CSR built into the business model

Particant productions present an intriguing example of how CSR is built into the business model. From Fastcompany

Participant Productions is the first film company to be founded on a mission of social impact through storytelling. But it's no charity. It's a pro-social commercial operation, a hybrid emblematic of the social-entrepreneurship movement. "Ultimately, the goal here is to build a brand around social relevance in media," Skoll says. He staked the company $100 million for its first three years; every script is evaluated equally on its creative and commercial potential and its ability to boost awareness of one of six issues: the environment, health, human rights, institutional responsibility, peace and tolerance, and social and economic equity. For each project, Participant execs with nonprofit backgrounds reach out to public-sector partners, from the ACLU to the Sierra Club, for their opinions. If those partners don't think they can build an effective action campaign around the film, it's a no-go. At the same time, "It can't be good-for-you spinach, or it's not going to work," says Participant's president, Ricky Strauss, a former production and advertising exec at Columbia and Sony Pictures Entertainment. "The more mainstream the story, the more opportunity to make an impact."

"Love of power over men is a base instinct no less petty or universal than greed. "

The CAPM has always been a troubled child. Even though its explanatory power is relativly small it has been a natural part of the basic curriculum at business school for quite a while. However, this working paper from ERIC G. FALKENSTEIN presents an explanation for why it fails to explain reality.

The following excerpt is from mahalanobis:

In the paper, my alter-ego explains this as a consequence of people caring about their relative status, rather than absolute wealth. In such an environment, nondiversifiable risk becomes like diversifiable risk in the traditional CAPM, avoidable, so unpriced. All you have to do is assume people care about relative wealth and using arbitrage or utility theory, risk is not related to returns. A beta=0 asset has the same risk as a beta=2 asset to someone benchmarked against the market. The paper presents a simple model, and goes over the empirical evidence with copious references.

There’s actually been quite a few models using a relative status approach for various parochial problems, so it’s not novel in that aspect, it just takes the approach to the general problem of risk and return. And all the general normative implications for volatility retain, including the desire to hedge, or buy insurance (though not, say, Global Warming insurance). There is one big seemingly counterfactual implication: that the equity risk premium is zero. I address this by noting that the equity risk premium used to be estimated at around 8%, and is now generally estimated around 3.5%, so another 3.5% is not farfetched. Further, that estimate ignores transaction costs, and peso-problems in equity indices, which takes this to zero (is the marginal investor the Vanguard500 investor? A high volume/expense day trader? A 5% front-load paying granny?). It should be noted that the traditional model generates only a 0.35% risk premium for plausible parameters, so this isn't as contrary as it seems (any outside-the-box refinement to the traditional model could well be applicable to this one).

Love of power over men (and the implied greater access to women regardless of aggregate wealth) is a base instinct no less petty or universal than greed. Economists should not shirk the implication because as dismal scientists, we draw the line at greed, not envy. It’s not a normative theory, just a positive one (ie, descriptive, not prescriptive). Not only can a relative status utility function explain the absence of the risk aether’s effects in markets, but it can potentially explain other issues, such as the home bias (people are more concerned about their income relative to their countrymen, not the world), endogenous instability (a world where ‘no risk’ is defined as what everyone else is doing has some arbitrariness), and why aggregate happiness is stagnant in countries 5 times as wealthy as 70 years ago (the rat race is unaffected). Rick Harbaugh has a paper where a similar approach generates the utility function of Prospect theory, which is typically just asserted as a funky preference. So there's much to be gained, and only empirical embarrassment to lose (plus all those canned presentation about CAPM given to students).

The abstract of the original articel :

This paper presents a utility function refinement that explains the empirical irrelevance of risk to returns. The key is that in an environment where people care about relative wealth, risk is a deviation from what everyone else is doing, and therefore becomes like diversifiable risk in the CAPM, avoidable. Using an equilibrium or an arbitrage argument, a relative status oriented utility function creates a zero risk-return correlation via a market model that implies a zero risk premium. This approach is described as being theoretically consistent, intuitive and a better description of the data.

