November 10, 2010

Cognitive Abilities and Household Financial Decision Making

Having spent an inordinate amount of time earlier this year figuring out an optimal family cell phone plan, it strikes me that an awful lot of American corporate activity these days consists of figuring out ways to nickel and dime people over complex monthly charges. It's like a never-ending low intensity war between MBAs with computers versus customers, half of whom will be below average in intelligence, energy, or experience. 

The MBA holy grail now is to figure out a way to get people to agree to pay an extra $9.99 per month for something they won't use -- especially, if the original process of coming up with their bill of $173.41 per month was so arduous that they won't bother to go through all the work it would take to have it reduced to $163.42.

My impression is that American business has gotten more chisely over the years, probably because it's now so easy for MBAs to model complicated variations of payment plans on spreadsheets and then have them coded into the software used by the $10/hour people at the customer service phone bank. In the old days, it was too complicated for a business to concoct and (especially) administer a whole bunch of different payment options, so corporations offered the equivalent of vanilla, chocolate, or strawberry, and didn't change them too often. Hence, customers had a fighting chance to figure them out.

Nowadays, though, every MBA can whip up on his PC a million different options. That sounds good for consumers, right?

In theory, it's also gotten easier for customers to whip up a spreadsheet of their own to figure out their optimal choice. Yet, what percentage of the public is proficient with Excel? Ten percent, maybe? 

When I was a young MBA in 1984, the Lotus 1-2-3 spreadsheet was the first piece of software I used on my $9,000 IBM PC-XT (10 meg hard disk). It was awesome. I figured at the time that half the public would be spreadsheet mavens within a decade.

I was wrong. Although spreadsheets were the glamor software in the mid-1980s, they rather quickly hit a ceiling in popularity and were supplanted by words and pictures software.

This trend toward complexity led us to disaster in the mortgage meltdown as the complexity of the new products covered up their implausibility. As products became more complicated, customers and investors became more dependents upon professional experts, whether mortgage brokers, appraisers, ratings firms, or investment bankers. Simultaneously, however, the various players figured out how to corrupt the people who were supposed to be the independent, neutral professional advisers. For example, mortgage brokers were offered payments to put their clients into higher interest products.

As daily business becomes more complicated, the intelligent and energetic, the ones who can figure out how to cut their bill to $163.42, benefit at the expense of the tired and dumb who can't. 
Here's a new paper by two Chicago Fed researchers who looked up the military's Armed Forces Qualifying Test entrance exam scores for people who had a chance to make two common mistakes with their finances.

We analyze the impact of cognitive skills on two specific examples of consumer financial decisions where suboptimal behavior is well defined: first, the use of a credit card for a transaction after making a balance transfer on the account, and second, cases where individuals are penalized for inaccurate estimation of the value of one’s home on home equity loan or line of credit application. We match individuals from the US military for whom we have detailed test scores from the Armed Services Vocational Aptitude Battery test (ASVAB), to administrative datasets of retail credit from a large financial institution. Our results show that consumers with higher overall composite test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake. Importantly no such effects are found for verbal or for most other component scores.

Here's their description of the first of two potential mistakes they can track versus AFQT scores that consumers often make:
Credit card holders frequently receive offers to transfer account balances on their current cards to a new card. Borrowers pay substantially lower APRs on the balances transferred to the new card for a sixto-nine-month period (a “teaser” rate). However, new purchases on the new card have high APRs. The catch is that payments on the new card first pay down the (low interest) transferred balances, and only subsequently pay down the (high interest) debt accumulated from new purchases.

The optimal strategy during the teaser-rate period, is for the borrower to only make new purchases on the old credit card and to make all payments to the old card. To be clear, this implies that the borrower should make no new purchases with the new card to which balances have been transferred (unless she has already repaid her transferred balances on that card). Some borrowers will identify this optimal strategy immediately and will not make any new purchases using the new card. Some borrowers may not initially identify the optimal strategy, but will discover it after one or more pay cycles as they observe their (surprisingly) high interest charges. Those borrowers will make purchases for one or more months, then have what we refer to as a “eureka” moment, after which they will implement the optimal strategy. Some borrowers will never identify the optimal strategy.

Got that?

This is the kind of puzzle I would have been fascinated by in 1984. I would have fired up Lotus 1-2-3 and worked it out. Today, though, it just makes my brain feel tired merely to start reading the above description. I just immediately get the impression "Somebody with a fresher MBA than mine has put a huge amount of energy into trying to confuse me into paying more," and I want to go lie down.

