Episode #118: Free-rider Friday - November 2016

Segment One

What a month! Donald Trump wins the presidency and the Cubs win the World Series.

Theo Epstein broke the curse of both the Red Sox and the Cubs. Ed thinks he destined for the Baseball Hall of Fame.

The prediction markets, Nate Silver, and the polls got the election wrong. They all reinforced each other and it was a classic example of an echo chamber.

Only three polls got the results right, and one private pollster: Investors Business Daily, Los Angeles Times, and Trafalgar. The private pollster was working for the Trump campaign, John Mclauglin of the Hoover Institution.

Is the election result similar to the 1961 World Series, when the Pirates beat the Yankees in four games, even though the Yankees outscored them overall?

If we scrapped the Electoral College, it’s a static analysis to argue that Hillary would have won. The election dynamics would have been different, with the candidates spending time differently in different states.

Segment Two

Did Trump receive a mandate?

Have the Democrats been reduced to a bi-coastal party?

The plurality of Americans voted for no one, which has always been the case.

Either way, voting is a flawed way to make decisions.

Imagine making decisions on whom to marry, what car to buy, where to live, your job, by popular vote.

Maine passed a law allowing for rank-choice voting.

Ed explained Approval Voting and N/3 Analysis as a way for organizations to make better decisions than simply majority or plurality voting.

Segment Three

Author of The Last Campaign: How Presidents Rewrite History, Run for Posterity & Enshrine Their Legacies, Anthony Clark appeared in this segment to discuss the Obama Presidential Library.

The Obama Presidential Library site has been selected: Historical Jackson Park, Chicago, Illinois, expected to open in 2021.

However, the records will be out in 2121—it takes 100 years for the National Archives to process and release all the records. More emphasis is placed on opening the museum to promote the legacy rather than hiring archivists to process records.

The Reagan Library opened in 1991 and they still haven’t processed 75% of the records yet.

Segment Four

Rocket Man: Elon Musk

“I’d like to die on Mars. Just not on impact.”

On September 27, Musk outlined his plans to colonize Mars within 10 years:

• 100 passengers @ $200K each

• The journey will take 6 months

It’s a hedge against Earth-bound extinction. Stephen Hawking, among others, believes we are all sitting ducks for a supervirus, malevolent AI, nuclear war, etc.

The Economist called this view “Claptrap.”

Living on Mars would be difficult: Need pressurized buildings, communication with Earth would be tedious, you’d have to recycle nutrients and waste, etc. Biosphere 2 in the 1990s was quickly abandoned as impractical for some of these reasons.

Musk also said the government would have to open its checkbook.

Cool, but why should we all pay for it?

Musk might be more impressive to show results here on Earth first, perhaps by turning a profit in one of his three enterprises.

• $1.3B Tesla subsidies

• Export/Import Bank subsidized payloads for SpaceX launches

• $4.9B in total subsidies over the past 10 years, according to the Heritage Foundation (approximately 50% of Musk’s wealth).

“Quick and Dirty,” The Economist, October 8, 2016

Short-Termism is a problem?

1. The average holding period of shares is 200 days

2. Managers are perceived to be harried to meet targets in one year or less

This is not a helpful lens: the same system that’s poured capital into Tesla, Uber, Twitter, Amazon, etc., is accused of short-termism.

America is the most hyperactive market with the best-performing economy, and with dominant firms.

S&P has a new index, and it claims to track firms with a long-term focus.

Three out of ten of its largest holdings are cigarette firms, which may outlive their customers for all the wrong reasons.

The tension between short-term vs. long-term is what makes capitalism tick.

Episode #117: Interview with David Friedman, Anarchist, Anachronist, Economist

About Our Guest

Ron and Ed are thrilled to have as a Guest this week, the self described anarchist-anachronist-economist David Friedman. 

David is an American economist, physicist, legal scholar, and libertarian theorist. He is known for his writings in market anarchist theory, which is the subject of his most popular book, The Machinery of Freedom.