Remember the costs of information acquisition

When thinking about how to invest your portfolio additional information is not necessarily a good thing as this illustrates:
Seen at Mhalanobis:

A paper by Guiso and Jappelli looked at Information Acquisition and Portfolio Performance. They develop a theoretical model that shows how an overconfident investor is actually made worse off, because they overestimate the precision of their signal. The really interesting part of their paper is a novel set of survey data from an Italian bank that shows people who are confident are generally worse investors than those who are ignorant. Investors experienced a lower Sharpe ratio the more they invest in investment information. It seems people use information to rationalize risk taking that is not commensurate with greater returns; a simple strategy of basic naïve asset allocation dominates the average active investor.

"Gluttons at the gate"

A quite good article about the development in PE can be found at businessWeek

Three weeks after giant private-equity firm Thomas H. Lee Partners agreed to buy an 80% stake of Iowa Falls ethanol producer Hawkeye Holdings in May, Hawkeye filed registration papers with the Securities & Exchange Commission to go public. The buyout deal hadn't even closed yet, but Thomas H. Lee was already looking forward to an initial public offering expected to generate a huge profit on its $312 million investment. The firm didn't just cross its fingers and wait, however: It took $20 million from Hawkeye as an advisory fee for negotiating the buyout and a $1 million "management fee"--and will soon take about $6 million to meet its own tax obligations. All told, Thomas H. Lee will collect payments of around $27 million by yearend--despite Hawkeye's having earned just $1.5 million in the six months through June.

These are crazy times in the private-equity business. It used to be that buyout firms would spend 5 to 10 years reorganizing, rationalizing, and polishing companies they owned before filing to take them public. Thomas H. Lee couldn't have created much lasting economic value in the three weeks before the filing, but that didn't stop it from writing itself huge checks from Hawkeye's ledger. Thomas H. Lee and Hawkeye declined to comment.

Buyout firms have always been aggressive. But an ethos of instant gratification has started to spread through the business in ways that are only now coming into view. Firms are extracting record dividends within months of buying companies, often financed by loading them up with huge amounts of debt. Some are quietly going back to the till over and over to collect an array of dubious fees. Some are trying to flip their holdings back onto the public markets faster than they've ever dared before. A few are using financial engineering and bankruptcy proceedings to wrest control of companies. At the extremes, the quick-money mindset is manifesting itself in possibly illegal activity: Some private equity executives are being investigated for outright fraud.Taken together, these trends serve as a warning that the private-equity business has entered a historic period of excess. "It feels a lot like 1999 in venture capital," says Steven N. Kaplan, finance professor at the University of Chicago. Indeed, it shares elements of both the late-1990s VC craze, in which too much money flooded into investment managers' hands, as well as the 1980s buyout binge, in which swaggering dealmakers hunted bigger and bigger prey. But the fast money--and the increasingly creative ways of getting it--set this era apart. "The deal environment is as frothy as I've ever seen it," says Michael Madden, managing partner of private equity firm BlackEagle Partners Inc. "There are still opportunities to make good returns, but you have to have a special angle to achieve them."

Decreases in the attention span leads to new ad strategy

The example below concerns the reduction of the length of a radio ad.
from knowledge@wharton

On its website, Clear Channel discusses how it has cut down on the number of ad minutes per hour and on the number of ads in each commercial pod in an attempt to create a better experience for commercial-weary listeners and a better advertising environment. "When the music stops, the listening shouldn't," says the website, adding: "With fewer commercial breaks, shorter pods and shorter, more creative copy, spots get more share of voice and higher recall."

According to Wharton marketing professor Patricia Williams, "there is an increasing recognition that consumers just tune out ads. So the likelihood that you're going to keep consumers engaged for a 60-second or 30-second ad is minimal, especially on radio and TV when people will channel-flip as soon as the ads appear. There's also recognition that a good amount of the time advertisers are buying in a traditional 30- or 60-second ad might be a waste anyway because consumers aren't paying attention."

Joseph Turow, a professor and associate dean for graduate studies at Annenberg, agrees. "So many people are using iPods and going on the web to get music," he says. "And radio stations are seeing that a lot of people are leaving because they can't stand the number of ad minutes. So Clear Channel is trying to cut down [on ad minutes] to get more [listeners]."

...
"When advertisers went from 60-second to 30-second commercials and from 30-second to 15-second commercials, they said, 'Wow, I can reach twice as may people with shorter spots,'" says Reibstein. "But that ignored the question of whether a shorter ad has the impact of a longer ad. Clearly that's not the case. However, if all you want to do is get your name out there, shorter is fine. But if you have to explain something, or visually show something more complex and with more content, you can't do it with a little blip."
...