Conversely, in 1984, would I have fired up my PC to figure a way to chisel our customers out of an extra $9.99 per month? Well, in 1984 my customer was P&G, my employer's biggest client, and we were all terrified of offending them in any way, so I wouldn't have done it. But, if my customers were just a bunch of nobody consumers, well, yeah, I probably would have done it and then justified it to myself with some libertarian spiel. But now, I'm old, tired, not as smart, and not as persuaded by libertarian theories of ethics. Anyway, the difference in 1984 was that the natural response to getting a PC was: "What problems can I solve with this?" By 2010, most of the obvious problems solvable with a PC and a spreadsheet have been solved already, so more energy is devoted to creating new problems.

Not surprisingly, it's easier to chisel people with two digit IQs than people with three digit IQs:
We find that among those with AFQT scores above 70 [i.e., the 70th percentile], everybody ultimately identifies the optimal strategy. In contrast, among those with an AFQT score below 50 [50th percentile, i.e., two-digit IQs], the majority will not identify the optimal strategy. ...

Interestingly, verbal intelligence doesn't help much:
In columns (5) through (8) we use the four component scores (arithmetic reasoning, math knowledge, paragraph comprehension and word knowledge) that are used to calculate the AFQT score. In all four specifications the two math scores are both highly significant suggesting that quantitative skills are critical for avoiding suboptimal behavior. In contrast, we estimate that the effects of the two verbal test scores are a fairly precisely estimated 0. For example, the largest point estimate for a verbal score suggests that a one standard deviation increase in word knowledge would only increase the incidence of “eureka” moments by a little more than a tenth of a percentage point.

By the way, this should provide a cautionary note for using the ten-word vocabulary test score in the General Social Survey (GSS) as an automatic proxy for IQ. It's often a decent proxy, no doubt, but there are certain situations in which it's not.


robert61 said...

Yet, what percentage of the public is proficient with Excel? Ten percent, maybe?

I'm guessing that's off by an order of magnitude. Sorry, no model. Apparently I'm one of the 90 (or is it 99?) percent.

Anonymous said...

There's also the ability of consumers to collaborate. This will mean that you in effect have people who are good with spreadsheets ranged against people who are adequate at maths but are good at ranging along a number of conversations (discussion boards) and can use google effectively.

Laban said...

There are laws against racial and sexual discrimination. But the intelligent can rip off the not so intelligent as much as they like, and it strikes me as it strikes you - that this tendency is increasing. Yet native intelligence is just as inherited an attribute as skin colour or sex.

In the UK tariffs for energy (gas/electric) are fiendishly complicated - and there are continual special offers for new customers that the old customers never see - so a young, high-income smarty might be paying 20% less than the low-income elderly lady next door.

(UK electricity and gas used to be nationalised industry, and all residential customers paid the same price whether next door to a power station or at the end of ten miles of pylons serving only a few customers.)

But there are in the UK sites like USwitch and MoneySavingExpert which attempt to disentangle the tariffs. That's where the young smarty will have found the best deal.

Trouble is

a) discrimination between the intelligent and the not so intelligent is pretty much a basis of capitalism IMHO

b) our children don't get taught Grimms Fairy Tales in school any more. Tales like Hans In Luck learned in childhood would provide some innoculation.

Tscottme said...

A quick shortcut for avoiding the chiseling schemes of the MBAs is to listen to a quality consumer affairs radio program, available by free podcast, like Clark Howard show. I've listened to various similar shows over the years and his is the most useful. The MBAs follow trends like many others. So once you learn the trick that is going around the MBA world you see it pop up in one industry after another. Once you see several families of schemes you can become your own consumer affairs investigator.

Having been very poor and worked around very wealthy people. Having been above average intelligence and working around average and below-average people, I've seen that the real key factor is usually the desire to do better or to know more. The poor just accept their faith and get as comfortable as they can. The dumb see no need for new info and better habits because the world seems just plain random anyway.

The poor and the dumb just aren't sufficiently motivated to be less dumb or poor. Often they also don't know anybody that has ever been motivated otherwise so they perpetuate their surroundings.

Anonymous said...

One is surprised that the dummies have a high enough income and credit score to be given a card in the first place. But I guess they give credit cards to anyone with a pulse these days...

Anonymous said...

Yet, what percentage of the public is proficient with Excel?

Define "proficient with Excel".

Granted, I haven't tried to use it in a few years, but the last I tried, it still didn't support row manipulations or column manipulations.

