alright, but fed up with being slowed down and looked to for handouts.  Germany definitely wasn't trying to give any change to Greece with Ireland, Spain, and Portugal already looking longingly at it.  America's debt almost made it go from AAA to AA rated, which is worse than when your favorite restaurant gets tagged with a "B" in the window from the health inspector.  In a country where credit cards are as ubiquitous as debt solution commercials, it's no surprise we owe a few friends a couple of dollars.  Actually we owe ourselves a couple of dollars too, in the form of domestically held bonds and transfer payments for the retiring baby boomers.

It seems like looking at debt is the best way to look at the global economic landscape, and that's a pretty scary observation.  But if I knew someone in debt, the last thing I would tell them to do is forget about it and treat themselves to a night on the town.  Admitting we have a problem is as cliche as it is a necessary first step.  The golden rule in economics as well as the backbone of ethics and morality goes something like, "Do unto others as you would have them do unto you".  A common caveat to this thinking is excluding those people who don't have a voice.  In this case literally, because those being most left out of the conversation are future generations.  Once they do get their voices, there is little doubt they will be using them to scream at Grandma and Grandpa for running up such a big tab at the last generation party.

Without being too insensitive, we need to get started before the lucky ones die.  As uncomfortable as it is to say and support, everyone needs to tighten their belts.  Even the elderly must take part in the readjustment process that will move America towards a stable equilibrium.  Making exceptions is an expensive gesture that is often not treated as such.  The reason such exceptions have become as customary as a tipping your waiter is because the person getting the bill hasn't shown up to dinner yet.

National Debt

July 4th is the perfect time for friends, family, and food.  Appreciating all the sacrifices that have been made and are being made in the name of our country is essential to the spirit of Independence Day.  The importance of which cannot be reiterated enough.  It isn't all we have to remember though.

Celebrating independence is a celebration of getting to play our own hands at the global poker table.  As a nation we are able to act of our own accord.  That being said, an independent nation with a largely dependent population shouldn't be called independent in the first place.  In the spirit of independence, we all should be concerned with, or at least aware of the current landscape of our country.  I like to look at economic indicators and pretty charts for this, but patriotism is a far more flexible calling

However you choose to leave your impression on this world or let it leave its impression on you, thinking about what you do to sustain and extend independence is a tradition that would surly be in the holiday spirit.  Troops do it by advancing our nations military endeavors.  Their hands on relationship with freedom is what we remember and honor them for.  Teachers do it by educating the population so it can enjoy the most fulfilling freedoms there are while being critical enough to be able to protect them.  Lawyers train to understand all the laws, while cops train to enforce them and politicians run to change them.  Builders give us a place to sleep while were independent, and firemen make sure its safe.  Entrepreneurs give us freedoms we never knew we could have and baby sitters watch their kids while they do it.

Independence day is a group project where some people seem, and sometimes are, much more important to it than others.  Just like in life, the role you take on is largely a reflection of the role you think you can have.  What advances independence is as up to interpretation as what should be done with it.  We all have a stake in independence and July 4th is a great time to reflect on how we can all protect it.  Happy Independence Day everyone.

Readers Digest

After cooking my 3 course dinner in 3 1/2 minutes, using my electric toothbrush that promises only a minute of scrubbing is needed, and waiting 4 minutes for an album to finish downloading because my internet was being slow, I laid back and opened The Economist.  Not too much later I checked my watch and couldn't believe my eyes.  A whole three minutes had passed and I was just getting to the bottom of the first page.

While everything else is moving along faster, and faster, the art of reading has kept its pace like a disciplined runner.  While the information you get is being hunted and gathered at an unprecedented rate, the mental digestion process hasn't changed a bit.  And like food, data spoils and is best eaten fresh.

When up to the minute information is just too fast for the "wait a minute" reader like myself, something needs to change.  I started skipping some articles in the publications I subscribe to recently, a practice I pledged to avoid.  Reading two week old economic indicators, and hearing about how Dominique Strass Kahn can get a little touchy for the fourth time in a row, I couldn't help but notice how so much information has such a short shelf life.  As new issue upon new issue piled up, I found myself rushing through articles like they were instructions to diffusing a ticking time bomb.  I was reading more, understanding less, and mispronouncing a lot of words in my head.  To my dismay, I would get to a new issue and find articles similarly crafted, and changed only in that they were more updated.  I had to question my approach and figure out a new way to read.

What I've begun to do is look at "Contents" pages of magazines I haven't gotten to and trying to have a more balanced reading diet.  I found in most cases that just reading an article from the latest issue did fairly well at covering all the preceding issues and was far more efficient.  Of course the unfortunate side of this is the missed anecdotes, unappreciated verbal flourishes, and undiscovered interpretations that come along with such a diet.  For someone who appreciates alliteration as much as apple pie, it's just a bit like missing out on dessert.