He has an active blog at which he opines about everything from medieval recipes to global warming. 

Segment One: Ed’s Questions

The Machinery of Freedom: Guide to a Radical Capitalism

$10.97

By David D. Friedman

Buy on Amazon

What are your thoughts on the election?

Would President Obama pardon Hillary Clinton, even though she hasn’t been convicted of anything? Is there precedent in any legal system for a pre-emptive pardon?

Should we transfer the pardon power to Congress?

Segment Two: Ron’s Questions

In Hidden Order: The Economics of Everyday Life, 1996, you discuss the assumption of rationality. It’s false, but useful. It describes our actions, not our thoughts.

Why do economists hold on to the assumption of rationality?

You haven’t seen any major advances because of behavioral economics?

Price discrimination. What are the welfare benefits of price discrimination?

Segment Three: Ed’s Questions

The market is often blamed for inequality, but you point out that often times it is government that is more unequal to the poor. Could you give us an example or two?

You’ve written on public-key encryption, is blockchain and Bitcoin a manifestation of that?

Question from Jay, one of our listeners: Who or what led you to your anarchism?

Segment Four: Ron’s Questions

In Law’s Order, you point out that the death penalty is irreversible, but so is prison time. And since prison has to be imposed at a higher probability to get same deterrent effect, there will be proportionally more mistakes with imprisonment than the death penalty.

You have a PhD in physics. What’s your view of Global Warming?

Are you concerned about the declining population in some countries, such as Europe, Japan, etc.?

Three times as many disagreements each year among eBay traders are resolved using its online dispute resolution system than there are lawsuits filed in the entire US court system. Might this be an example of some of the ideas in The Machinery of Freedom being implemented?

Illustrated Summary of Machinery of Freedom

More Books by David D. Friedman

• Price Theory: an intermediate text, 1990

• Hidden Order: The Economics of Everyday Life, 1996

• Law’s Order: What Economics Has to Do with Law and Why it Matters, 2000

• Future Imperfect: Technology and Freedom in an Uncertain World, 2008

• The Machinery of Freedom: Guide to a Radical Capitalism, 3rd edition, 2014

Episode #116: Interview with pricing expert, Tim Smith

Biography

Dr. Tim J. Smith is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right and Pricing Strategy, and founder of Wiglaf Pricing. He has been a keynote speaker and workshop leader on a variety of pricing topics to professional audiences across the globe. Smith began his career as a research scientist in quantum mechanics. He’s an Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, a member of the American Marketing Association, Business Marketing Association, and American Physical Society.

He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago Booth School of Business.

Segment One—Ron’s Questions and Summary of Answers

You have a PhD in physical chemistry. How did you get into pricing?

I fell into it! Became an entrepreneur in technology and sales and discovered that value-based selling was basically the same as value-based pricing. Selling and math make a pricing professional.

Your first book was Hawks, Seagulls and Mice, (2006), what was it about?

It looks at the structure of sales and marketing across different industries, and how they vary.

In Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, 2012, you write:

The science of pricing refers to the act of gathering information, conducting quantitative analysis, and   revealing an accurate understanding of the range of prices likely to yield positive results.

The art of pricing refers to the ability to influence consumer price acceptance, adapt structures, and align pricing strategy.

Is pricing more art or science, or conceptual? You write it’s not an engineering challenge, but a strategic challenge?

It’s a strategic science, which puts it closer to an art.

You wrote in your latest book, Pricing Done Right

Although price not a competitive advantage, pricing may be.” Rethinking the unit in pricing, and change your industry, such as hourly to fixed prices, Zipcar, iTunes and music, etc.

 You can imitate a price, but it’s march harder to imitate a pricing structure, which can be a          competitive advantage.

Why does cost-plus pricing continue to be endemic?