For instance, if you wanted to add Column One to Column Two so as to produce Column Three, then you couldn't simply say:

C3 = C1 + C2.

Instead, you had to write some hideous cell-based code [for each "i"] and then iterate over all "i".

God it was a disaster.

Evil Sandmich said...

My cable company is the same way. If one was to take every phone, TV, and Internet option that they offer and work up the combinations in a spreadsheet it's doubtful that many people are even running a new enough version of Excel to compute them all.

MQ said...

This issue is the entire point of the new Consumer Financial Protection Agency created by the financial reform bill. They are supposed to be protecting consumers from this kind of stuff. Of course, the Republicans strongly opposed it as socialistic interference with the economy.

JJW said...

Steve, your intuition is correct: “an awful lot of American corporate activity these days consists of figuring out ways to nickel and dime people over complex monthly charges.” Let me recommend to you and your readers. Chapter 30 of William Poundstone’s, Priceless: the Myth of Fair Value and How to Take Advantage of it (2010).
Quoting one of the telephone marketing firms, Poundstone notes that the key to cell phone pricing lies in managing the consumers limited attention. “Those elements which are in the customer’s focus will require attractive prices to draw them in, while those outside the customer’s main focus can be maintained at higher, less attractive levels.”
The complexity of these plans means that it is difficult to comparison shop. It also explains why these plans are changed frequently; once people start to figure out either on their own or through their friends what these plans really cost, they can manage their cell phone plans more efficiently. This -- of course – is exactly what the cell phone companies are trying to prevent.
This wholesale use of behavioral economics to manipulate consumer behavior poses a real threat to our free-market economy because if not fraud itself, this type of manipulation is fraud’s first cousin. It endangers the morality needed to run markets.

Jonathan Silber said...

"Our results show that consumers with higher overall composite test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake."

So, people who calculate better on math tests also calculate better in real life.

Who'd of thought!

And to think that there are people,
with fancy educations, who spend their lives performing such studies, and other people who are willing to pay them!

Black Death said...

My wife, who has an MBA, recently devised a plan for our cell phones that cut the cost and got us new phones. But it wasn't easy or obvious, and it took her a while to figure out all the twists and turns.

As to the larger question you raise, well, smarties have been taking advantage of dummies ever since the world began. Sorry, but no law or regulation can cure stupidity.

rightsaidfred said...

On a parallel topic, the accounting profession keeps coming up with more complicated procedures which add marginal value to the business but make it easier for the Enrons and Bell, Californinas to conduct wholesale theft.

Anonymous said...

I remember when automobile pricing information became readily available over the internet. It was said by some that the last stupid customer had walked throught the door of the car dealers. In fact, such information resources mostly seem to have been taken advantage of by typically conscientious middle and upper middle class consumers. I recently had a car salesman tell me that you would be amazed how many purchasers still paid full list price. I have no data to support my supposition, but I strongly suspect that the poorer, less intelligent customer is, in effect,subsidizing the more intelligent and better off. Kind of sad, really.

Bill said...

But, if my customers were just a bunch of nobody consumers, well, yeah, I probably would have done it and then justified it to myself with some libertarian spiel. But now, I'm old, tired, not as smart, and not as persuaded by libertarian theories of ethics.

Reading Steve is like looking in the mirror for me. There is something about leaving your thirties which makes libertarians look like callow, amoral, narcissistic fools, especially if you were one.

Anonymous said...

This goes on everywhere and the MBAs are just catching up to what blue collar types have been doing forever. Marshall McLuhan once said in a complex world everyone will have to be a specialist in something but he didn't follow through and admit that the world will be full of specialists in one thing ripping off those who specialize in something else, and vice versa. I bring my car in to the dealer for an oil change and they tell me I need a new air filter. Fine. Plus two new tires. Well...if you say so. Now I'm $400 poorer. Could I have checked those things beforehand? Sure. But should I need a checklist of things to check on my car before I bring it in to the people I'm paying to check these same things? Apparently. Plumbers and electricians are no different. I know the rudiments of cars and plumbing but if I'm confronted by a professional can I argue my way out of it? No. All I can hope is that my firm is somehow getting these back at these guys with needless monthly charges.

Matt said...

I'm not really sure a libertarian theory of ethics has much to do with it - ideally the point (if I understand it) is for both parties to make an voluntary decision producing mutual exchange for mutual benefit. At some point incredibly obscure pricing starts to look uncomfortably akin to fraud, and I think even Ayn Rand would have looked askance at that.

sabril said...