What is the best way for an advertiser to take advantage of super-short ads on either radio or TV? The Wharton marketers say five- or two-second ads may work well in reinforcing an existing brand with a high level of consumer awareness or announcing an upcoming event at an established retailer or a new product by a well-known manufacturer.

"Ads that remind people to 'Do something now' and basic brand-awareness ads work great on billboards," Schmittlein says, and probably they will on radio, too. Here are some examples: A computer company is introducing a new desktop model and uses a short ad to direct consumers to its website, where they can learn all about the model's functionality. A supermarket chain informs viewers that their stores will be open all day on an upcoming holiday. A TV network urges listeners to tune in tonight to the season premiere of last year's top-rated crime drama. A chain of convenience stores tells consumers during a July heat wave that its popular iced drink is available at a reduced price.

Say It with a Song

Several of those interviewed say adlets or blinks that use melodies, sound effects or well-known taglines -- or a combination of the three -- can be especially effective in keeping a brand or product top-of-mind. Examples of notable audio signatures include the Southwest Airlines 'ding', the "Intel Inside" tinkling audio tag, Fox's thumping theme music for National Football League games, or Coca-Cola's famous jingle, "It's the Real Thing."

...

One thing to avoid in scheduling super-short ads on radio or TV is clutter. According to Schmittlein, airing too many brief ads back to back would be a disservice to all the advertisers because their individual messages could get lost in the jumble. "It's just like billboards: if you have 10 billboards lined up next to one another, that's a problem," he says.

Another risk with five- and two-second ads -- but particularly the two-second spots -- is that listeners and viewers may miss them altogether. "If it's easy for consumers to avoid a 30-second message by changing the station, it's really easy to tune out a two-second message," suggests Williams.

At the same time, though, Williams says a two-second ad may work well, not in spite of its brevity, but because of it. When an ad comes on the air, it takes most people a couple of seconds to change the radio station or TV channel, and even TiVo recordings jump back a bit when programs are replayed. So viewers may see a couple seconds of commercial content they did not necessarily wish to view.

Reliability and sample sizes

It seems that somebody forgot that we need sufficiently large sample sizes when we try to conduct out-of-sample statistical inference. Especially in the case of cluster sampling where the assumption of random observations are questionable.

From WSJ

655,000 War Dead?
A bogus study on Iraq casualties.

BY STEVEN E. MOORE
Wednesday, October 18, 2006 12:01 a.m. EDT

After doing survey research in Iraq for nearly two years, I was surprised to read that a study by a group from Johns Hopkins University claims that 655,000 Iraqis have died as a result of the war. Don't get me wrong, there have been far too many deaths in Iraq by anyone's measure; some of them have been friends of mine. But the Johns Hopkins tally is wildly at odds with any numbers I have seen in that country. Survey results frequently have a margin of error of plus or minus 3% or 5%--not 1200%.

The group--associated with the Johns Hopkins Bloomberg School of Public Health--employed cluster sampling for in-person interviews, which is the methodology that I and most researchers use in developing countries. Here, in the U.S., opinion surveys often use telephone polls, selecting individuals at random. But for a country lacking in telephone penetration, door-to-door interviews are required: Neighborhoods are selected at random, and then individuals are selected at random in "clusters" within each neighborhood for door-to-door interviews. Without cluster sampling, the expense and time associated with travel would make in-person interviewing virtually impossible.

However, the key to the validity of cluster sampling is to use enough cluster points. In their 2006 report, "Mortality after the 2003 invasion of Iraq: a cross-sectional sample survey," the Johns Hopkins team says it used 47 cluster points for their sample of 1,849 interviews. This is astonishing: I wouldn't survey a junior high school, no less an entire country, using only 47 cluster points.

Neither would anyone else. For its 2004 survey of Iraq, the United Nations Development Program (UNDP) used 2,200 cluster points of 10 interviews each for a total sample of 21,688. True, interviews are expensive and not everyone has the U.N.'s bank account. However, even for a similarly sized sample, that is an extraordinarily small number of cluster points. A 2005 survey conducted by ABC News, Time magazine, the BBC, NHK and Der Spiegel used 135 cluster points with a sample size of 1,711--almost three times that of the Johns Hopkins team for 93% of the sample size.