Data is coming out faster.  This doesn't only mean more of it is available, but also that more of it is pointless.  Some information is only worth it when it's fresh off the press or out of the proverbial oven.  Current events isn't always best read like a novel.  As dinners are getting zapped to pseudo-perfection in minutes, and movies streamed in seconds, the opportunity cost of old fashioned reading is sky-rocketing.  Not only can you do more than ever in the time that it takes to read a page on your favorite news site, but what you might be reading is going to spoil faster.  Like obesity became a bigger problem as food was hunted and gathered with new technology, so has information overload.  Similarly, as more unhealthy food options became available, data's fast food equivalent is out there and growing.   I'm trying different information diets to keep in shape and its a work in progress.  If you take a look, you might just find you're filling up on something lacking any nutritional value.

Heightened Expectations

     Congrats to the '11 Mavs for beating the dynamically unlovable Heat in 6 games.  I went to a bar with a few friends to watch and an argument about J.J Barea's height got about as much attention as LeBron's fourth quarter numbers this series.  The J.J dispute is not in the scope of this blog but a point that did get me thinking was the fact that he's listed at six feet tall all over the internet, and most importantly, on NBA.com.  I'm aware of the dramatic effect relativity can have on a fella, but J.J is about as six feet as Jason Terry's bicep tattoo is tactful.  Why the discrepancy on such an easily observable measurement?  We're talking the objective of the objective here. How does variation find its way into an utterly verifiable number?
     I read that athletes in the U.S are often measured with their shoes on. This leads to "shorter" European players standing above similarly listed U.S athletes and no, not just because no one gets the metric system over here.  The whole non standardized-ness of it all begs a question.  If we can dig up every detail about their past, speculate about their future, and bug them with pointless questions in the present, why can't we just know athletes heights?  The only economic metaphor I could draw would be a firm "cooking" their books to look better than they are or a credit rating agency inflating their ratings.  The difference is, when it comes to salary valuations of players who are already in the NBA, sport-metricicians are picking up PPG APG STL and RBD before HT and WT who don't even make tryouts.  If the owners don't inherently care about the heights of their players, the league doesn't benefit from shady statistics, and the fans would most likely just prefer the truth, maybe it's the players that turned the rule of the ruler into a democracy where everyone gets to pick their own height?  Eh, I doubt it; If I was J.J Barea I'd be proud as hell for every inch under six feet I was.  Congrats Barea, Nowitzki, Kidd, Cuban and the rest of the Dallas Squad.

Put Your Money Where Your Prophecy Is

44 minutes after the supposed end of the world, and I feel quite cheated.  Why do all the doomsday theorists get to take up valuable train advertising space, prime time news coverage, and undeserved space in the magazines and websites I read, without any expectations of accountability?  It's about time one of these movements is accompanied by legitimate stakes.  If judgment day is upon us, and you really want to let the world know, you could get attention by sparing yourself of all those worldy indulgences and giving them to me.  They won't matter pretty soon anyway right?  The end of the world doesn't seem like one of the harder things to convince people of if you really are sure of it yourself.  Instead of relying on the embarrassment of being wrong to dissuade people from attaching themselves to these wasteful causes, I'd like to see them challenged.  Sticking to their guns equates to just spouting rhetoric but a serious commitment that reflects the seriousness of their claim would be more appropriate.

Are the ads in the train that quote the bible and propose the end is near persuasive or informational?  I felt a bit ashamed of my city and the ad placement system in the subways when on my way home from Webster Hall at 4am I had to sit across from a propaganda-esque poster riddled with melodramatic biblical quotes and a referral to familyradio.com or some other similarly disturbing title.  Is this add trying to legitimize the claim that the world is over by showing me people were willing to spend money on designing and placing an ad?  That seems logically flawed since if it really was the end of the world, who cares about the money. 

Were they trying to convince me of the end so that I could tie up my loose ends with god on the ride home?  Considering I just came from a show by a group named Zed's Dead performing a genre of music where "filthy" is the head-honcho of compliments, there wasn't much salvation to be found on this hazy ride home.  Furthermore, my only company on the train was a 20 something year old passed out, who intermittently threw up on himself and forced me to change seats several times even though I was on the other end of the train because of the tributaries formed by what he had to drink that night and the capricious movements of the Q train.  I alerted the police to help out my faded fellow passenger when I got to my station. Maybe that's what the poster was encouraging, but I doubt it.

If those ad's worked, and got people to go to the links they showed, and increased revenue of those companies, SHAME ON THEM!  It isn't ethical to increase traffic in hope of future gains by claiming there won't be anymore traffic, hope, future, or gains.  It's a win-win for them and a lose-lose for me.  They get a completely unjustifiable amount of attention that benefits them in a long-run that they said wouldn't exist.  As Keynes said, "In the long-run we're all dead".  Apparently if you tell everyone their dead in the short run, you don't have to worry about the long run.