If you are reasonably smart and disciplined, you can actually get many dollars in zero interest loans if you are willing to dance from card to card and juggle money around.

It's all a game between you and the credit card company -- they are hoping you will screw up or get caught short at the end and wind up paying their huge penalty interest rate.

I should add that those offers have been pretty rare the last couple years.

Nanonymous said...

What pisses me off most is that these Federal Reserve bank employees (well-compensated, no doubt, from taxpayers' money) spend time on "research" that outputs this kind of conclusions:

Our results show that consumers with higher overall composite test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake.

Really? Now, that's a revelation. C'mon, it's 21st century now - how many more decades will we be circling around the obvious?

Mr. Optimistic said...

I sometimes think that our betters at Davos and Aspen have thought this problem through. They certainly have the most at stake.

The fundamental problem with Capitalism is that it is inherently unstable. Trends like globalization, technology and growing massive data stores only further concentrate wealth faster among fewer elites already with the existing wealth, human networks and/or increasingly select talents. Such positive feedback systems require dampening least they self-destruct.

Like sports or academics, wealth and power accumulation would naturally be very unevenly distributed under any system. There is approximately 1 NFL starter for every 21 players drafted (avg career 3yrs and 7 rounds of 32 drafts per year), 1,050 college players per NFL starter, 26,250 HS players per NFL starter and and probably over 100,000 middle school players per NFL starter.

Just as NFL stars amass historically disproportionate wealth, our wealthiest and most connected elites concentrate ever more wealth. Unlike the NFL however, society cannot afford to simply cast off the millions who do not possess the more demanding skill to contribute to modern society.

Thus increasingly amounts of dampening inefficiencies to find a "productive" role for such individuals: bigger government, affirmative action and more elaborate wealth redistribution schemes to keep the wheels on the whole system.

These transfer wealth from the shrinking working middle to the swelling idle poor with elites taking a generous cut for their good work of course. However, this dampening scheme is also inherently unstable and just kicks the can down the road (see CA, NJ, NY and IL).

Until the whole structure collapses, sops must be made to Individualism and Capitalism to keep the productive middle class yoked and still striving to pull the wagon as despite their growing weight and shrinking opportunities.

If the end of the system is inevitable, the logical goals for our elites would be to skim and exploit as much and as fast as possible before the entire structure collapses. Unfortunately, this seems to be the the plan based upon the Clinton, BushII and Obama years - with each administration more egregious then that previous.

Jamie said...

Steve, "this should provide a cautionary note for using the ten-word vocabulary test score in the General Social Survey (GSS) as an automatic proxy for IQ."

I bet that the paper's authors, good statisticians that they are, have taken into account the correlation between math and verbal parts of the AFQT. Their concusion about the verbal part probably means: "if you have the math score in the 30th percentile, the fact that your verbal is at 50 will not help you much". It does not mean "just by lookinng at your verbal portion of AFQT, we cannot make any conclusion about how financially savvy you are."

So, the GSS is still quite useful, even for non-verbal problems.

Anonymous said...

This is of course the reason for the Global Warming controversy. There are essentially no disinterested quantitatively competent believers in Global Warming. If you are at all comfortable with numbers you almost certainly aren't very worried about Global Warming.

For example consider the Michael Mann "Hockey Stick" graph. Mann admitted that he wasn't particularly good at math yet you almost never hear a debate about his formulas or algorithms.

Anyone who's interested can just look up the formula for Principal Component Analysis in Wikipedia. It's quite easy to see the trick that Mann employed. Examine the formula and you can see at once why as McIntire and McKitrik could show that this formula can yield hockey sticks graphs from random numbers.

I don't think 10% do that. More like 1 tenthousanths of 1%.

No one who was ever employed in making mathematical models for government of industry is likely to be very impressed by climate models. In private industry the MBAs may indeed be using Excel to wring a few more shekels from the innumerate. In public policy they try to stun the people with the mystery and majesty of "math models" - confident that the public will be too intimidated to resist.

BTW like many of my generation I wrote my first word processor in BASIC. I also "invented" my first spread sheet also in BASIC. Of course that creation only worked on one specific problem but it did allow some limited "what if" noodling. When I first saw 1-2-3 I threw my clumsy concoction away.

In computer education teaching Excel is just about the bottom of the barrel - not because Excel is so inferior but because the students who need such a class are. Excel itself is a lovely product - elegant and sophisticated. Alas Excel students are just those who can't quite grasp what it is for. You end up teaching rote operations not concepts or possibilities.