What happens when you don't use enough cluster points in a survey? You get crazy results when compared to a known quantity, or a survey with more cluster points. There was a perfect example of this two years ago. The UNDP's survey, in April and May 2004, estimated between 18,000 and 29,000 Iraqi civilian deaths due to the war. This survey was conducted four months prior to another, earlier study by the Johns Hopkins team, which used 33 cluster points and estimated between 69,000 and 155,000 civilian deaths--four to five times as high as the UNDP survey, which used 66 times the cluster points.

The 2004 survey by the Johns Hopkins group was itself methodologically suspect--and the one they just published even more so.

Curious about the kind of people who would have the chutzpah to claim to a national audience that this kind of research was methodologically sound, I contacted Johns Hopkins University and was referred to Les Roberts, one of the primary authors of the study. Dr. Roberts defended his 47 cluster points, saying that this was standard. I'm not sure whose standards these are.

Appendix A of the Johns Hopkins survey, for example, cites several other studies of mortality in war zones, and uses the citations to validate the group's use of cluster sampling. One study is by the International Rescue Committee in the Democratic Republic of Congo, which used 750 cluster points. Harvard's School of Public Health, in a 1992 survey of Iraq, used 271 cluster points. Another study in Kosovo cites the use of 50 cluster points, but this was for a population of just 1.6 million, compared to Iraq's 27 million.

When I pointed out these numbers to Dr. Roberts, he said that the appendices were written by a student and should be ignored. Which led me to wonder what other sections of the survey should be ignored.

With so few cluster points, it is highly unlikely the Johns Hopkins survey is representative of the population in Iraq. However, there is a definitive method of establishing if it is. Recording the gender, age, education and other demographic characteristics of the respondents allows a researcher to compare his survey results to a known demographic instrument, such as a census.

Dr. Roberts said that his team's surveyors did not ask demographic questions. I was so surprised to hear this that I emailed him later in the day to ask a second time if his team asked demographic questions and compared the results to the 1997 Iraqi census. Dr. Roberts replied that he had not even looked at the Iraqi census.

And so, while the gender and the age of the deceased were recorded in the 2006 Johns Hopkins study, nobody, according to Dr. Roberts, recorded demographic information for the living survey respondents. This would be the first survey I have looked at in my 15 years of looking that did not ask demographic questions of its respondents. But don't take my word for it--try using Google to find a survey that does not ask demographic questions.

Without demographic information to assure a representative sample, there is no way anyone can prove--or disprove--that the Johns Hopkins estimate of Iraqi civilian deaths is accurate.

Public-policy decisions based on this survey will impact millions of Iraqis and hundreds of thousands of Americans. It's important that voters and policy makers have accurate information. When the question matters this much, it is worth taking the time to get the answer right.

Valuation of social networks sites

In line with the recent rumors that google migth buy youtube Knowledge@wharton
presents a quite good dicussion about valuation of these sites:

Less than three years after emerging from nowhere, the hot social networking website MySpace is on pace to be worth a whopping $15 billion in just three more years. Or is it?

Is the much smaller Facebook, run by a 22-year-old, really worth the $900 million or more Yahoo is reported to have offered for it? Maybe. Or maybe this is Dot-Com Bubble, Part II, with MySpace, Facebook, YouTube and the other new Internet phenoms destined for oblivion when the fad fades.

"What makes this hard is that these companies seem to be so many years away from the kind of earnings that the valuation numbers are forecasting for them," says Andrew Metrick, finance professor at Wharton. The $15 billion MySpace figure "would imply that a lot more people will be on MySpace than are currently on it."

While the social networking sites vary considerably, each relies heavily on content provided by users who can post personal profiles and build networks among friends and others with shared interests. For the most part, these users have free access and the sites are funded with advertising revenue. To lure advertisers, young sites typically offer deep discounts that make profitability elusive, and it is unclear when they will be able to push ad rates higher, if ever.

The problem, as Wharton accounting professor Robert W. Holthausen sees it, is a dearth of information to plug into the standard valuation models. "You have little data on what kind of revenues they can generate and what their cost structure is."