Because it’s simple, common, mechanical. It’s a form a satisficing (satisfy + suffice). It’s precisely wrong, rather than approximately right.

The shift from setting prices to communicating value is really a business model change, isn’t it?

Yes.

Clayton Christensen’s new book, Competing Against Luck, argues that the job the customer is doing with your product or service needs to be understood.

It goes back to Ted Levitt, nothing new, really.

Segment Two—Ed’s Questions and Summary of Answers

Why Wiglaf Pricing?

Wiglaf is a character in the Anglo-Saxon epic poem Beowulf. He is the son of Weohstan, a Swede of the Wægmunding clan who had entered the service of Beowulf, king of the Geats. Wiglaf was Beowulf’s advisor, and helped him slay his dragon.

Your mantra

You have a mantra, three questions: What’s my alternative? Are you better or worse? And why should I care? [these are the questions customer’s ask themselves].

If a customer isn’t profitable, they aren’t a customer—they are a leech. It’s all about servicing customer needs... profitably. Not every customer is your customer, or your target customer.

What are some of the biggest mistakes organizations make regarding their pricing strategies?

Treating price as an outcome; what price do we need to   make this sale. Pricing is a verb, not a noun—it’s a process.

Do you think discounts are needed in some industries?

They are in some industries, but they need to be managed dynamically, and planned, over time. Unplanned discounts are ripe for better planning. Key question to ask: how will this discount improve the relationship with this customer.

Segment Three

Tim's latest book is Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, 2016, he lays out five key decisions of a Value-Based Pricing Framework:

1. Business Strategy

2. Pricing strategy

3. Market pricing

4. Price variance policy

5. Price execution

Also, four pricing strategy issues:

1. Price positioning

2. Price segmentation

3. Competitive price reaction strategy

4. Pricing capability

Should pricing be centralized or decentralized?

The extreme of both have failed in most firms. I advocate cross-functional teams (marketing, sales, finance and pricing). It’s an enabler, not a replacer—it can’t be alone. Is pricing too important to leave to the pricers?

It’s fascinating research coming out of Germany, demonstrating most profitable firms are those that don’t have complete centralized or decentralized decisions. There’s no way a centralized pricing group has the same tacit knowledge of the sales force in the field. You have to marry that tacit knowledge with the explicit knowledge of the pricers.

This is the approach of Target Costing at Toyota, Nissan, IKEA, etc.

You write neutral pricing is default strategy (least likely to have price wars), and that penetration pricing cannot generally be defended from a strategic viewpoint (failures are greater than success, e.g., Amazon).

GoPro failed with it as well. Just because you have a lower price doesn’t mean people want it.

What industry does the best job at pricing?

Some have the algorithms down well (airlines, hotels), but no one industry has the strategy down. Some individual firms do, such as Eastman Chemical, and Peugeot with its Vespa sales into India.

Sports, music, and other event based industries are dynamically priced. We still don’t have a perfect model,   but things are changing.

Is there really such a thing as price gouging?

Price gouging is a legal term. It’s illegal. Outside of that, it’s buyer beware.

Value a feeling?

You write: “Beyond economic benefits, there are behavioral, emotional, hedonistic, and psychological benefits. Though calculating the impact of these benefits may be difficult, their impact on customer choices often outweighs purely economic arguments alone.” Is value a feeling more than a number?

 It goes along with it, but I wouldn’t have used the same words.

Pricing legend Robert Cross posited that people with musical ability make good pricers. Do you have any theories on what makes a good pricer?

I’d put diplomacy as number one.

The pricing profession has grown dramatically in the past 15 years or so, do you think professional pricers have lessened, or increased, price wars?

I would like to say yes, but look at the current price wars in airlines, hence they are unprofitable. Freedom includes the freedom to be stupid. Amazon and Wal-Mart were trying to show how low they could sell a book, even below cost.

What advice would you give to someone who wants to get into pricing?

Read my books, join the Professional Pricing Society, understand your business.