Anonymous said...

We are on our way to becoming a low trust society partly because of this. I have gotten a royal hosing from my cell phone company (hint- the whole wifi thing is a scam) and people can see you can't trust your bank or your credit card company.

Anonymous said...

The problem with your paternalism is: you are going to have to take away people's ability to choose. Are you going to take away everyone ability or are you going to have a qualification test for living your own life as you see fit? The people you restrict for their own good are not likely to view you as a benefactor.

In general nations where elites had the power to make choices for the average person lead to the elites making things very bad for the average person. The US exceptionalism where anyone had equal rights to contract, legally oblige themselves, borrow and save as they see fit, etc. yielded a lot better material conditions for the average person.

Sure some people make stupid choices. That does not justify taking away their rights to make choices. Maybe they are making better choices anyway - people who lived for the moment are about to be bailed out and people who saved and provided for the future by denying themselves instant gratification may be about to lose everything to inflation and financial implosion.

Anonymous said...

Another problem is that working hours have dramatically increased since you were getting your MBA (only in the US, not in Europe). Who has time to read the fine print?

Nathan Cook said...

Just a brief point on the relevancy of the GSS score in measuring intelligence: if you have measures both of verbal and of mathematical intelligence, there are maths tasks where the maths score does all the prediction and the verbal score doesn't do any. But that isn't because the verbal measure can't predict performance; if you didn't have the maths score, the GSS score would be useful, because verbal and mathematical intelligence are positively correlated. That includes, I think, the example discussed here.

You can construct tasks where verbal intelligence doesn't predict performance, but they're necessarily artificial. Usually if your task measures maths intelligence, it also measures verbal intelligence, because both are correlated with the general intelligence factor.

Anonymous said...

This post relfects a very Bell Curvish way of thinking.

So, let me tell you the biggest flaw with this cognitive meritocracy outlook.

Two undisputed facts:
(a): IQ is distributed as a bell curve, and group-level IQs are highly resistant to interventions.

(b): Wealth is much more skewed and heavy-tailed than a bell curve, and has become much more so over the last 30 years.

If you admit (a) and (b), then you should admit that there are strong limits to the degree to which success in America can be explained by IQ, and that much of our extreme inequality is due to public policy rather than differences in Gaussian-distributed intelligence or work ethic.

Liberals are too stupid to realize it, but bell curve distributions are actually evidence that the inequality we've seen since Reagan is due to an unequal playing field.

PRCalDude said...

Thank you, Tscottme. I suspect that most of these MBAs are lazy and are just ripping-off another MBA's idea, like you said.

It's like a never-ending low intensity war between MBAs with computers versus customers, half of whom will be below average in intelligence, energy, or experience.

The war isn't just at the wireless companies, but at the supermarkets, Targets, and other places where the poor and frugal alike can be found. My wife has noticed that certain supermarket chains have been notorious for advertising deals and then failing to honor those advertisements at the register where you must be assertive enough and not-embarrassed-enough to get the cashier to do a price-check for you.

The reality is that such malfeasance hurts their bottom line because people talk and don't like being ripped-off. It's a short-term, one-time result that comes from short-sighting thinking and lack of long-term planning. I suppose it's no different than how everything else is run in this country nowadays though.

Geoff Matthews said...

I was proficient in SPSS before I was proficient in Excel. But once I was required to start using Excel, I found it fairly easy.
I'm teaching a stats class and requiring my class to use Excel throughout. I figure, at the very least, they should be proficient with this if they are going to work in business.

Whiskey said...

Or, you could just figure on paying cash for everything, except houses and cars, and focus on not getting too cheated on those major purchases.

Pay as you go, phone plans are pretty popular now. Even for those not in the illicit substance business.

Related, those pre-paid credit cards, terrible deals. They often have $50 or more charges for "activation." Capital One is the most exploitative, with the highest fees and the most targeting of below average credit score consumers.

Perhaps the best strategy is to avoid any financial service company that advertises, on the general principal that it is bottom fishing for people to cheat.

Anonymous said...

An excellent column Mr. SS! It's a welcome change from your usual obsession with race. I might've even been tempted to donate if I weren't so certain that you meant harm to my peeps.

SGOTI said...

Wow, "Mr. SS". Did you think that up all by yourself?

Chief Seattle said...