Valuing advertising-driven sites is particularly hard because the same numbers -- such as the number of users or page views -- can mean different things depending on how the advertisers are billed, Holthausen adds. "How often do they get paid for that advertising? Is it just when the advertisement appears? Or does there have to be a click through?" Similarly, not every user has the same value. That depends on how much the typical user is likely to spend and what he or she is likely to buy. Finally, Holthausen notes, a site will be more valuable if it uses a proprietary technology than if it simply offers services competitors can easily duplicate.

The $15 billion MySpace prediction was issued late in September by RBC Capital analyst Jordan Rohan, fresh from a meeting with Fox Interactive, the News Corp. unit that acquired MySpace's parent company, Intermix Media, about a year ago for a then-astounding $580 million. Rohan cited MySpace's phenomenal growth. It now has more than 90 million active users, twice as many as a year earlier, making it a magnet for advertisers. It recently signed a deal with Google to display search results and sponsored advertising links in exchange for $900 million over three years. In setting the $15 billion forecast, Rohan pointed to Google, which also relies on ad revenue, and which has a market capitalization of $120 billion.

But is Google a good benchmark? Google is without question the premier Internet search service, while MySpace is one of a number of competitors scrambling for market share in a new industry. Google has a proven track record of profitability, while MySpace does not.

Moreover, even Google's $120 billion market cap may reflect some irrational exuberance, making it a misleading model. Its shares sell for about 55 times annual earnings, roughly triple the price-to-earnings ratio of the average Standard & Poor's 500 company. Using the same 55-times-earnings figure, MySpace would need about $270 million in annual profit to justify a $15 billion value. Can it do that in three years, given it is expected to generate only about $200 million in revenue this year? It looks like a reach.

Consider some of the figures bandied about for Facebook. Last January, Facebook founder Mark Zuckerberg, now 22, reportedly turned down a $750 million offer from Viacom, holding out for $2 billion, according to news accounts. This fall he is said to be mulling over a $900 million offer from Yahoo. Those are big numbers considering that the business, started early in 2004, has a modest nine million users and is believed to have annual revenue of around $50 million, though some experts expect that to double soon. If Facebook were valued at 55 times earnings, it would need a $16 million profit to justify a $900 million price.

"Discounted Cash Flow"

Still, there are sure to be some winners in social networking, and sites that are already pulling in significant revenue must certainly have an edge over the dozens of lesser-known competitors. "That's a lot of revenue," Metrick says, noting that this distinguishes Facebook from the dot-com bubble firms. "There were a lot of Internet companies in 1999 that had no revenue.... That kind of [$900 million valuation] doesn't seem so crazy if you believe there is a lot of growth built in." But, he adds, "There are a whole lot of examples of firms like Netscape which grew -- and then eventually lost."

The market-capitalization method of valuation is typically used with a public company -- a free standing entity that sells stock to the public. And it's best for stating a current value rather than a future one. Analysts also like to factor in a company's future prospects, using any number of calculations to derive a figure for "discounted cash flow." Essentially, they look at expected revenues over a given number of years and subtract expenses to arrive at a figure for "free cash flow." Then, using various assumptions about interest rates, they determine what money received in the future is worth in today's terms.

Analysts can never be sure about any company's future revenues and expenses, but the problem is even worse when dealing with a young company in a fledgling industry. The assumptions used in any valuation model are ideally based on experience of at least six or seven competitors, Metrick says. But there is no good peer data in the new social networking business.

With older industries, analysts often value a company on some ratio, such as a multiple of revenues. "But the problem is you are assuming the valuations put on these are rational," says Holthausen, arguing that expectations for new industries are often not rational. During the dot-com bubble, some companies that did have substantial revenues were valued far beyond what any standard analysis would say they were worth, he adds. "You totally had to suspend belief."

After the bubble burst, valuing the survivors did become more sensible, and some are assessed fairly easily with standard approaches, according to Wharton marketing professor Peter Fader. That's especially true of publicly traded companies involved in ordinary commerce, such as bookseller Amazon.com and auction site eBay. Their stocks trade at 45 and 39 times earnings, respectively.

"You're not going to see an Amazon being overvalued like [Internet stocks] used to be," he says, "but these social network sites are the Wild West. This is an area where it has been notoriously fickle. It's not like search engines, where you can really compare them on objective criteria," he suggests, referring to established players like Google and Yahoo.

