Incentives - Part 1

OK, so this is Part 1 of 2 on different factors to consider on incentives.

A lot of healthcare plans are trying out incentive plans to encourage patients to take action to make themselves more healthy. A laudable goal, plus a healthy insured party is a cheaper insured party, so everyone wins except for the providers of chronic and acute care.

Here's the first wrinkle:

http://econ161.berkeley.edu/Economists/prisoners_dilemma.html

Quick summary: If you run the iterated prisoners dilemma where one party gains more in absolute terms than the other in all payout terms, the party that gets the short end of the stick occasionally defects just to increase the sense of "fairness" even though it reduces his own absolute payout.

So, if you are giving someone an incentive, either:

1. Split the gains from cooperation evenly

or

2. Keep your gains to yourself

Giving someone an "I took my insulin" pin while you take home an extra $1,000 is probably not an option.

Incentives - Part 2

OK, so this one is at least explicitly about medicine. It's also about our local tempest in a teapot - the fact that certain high-falutin' institutions of higher medicine in the area (BIMDC, par example) get a whopping 15-40%! larger reimbursement for procedures.

Now part of this is due to a big negotiating advantage given the size of their ownership company, but it's also because a very large fraction of the place's staff is from a certain school that starts with "H" and ends with "arvard". The PATIENTS want to associate with the elite staff, too.

Overcoming Bias: What is Medical Quality?

So, "incentives - part 1" talks about the "fairness" of incentives, where if you're making money out of me cooperating with you, you'd better share. Otherwise I'm going to stick it to you, even at the cost of my own optimal outcome.

And "Incentives - part 2" talks about people WANTING to spend money, to associate themselves with elite institutions. They are actually willing to pay more themselves, too.

I think both are social status things.

The first could be read as "Yes, you're always going to make more than I do, but I need to show you that I'm in control of how much you make. It's important enough that I'll pay to demonstrate that I am not helpless."

And the second is a little easier: "I want to be able to tell my friends that I went to the GOOD hospital. With the nice Harvard docs."

Any patient incentives need to take these into consideration, I think.

The Mortgage Crisis in Two Documents

This is a very, very good, direct, no nonsense, easy to understand way to explain the mortgage part of this little sitch we find ourselves in:

William K. Black: The Two Documents Everyone Should Read to Better Understand the Crisis

Basically:

1. Before it tumbled, S&P management (at least a particular manager) actively discouraged testing of the underlying "tapes" of the supporting files on bundles of mortgages in CMOs that were being rated by the agency. It was "totally unreasonable" to ask for these tapes, mostly because the buyers of these bundles didn't bother to ask for them, since they were in too much of a hurry to package them up and sell off the trenches. This is also going to make it really hard to figure out what happened. It's not clear that the documents even exist for some of them.

2. After the fall became clear, independent auditors not only found lack of documentation, but widespread fraud. Claiming occupancy of a house you are just buying to flip, for example, will reduce the apparent risk (and therefore the cost) of the mortgage, but also totally screws up the models that rely on historical default rates on owner-occupied properties. Not that historical default rates are any better than tea leaves in a market like this.

Fascinating.

Almost, but not quite perfect conspicuous consumption

This is as close to potlatch as you can get, I think, and it's green, to boot:

Recession hits 'I am rich' application - vnunet.com

This is an iPhone app and Android app that costs $1,000 or $200, respectively. It's only function is to display a jewel on the screen to inform others that you bought it. So you can impress people.

I think it is a little too direct, though. We normally like to dress up our demonstrations of excess wealth in either avocational pursuits, esthetics or philanthropy. Otherwise it's a bit nouveau riche.

Then again, so is a Vertu Phone.

Plus, the picture is too copiable, which is the point of the little authenticity cards in a "real" Fendi bag. Half of the pictures in this ebay auction feature the authenticity card. If it was just esthetics or quality craftsmanship we wouldn't care. But, the aesthetics and craftmanship are essential to the "dressing up" function, above.