Very interesting, and true. I've decided that its not worth my time to figure out whether I'm getting screwed by complicated pricing models (I assume I would be). I use a debit card, not a credit card. Yes I don't get points or miles or whatever, but I also don't have to think about it. When my cellphone plan expired I got a pay-as-you-go plan from AT&T instead. It's about half the cost since I don't use the phone too much. Warranties - too much hassle, just buy good stuff to begin with or throw it out. Insurance? Keep catastrophic, avoid the rest. Simple strategies for bypassing MBA spreadsheet hell.

headache said...

This trend toward complexity led us to disaster in the mortgage meltdown as the complexity of the new products covered up their implausibility.

If I read both Prof. Bill Black's column in Huffpo and Denninger (Ticker Guy) correctly, the mortgage meltdown was the result of deliberate fraud, and things like the diversity homeowner drive were necessary legislative preconditions for this fraud.

AllanF said...

Please tell me when they run a similar study on journalists.

Though, I suspect they may have a hard time finding any smart enough to make up the experimental group.

Anonymous said...

Heck it is not just corporate America that is doing this. In KCMO, the water department switched this summer from bi-monthly billing to monthly billing in order to cover up their rate increase. I used to get billed about $45 every two months. Now am I getting hit for $33 every month even though my usage is similar to the past.

I bet most people think they are getting a better deal now because they are cutting checks for only $30 a pop, not realizing that they are now doing it every month instead of every other.

Anonymous said...

You can also add the corporations who have reduced the volume of their product while keeping the price the same. For example, many ice cream makers have kept the familiar size square carton that used to be a half gallon (64 ounce), but is now 56 ounces. How many folks realize that the cost per ounce has increased?

The Anti-Gnostic said...

Simple strategies for bypassing MBA spreadsheet hell.

I take the same approach to life. Any transaction that starts getting too complicated, I just apologize for wasting the other party's time and take my leave.

More often than not, this results in somebody making (or pretending to make) a phone call, and the deal magically becomes simpler and cheaper.

Anonymous said...

In a sense, this has been true for generations. Back in the pre-personal computer days, there used to be regular stories in newspapers and on TV about how a housewife could shave 75% off her family's grocery bill by clipping coupons and watching for sales. But who ever had the time to do all the work needed to get those savings? You practically had to make "saving money on groceries" a full-time job.

The same thing is true now that was true then: Most people take a very large-grained approach to this sort of thing. Within a certain margin, life is too short to worry about every way in which you have spent less.

Steve Wood said...

Besides stupidity, there are also the time and interest factors. It takes time to sort through all that complexity. Furthermore, some people are more sensitive to overspending or simply get their kicks looking for ways to save money. Others of us have more interesting things to do with our time. So, if you're a busy person who isn't particularly focused on saving small sums of money then you do tend to overpay ... and probably deserve to. That's why I don't scream that I'm being "ripped off" by the cable company or whatever; if I cared enough to bother to take the time to investigate, calculate, etc., I could save some money. I don't care enough and so deserve the consequences.

On the other hand, I have found that simply calling the cable, phone, etc., company and asking to review my account to see if there are ways to save money often results in decent savings for very little time investment.

Re spreadsheets: I have been using them for 20 years, and the changes over time are mostly not for the better. Excel is now absurdly overcomplicated for most ordinary purposes, with common commands that used to be on the home page hidden on various tabs. That complexity could be a reason why spreadsheets haven't, er, spread.

Finally, re libertarian ethics: I agree with Bill (and, apparently, with Steve). True-believer libertarianism is mostly a faith for the young. As you get older and see more of life, you begin to recognize a few things: (1) human nature and biodiversity are such that, in an unregulated world, many people would not be able to look after themselves without serious adverse consequences, no matter how "empowered" they might be; (2) as a decent human being, you don't want to live in a society where foolhardy or merely unfortunate people are allowed to starve in the streets; and (3) bad things - things that couldn't reasonably have been planned for - can happen to you, too. Those thoughts chip away at the libertarian mentality.

Mercer said...

Posts like these confirm my belief that privatizing social security would be a disaster.

It is not merely a lack of math ability to understand financial information that many people lack. Math skills alone are not enough to invest well. Many people with high math skills bought internet company stocks that never earned a profit and were surprised when their stocks became worthless. They let their emotions overpower their quantitative thinking. Even Newton lost money in the South Sea Bubble.

Adam said...

There's a very good chapter on this trend (economists call it price discrimination) in the Undercover Economist. It's good in that it allows one business to simultainously serve frugal shoppers while getting larger returns from less frugal customers.