Among the unknowns: How well can social networking sites hold on to their users? One player, Friendster, burst onto the scene a few years ago, then largely deflated. On the other hand, users go to considerable trouble to upload information and images to these sites, and to establish elaborate networks of friends for electronic sharing. They are not likely to abandon all that effort as casually as they would switch from one online bookseller to another. "It does seem to me there is some stickiness to the model," Holthausen says.

Networks Based around Products

Metrick believes social networking sites will not be a passing fad. But there's no guarantee that MySpace, Facebook or any of the other current players will be the big winners in the end. Fader, too, believes social networking is here to stay, but he thinks it may work best not as a freestanding function but as an additional feature on sites that draw users for other reasons. Hence, the winners may turn out to be other sites that adopt social networking features. Or they may be new players, or current networking sites that broaden their offerings.

Many sites may ultimately be acquired in the way MySpace was bought by publicly traded News Corp., the enormous multi-national media company run by Rupert Murdoch. Part of the News Corp. strategy is to let advertisers link users into networks based around products, such as movies or music groups. More than a million bands have profiles on MySpace, for example.

If MySpace becomes the model, social networking sites will be quite different from the classic dot-com bubble companies which tried to cash in big by going public while staying independent. The risks are not the same when an iffy venture is part of something bigger, says John R. Percival, adjunct professor of finance at Wharton. "This is kind of like the oil and gas business. The risk might not be as great as you think, and a high valuation might be justified."

A small, independent oil driller faces a huge risk in drilling a new hole, which may be dry, he says. Compared to that, risks from changing oil prices and demand are relatively small. But the situation is reversed when the driller is part of a bigger enterprise that drills many wells. A dry hole here and there doesn't matter, but changes in oil prices and demand do.

Social networking sites may be risky for their founders and the venture capital firms that fund them in the early years, but they don't appear to be pumping huge amounts of risk to the marketplace the way tech firms did in the late 1990s. "If you have a little bit of money invested in this and you're already invested in other things," says Percival, "frankly the risk is not as big as you think."

Recalling the first dot-com bubble six years ago, Fader notes, "We all look back and laugh and say we will not go through that exercise again, but this could easily be a case of history repeating itself."

Segmentation

So is this the result of better segmentation by the networks?
The example is from the Freakonomics blog

We mention in passing in Freakonomics that blacks and whites in the United States have very different TV viewing habits (see page 182 of the book). Monday Night Football is the only TV show that historically has been among the top ten in viewership for both blacks and whites. Seinfeld, one of the most popular white shows ever, was never in the top 50 for blacks.

So I was intrigued when I happened to catch USA Today’s recap of last week’s prime-time Nielsen ratings in its Wednesday issue.

The top 10 shows for whites last week:

1) CSI
2) Grey’s Anatomy
3) Desperate Houswives
4) Dancing with the Stars
5) CSI: Miami
6) Sunday Night Football
7) Survivor
8) Criminal Minds
9) Ugly Betty
10) CSI:NY

And for Blacks:

1) Grey’s Anatomy
2) Dancing with the Stars
3) CSI: Miami
4) Ugly Betty
5) Sunday Night Football
6) Law and Order: SVU
7) CSI: NY
8) CSI
9) Next Top Model
10) Without a Trace

If this one week of data is a good indicator (and I think it is), there has been a remarkable convergence in television viewing habits. A few years ago almost all the top black shows featured predominately black characters and most were not even on the big four networks. Now, there is almost a perfect match between what blacks and whites are watching and while many of these shows have black characters, none feature a predominately black cast. (As an aside, I thought it was interesting that in the box in USA Today that listed the top shows among black viewers they put a picture of Chandra Wilson from Grey’s Anatomy.)

Does this convergence in TV viewing signal a broader pattern in cultural convergence? Probably not, but it is worth keeping an eye on.

Amidst all the change, however, one thing seems to be as certain as death and taxes: both blacks and whites will watch football if you put in on in primetime.

Expected utility

Risk aversion is an important thing.... The example of warranties... From washingtonpost

"All you have to do is see how aggressively these things are sold at the point of sale," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America, a District-based nonprofit association of 300 consumer groups. "It's not a good buy under most circumstances."
..
The instinct to protect what we have and forgo the obvious benefits of another course is one long studied by behavioral economists. Kevin McCabe, an economist and director of the Center for the Study of Neuroeconomics at George Mason University, said that even without knowing from experience that a product will break, many people insure it anyway.
...