If you really wanted to have a good version of this:

1. Custom art work (for $1,000 you could afford some customization. Get a custom logo done here, for instance. It's only $149!)
2. Embedded public key signature to prove it's "real". Link it to the serial number of the phone. Make it displayable as a 2d scannable code so someone can take a picture and authenticate at leisure. It's like Zillow for your phone!
3. Functionality - it has to arguably DO something even moderately useful or fun. Game, reminder system, something. It isn't important what it does, just that it does something. It's like the denominator in a fraction: the smaller it is, the bigger the result, as long as you don't divide by zero - then it's undefined.

Maybe it's not potlatch, I'm now thinking it's more like Limoges snuff boxes: The Art of the Limoges Box

They had a purpose, too.

"Media industry" rant - warning - dataless conjecture - warning

Here is a set of random comments and then a conclusion that may have some truth to it. Not claiming an original thought, but here goes:

1. People like to be entertained by people more talented than themselves. You can go into a lot of evolutionary/biological reasons for this, but it remains that people have paid to be entertained by others for quite some time, so they must want that. For more information, you could go to: The Mating Mind: How Sexual Choice Shaped the Evolution of Human Nature


2. It used to be that to be entertained by someone, you had to be in the same location at the same time. This limited the range of potential payers at any one time to the maximum number of people that could see/hear the artist.

3. Naturally, the artist would like to expand this, since for payment to increase, at some point you would like to maximize how many people each performance entertains. This goes for psychic as well as monetary payment. Impressing the girls is just important as if not more important as an incentive as cash, although one could argue the incentive for getting cash is to impress girls, so it's the same thing. I'm obviously using "girls" as a short hand for "potential mates" here, although truthfully I've never seen anyone work very hard to impress the boys. We're already impressed, really. See "Mating Mind", above.

4. Artists then developed techniques to increase viewing/identification with work:
- putting paintings on the much more portable "big piece of wood" instead of the relatively location-constant "cave wall."
- "signing" the painting, since you weren't necessarily going to be around
- Developing writing systems
- Printing press
- Big optimally shaped performance spaces, first outside, then inside, with big masks and cone-shaped loud speakers - with a big "chorus" of people to yell the narration so the back rows could hear, etc., artificial lighting, big expensive stage sets and mechanisms for moving them around (like the Paris opera building, for instance.)
- writing music down instead of learning by apprenticeship
- phonographs, moving pictures, etc etc.

and so on.

5. Each "old" industry keeps cutting out costs by applying the new technology to the old business model, until the old business model doesn't have enough fixed costs to keep out entrants. For a REALLY great discussion of this phenomenon, read the network television chapter of Competition Demystified : A Radically Simplified Approach to Business Strategy


6. Then someone spoils the party by translating the bible into German and selling copies DIRECTLY! WITHOUT THE CHURCH's PERMISSION! To the common rabble! Each new innovation cut out the old masters, since if you could have access to art, literature, music that was BETTER than you could obtain from the previous generation's technologies, and CHEAPER, why wouldn't you?

7. At steady state, it's probably true that these industries operate at a net margin driven by the direct cost of creating and delivering the goods, NOT the direct cost of doing the same activities in the previous regime. You can't tell me that the REAL long term price of a Kindle book is $9.99. It's cheaper than the physical price, and more convenient, too, so I pay it, but the parts of that price that don't go to the author or the delivery channel (like the publisher's "cost" for "printing" via 3G network) are doomed. I'm not still paying 30% of the cost of a monk to hand-write a copy of The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business (Collins Business Essentials)
, and in 5 years a Kindle: Amazon's Wireless Reading Device
/sony reader user won't have the residual cost of 30% of the cost of "printing presses" for an electronic book. If they do, someone else will cut another deal and go around them. The current crippled state of publishing is the Schumpeter moment for them. Music already passed through it, I think. Hollywood/TV is on the edge, and the $30,000 HD camera and full-cycle editing in one computer are going to push them over that edge. Benjamin Button was the first movie to be shot on Digital nominated for a cinematography academy award. It won't be the last. Seems unlikely any movie not shot by Spielberg (who still EDITs ON CELLULOID!) will be shot on film in less than 5 years. It's just too cheap. 4 Hours of digital video fits on a single HD. 4 MINUTES of film costs over $300. For a reasonable amount of editable footage, HD cameras make the technology of shooting essentially free, relative to all the other costs. (great interview on KCRW's "The Business" about this last week, BTW)