Whiskey, you miss out on all sorts of freebies from the CC companies at the very least you should ask for a price break on bigger purchases for paying cash, interchange fees can run small businesses as much as 4-5% of the transaction.

Anon in Excel Ctrl+d and Ctrl+r are your friends.

Anonymous said...

>Simple strategies for bypassing MBA spreadsheet hell.<

But a mentality exists that digs that crap. I know an elderly, financially well-off man who often spends weeks figuring out how to save a hundred bucks or less via Rube Goldberg like machinations. He is intensely proud of this, brags interminably about how he gets everything cheap. He gets off on out-chiseling the chiselers.

He is retired of course, and slightly crazy.

Polymath said...

Scott Adams figured this out 13 years ago. In his book "The Dilbert Future" he defined "confusopoly" as "a group of companies with similar products who intentionally confuse customers instead of competing on price". His examples were telecom and financial services companies.

Anonymous said...

You can add figures in Excel columns simply by highlighting them all and selecting the appropriate function - but why would you want to?

Mr. Anon said...

AT&T, and it's co-conspirators have hit on a pretty good scam: third-party billing. Someone can order some service - E-mail or ringtones, for example - and bill it to your phone-bill using only your name and phone-number, which they can get off the internet. These charges are only eight or nine dollars a month, but they can persist on your bill indefinitely if you don't challenge them, and of course AT&T get's a cut. There are probably a lot of old people who never notice that there's an extra charge billed to them, and just go on paying it. I even suspect that the companies that offer these (mostly worthless) "services" have rooms full of people who do nothing but order these "services" in the first place, making it nothing but organized theft.

Then of course, there's all the third-party car-warranty scams (many of which originate from Missouri).

Clark Howard is a good source for information on personal finance, but he's the sort of guy who really jazzes on saving 20 bucks. If you did everything he recommends doing in order to save every last possible dime, you wouldn't have a moments spare time to enjoy life.

Kylie said...

"Besides stupidity, there are also the time and interest factors. It takes time to sort through all that complexity. Furthermore, some people are more sensitive to overspending or simply get their kicks looking for ways to save money."

That's my husband in a nutshell. He hates being taken advantage of, loves a bargain and spends much of his free time comparison shopping online, crunching numbers and doing work himself that others pay to have done.

He scrutinizes our monthly bills and is not only willing to switch service plans if he finds a better one but he also plays companies off against one another. He's ruthless and aggressive and I often pity the customer service reps who take his calls.

But our income goes a lot farther than it would if he weren't so savvy.
He told me today we're going to get a high quality steel roof. We'll end up paying about 40% what my neighbor paid for her shingle roof on the same size house.

"Others of us have more interesting things to do with our time." Yeah, like hang around here, which I do on the computer he found for me at a great low price.

TGGP said...

I second the point about controlling for the correlation between word knowledge and math ability.

Regarding IQ and wealth: summing up a bunch of random variables of small effect gets you a normal distribution. Multiplying a bunch of variables gives a log-normal distribution. Should we expect various factors to add linearly toward wealth or multiply? I also agree that chance plays a large role (such as determining which very talented person becomes a superstar).

rob said...

Re spreadsheets: I have been using them for 20 years, and the changes over time are mostly not for the better. Excel is now absurdly overcomplicated for most ordinary purposes, with common commands that used to be on the home page hidden on various tabs.

I think this best explains the evolution of the MS Office programs. Gates is just effing with us.

sub MS for google.

Tscottme said...

If your cable TV is too high, call up and tell them you want to cancel. That triggers a transfer to a "retention specialist" or some other BusinessWeek pseudo-title, and then tell them you are cutting the cable due to high cost and low interest. Explain the details of a recent satellite TV ad and cable TV will usually match the sat TV offer ot give you the intro rate they offer new customers. I and others have been receiving the intro rate for years. About every 6 months call them and run the same technique.

Jonathan said...

The following is from today's TimesWatch:

Times 'New Media' Editor Suggests Print Subscribers Are Suckers

Forbes reporter Jeff Bercovici found out what one Times editor thinks of the acuity of the subscribers (suckers?) who are keeping the print edition of the New York Times afloat:

During a panel discussion at the Digital Hollywood New York conference, Gerald Marzorati, the Times’s assistant managing editor for new media and strategic initiatives, explained why the paper’s print business is still robust. “We have north of 800,000 subscribers paying north of $700 a year for home delivery,” Marzorati said. “Of course, they don’t seem to know that.”