That reliance on gut instinct points to an inherent disadvantage for consumers in the purchase process, economists and consumer advocates say. Buying an extended warranty is vastly different from selecting most other insurance products. When buying car insurance, for instance, it's relatively easy to make an informed decision by comparing terms and prices among different carriers. The power struggle between buyer and seller is relatively balanced.

But when deciding whether to buy an extended warranty, it is nearly impossible to comparison shop from the checkout counter. And, because the insurance and service companies are invisible at the time of sale, consumers can't verify their financial health or reliability.

...
Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties as their cut.

Of the remaining $7.5 billion, the publication estimated that $3 billion was paid in claims by the insurance companies that back the plans. On the other hand, according to the Insurance Information Institute in 2004, the U.S. auto insurance industry paid out $66 in claims for every $100 in premiums.

Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales. But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.

so where is the value:

But even Consumer Reports has made a few exceptions. Last year, for the first time, the magazine found that repairs on some products -- laptop PCs, treadmills and plasma TV sets -- were common enough and expensive enough that a decently priced extended warranty would make sense. Plasma televisions, the magazine said, run hot and are still considered a relatively new consumer technology.

Plus, dragging bulky, large-screen televisions into a repair shop is impractical for most consumers. Many extended service warranty programs offer in-home repairs.

Options are not always valuable?

Dan Gilbert has a great talk about the determinants of happiness at the TED blog. Notice especially the time inconsistency with regards to the choice of the photographers... You can get it at the following link

Immigration gone wrong?

Harvard Magazine presents interesting results about the propensity for immigrants to be violent.

First-generation immigrants are more likely to be law-abiding than third-generation Americans of similar socioeconomic status, reports Robert Sampson, Ford professor of the social sciences. These new findings run counter to conventional wisdom, which holds that immigration creates chaos. The prevailing “social disorganization theory” first gained traction in the 1920s and ’30s, after the last big wave of European immigrants poured into the United States. Scholars have maintained that the resulting heterogeneity harmed society. “They weren’t saying that this was caused by any trait of a particular group,” Sampson explains. “Rather, they were saying that lots of mixing would make communication accross groups difficult, make it hard to achieve consensus, and create more crime.”

Yet in Sampson’s recent study, first-generation Latino immigrants offer a particularly vivid counterexample to this common assumption. “They come into the country with low resources and high poverty, so you would expect a high propensity to violence,” Sampson says. But Latinos were less prone to such actions than either blacks or whites—providing the latest evidence that Latinos do better on a range of social indicators, a phenomenon sociologists call the “Latino paradox.”

Furthermore the author reaches an interesting conclusion about the costs and benefits of parallel societies:

The study also revealed that neighborhoods matter. “Kids living in neighborhoods with a high concentration of first-generation immigrants have lower rates of violence,” he explains, “even if they aren’t immigrants themselves.”

What makes new arrivals more law-abiding? Sampson theorizes that people who relocate here for the sake of greater opportunity come with a strong work ethic: “They may have a certain motivation to work and not get arrested,” he says. The young Latinos in Sampson’s study were also more likely to live with married adults, which correlated with a lower risk of violence, and to hold conservative opinions regarding drug use and crime, all of which might deter them from breaking the law. Finally, living in a neighborhood with many first-generation immigrants—who appear to bond over their shared experience—generates a dense social network that may steer young people away from crime. It’s likely, Sampson adds, that many of these immigrants are in the country illegally, which may give them “extra incentive to keep a clean record and not commit crimes, in order to avoid deportation.” After a few generations here, however, America’s tradition of “frontier justice” may prompt greater violence, he speculates. “It’s that notion of reacting to insults and taking the law into your own hands,” he says. “You would expect more exposure to that over time.”

A gorilla went by...

Knowledge@wharton has an entry about the difference between vigilant and operational leaders. It is descently written, but the following example says it all:

In one classic experiment, people failed to notice a gorilla walking through a basketball court because they were instructed to count how often the ball was being passed. The simple task of counting bounces and passes restricts their vision so much that they don't see the gorilla at all. This is what happened to Coke and Pepsi: They missed the gorilla amid the technical, legal and PR problems of the pesticide charge."