8. I'd argue that in the times of transition, the new version of the industry supplies much more end-user product for much cheaper, industry-wide. Encarta made the dollar value of the encyclopedia market go down, and yet many more people had access to an encyclopedia. Wikipedia had the same effect, I'd guess. In the long run, the natural price of an object is the variable cost plus whatever markup makes the system run at about 10-20% net profit, in the long run. A new technology hailed by the incumbent in quarterly/annual reports as cutting costs and therefore raising profits is just a predecessor to lower revenues for that industry in the long run.

9 Another symptom of the coming end of this stage of media is 3D movies. At least so far, people can't reproduce that effect in their homes. Movie people are desperately looking for something that their big companies can use a lot of capital to produce an experience you can't make yourself.

10. All the current media is toast. Everyone wants to have big, fat pipes of data they choose delivered to them. If a copy costs $.01 to make, ain' no DRM in the world that is going to support a price of $10. Ever. Advertising models are probably toast too, once people find out that the $1.99 iTunes episode of The Office that they can watch for "free" on TV at the price of watching sixteen 30-second ads at $30 CPM (equals- ready - 16*30/1000 = $0.48!) BTW, that is a very generous CPM at volume, it's more like $16-20 CPM online. And the TV rate assumes multiple people in the room watching the ad. Plus, not all shows are first-run, current season content. The rates in syndication are lower. So in the long run, the real market value is probably close to the cost to deliver a copy via the net. Just like a copy of a paperback book is pretty close to the physical cost of production and delivery, including rent on the store where you bought it. Otherwise, why would a blank diary book cost the same or more?

So, who wins?:

Same as always -
- The Entertained get more for less
- The Previous Kings cling onto their old models untill they go under
- Movie theaters seek charity patrons just like people theaters do now, to "maintain our cultural heritage"
- Newspapers? - 10% efficient bundles of dead trees that only worked when they optimized the delivery mechanism (boy on bicycle with a heckova arm) to delivery a bundle of information only related because it was roughly about information people in a roughly 40-mile radius cared to know about on a daily basis. Bundle pricing at its finest, but when the un-bundled version is available for free.... hmm..... ever wonder why calligraphy is a hobby, and not a profession, since the 1700s?
- Talented people entertain their friends/girls for cheap, using a rich tool set
- Some people get super-famous and get to trade on that for a while, but it doesn't lock in a big advantage. I think the 15 minutes of fame might really come true.
- Technicians like Edison come up with a new entertainment medium that takes a lot of money FOR PLAYBACK! Either the playback equipment or the distribution mechanism has to cost real money and/or wear out. Like a phonograph record. Or a movie theater, before TV. Or TV before Cable. Or Cable before streaming...
- Remember the "feelies" from "Brave New World?" Could be next.

Less of a conclusion, but I think the general wailing an gnashing of teeth about "the end of the book" or "the end of the newspaper" or "the end of the ...." is generally confined to the people who work in the soon-to-be-obsolescent fixed-cost part of the show. Very rarely do you hear that coming from the talent (authors, actors, musicians) or the entertained (readers, watchers, listeners.) It used to be that production of art and entertainment was limited to leisure hours and retained talent of the aristocracy. It's probably going back there.

A bit more of a Toffler-style revolution where the means of production are not siezed by the state, but are owned by the consumer.

Time to start a career in an industry that makes stuff: energy and food, mostly, plus keeping people healthy.

I await your vitriol with much eagerness....

43 Things quiz

I just did this:

I took the 43 Things Personality Quiz and found out I'm a

Money Managing Lifelong Learning Believer

it was fun!