As evidence that Times subscribers don’t realize how much a subscription costs, he pointed to what happened when the paper raised its home-delivery price by 5 percent during the recession: Only 0.01 percent of subscribers canceled. “I think a lot of it has to do with the fact that they’re literally not understanding what they’re paying,” he said. “That’s the beauty of the credit card.”

Bercovici pointed out:

Stealthily hiking rates on the assumption that customers are too dim to catch on and/or too lazy to do anything about it is the kind of thing that gives banks, credit card companies and cell phone providers such a bad reputation. When I pointed this out after the panel to Marzorati, he was quick to dial back his condescension. All he meant to say, he explained, is that customer retention is always better in an opt-out situation.

Indeed, that's a pretty cavalier position for a Times editor to take, given the ink Times reporters like Gretchen Morgenson and Stephen Labaton have spilled relaying the lack of disclosure and “abusive practices” of credit card companies.

Mitch said...

Financial decisions are only partly predicated on intelligence. Plenty of evidence shows that culture and organizational skills predict spending patterns and financial decisions. (and everyone knows that organization and brains are mostly orthogonal.)

Richard Hoste said...

If you are reasonably smart and disciplined, you can actually get many dollars in zero interest loans if you are willing to dance from card to card and juggle money around.

Hey Sabril,

This reminds me of college. I, as a young man with no credit history, could get an unlimited amount of credit cards with no interest for one year. So at the beginning of each school year I'd get a card, pay it off when the grants or loans came in for the next year and repeat the process over and over again. It never struck me as something that took smarts but as an IQ realist now this particular business practice of the banks makes sense. A smart person can pretty much borrow tens of thousands of dollars for free as long as he can pay it back within a year.

I as a teen once worked as a telemarketer and had a spiel that went something like this.

"Hi, great news! I'm calling from your Sears card to let you know we're going to give you two months free of life insurance. If there's any reason you don't like it, just let us know. After that you pay $9.99 a month, that is only if you choose to keep it."

If you speak fast enough and use long enough sentences a good percentage of people would just hear the word "free" and not understand that you actually have to call to cancel the program. The speech is structured to convey the impression that you have to actually take proactive steps to keep the plan without ever actually saying it. Oh, by the way the life insurance only payed if you died in some kind of vehicular accident and from what I hear if you actually call to cancel it they put you on hold forever in hopes that you'll give up.

IQ realism is the most cogent argument against pure libertarianism.

Anonymous said...

"Yet, what percentage of the public is proficient with Excel? Ten percent, maybe?"

Many admins can use excel to some degree. Even if they don't know the complicated formulas (concatenation is a good one--know what that is?) they could learn with the help menu tutorial. It's not that rare a skill.
I just don't think a lot of people use it for their personal finances. It's one thing to use it per instructions in a work/business context, another thing to figure out where your own numbers would fit into the scheme of things.

none of the above said...

I think the economic idea used here is less price discrimination (where you charge people who can pay more higher prices) than rational ignorance (where it's not worth your time to become informed on some issue, because your decision won't make you much money making a better decision.

If I can steal $1 from a million people, requiring each one to spend an hour to uncover it, then it's rational for each individual person to let me steal the money.

If I can live in a country where big companies with lobbyists and legal staffs don't really face the same kind of laws as normal people, so that if discovered, I probably won't be fined even as much as I made on the scam, there is little incentive not to do this kind of thing all the time.

Unknown said...

It was VisiCalc on the Apple II that started off the MBAs to being the handmaidens to the doom we now experience as "daily life".

Before they started in, the "What If" analysis required skills that were only gained as a result of experience, which most often also bestowed some reason, judgment, and wisdom upon the skilled person.

So, M&As did not get done just to lay off the workers and sell the assets to make a quick buck for the 3rd quarter, and no one go the bright idea of exporting jobs to first Mexico, and then to cheaper and cheaper places until everything ended up in the bottom of the barrel in China, where the low-cost provider wins the race to the bottom of the very bottom.

The punch line is that the Chinese Communists have built a capitalist economy selling cheaply-made goods to the people who used to make their livings making the same goods at slightly higher prices. Who is dumber, the one who opts for cheap imported consumer goods at the cost of an entire economy, or the one who opts to sell things to people who have no jobs and no money to pay the for the consumer goods?

Anonymous said...

BTW, the most g loaded subtest on WAIS-IV? Arithmetic at .78; Vocabulary is at .72.