Innovative marketing

Recently at my parents house an advertisement for Genaurdi's came in the mail with two coupon codes for online grocery shopping. The first coupon is for $10 off and expires 12/31. The second coupon is for $5 off and expires 10 days later.

I have frequently seen ads for some discount on your first grocery delivery order and I have never taken advantage of them. I think a lot of the reason I have not is that there is a large effort cost in making an online grocery purchase when you are used to real life grocery shopping. Choosing items from a list online is a lot harder than choosing them in a store, at least when you are used to choosing them in a store. The effort cost difference between online grocery shopping and real life grocery shopping presumably stabilizes over time, but the initial additional cost for online grocery shopping does act as a barrier of entry for the consumer.

The Genaurdi's coupons go further in trying to transfer the consumer entry cost to the producer than the coupons which offer only a discount on the first order. The first online order is probably the most costly absent of coupons, but the second probably also has greater effort cost than the steady state online grocery order. Genaurdi's compensates consumers for the greater effort cost of the second online purchase as well, but compensates them less than for the first purchase.

From a marketing perspective, these coupons also make sense. Someone that makes just one online purchase of groceries and finds it difficult because of the large effort cost of that first online order is likely not to return to make another without additional incentives. However, someone that returns to make a second purchase and finds it much easier than the first purchase seems much more likely to continue purchasing online groceries without coupons than someone who only receives a coupon for the first order. Thus, marketers should not only be focused on getting consumers to make a first purchase of online groceries, but also a second.

Religion, Science, Fear, Reason, and Turbulence

I was reading The Extended Phenotype, a book about evolution, by Richard Dawkins, a near militant atheist, on the plane ride to Philly. The guy next to me was reading the bible. At one point there was some turbulence, and it felt like near free fall for a second or two. I had my head down at the time, and noticed him jolt and grab the arm rests. I looked up and sort of grinned and he asked if I knew that was going to happen. I said no, it’s just turbulence.

I did not have a natural fear reaction like he did. My natural reaction was there must be some reason and everything will be ok. I think it may be because my conscious mind when it goes on a plane somehow turns off fear signals from the unconscious, but I’m not sure. But given our choices of reading material for the flight, I thought about a more interesting question: Are religious people more fearful than scientifically minded people? Is there causation in either direction? One purpose of religion seems to be to relieve people of fears about uncertainty in life (“God has a plan for me”, etc.). Are fearful people then drawn more to religion? My reaction of “there must be a reason for this” could certainly come from scientifically minded indoctrination, but also maybe I’m drawn to scientific thinking because I’m drawn to reason.

Running

I just went running in this. I'm quite proud of myself.

Precipitation map of Chicago

This is the precipitation map from weather.com around Chicago for 6:25pm today. It's quite beautiful provided you aren't walking through the "it looks like snow but its coming really fast and is water when it hits me" part of the map here in Evanston.

If you were to graph my weather utility across these realized weather outcomes it would look pretty crazy.

Expected Utility by Temperature

Below is a graph of my expected utility from weather based on the temperature. It includes things like chances of precipitation, wind, humidity, etc. It does not include the fact that Christmas is correlated with low temperatures. As with any utility function this is ordinal, not cardinal.

The jump discontinuity occurs where precipitation switches from being characterized by snow to rain. Rainy and 40 is way worse than snowing and 30. Luckily I believe I still did well on my exam tonight even though I spent some "study" time in the library drawing this on the board and thinking about it.

Links

The Onion's crash course in consumer theory - also available in blue

Talk to me when its Bo Jackson

My budget

I have been tracking my expenses since moving to Evanston in the end of August. I don’t have much income in school, and I wanted to evaluate my spending to help me decide whether I need to get a summer job or maybe take out some loans. I’m going to use this blog as a further commitment mechanism to make me track my expenses and keep them reasonable.

I picked my monthly budget amounts before I started tracking my expenses, and changed them slightly after September. My original budgets for groceries, eating out, drinking and clothing were $300, $100, $50, and $20. After a month tracking them I realized they could be adjusted. In addition to my monthly budget items, I also have yearly budget items of school supplies, local travel (mandatory cta-pass purchase), travel home, and fun travel which have yearly budgets of $480, $240, $600, and $960. My September, October, and November aggregated expenses by monthly budget category are below.

I am not concerned that I was way over budget in September. It was my first month in Evanston and I had a lot of atypical expenses because of that. I did keep a separate moving category, but that did not include everything I had to pay for because it was my first month.

I am slightly concerned about the eating out and drinking categories. In both October and November I was over budget in the categories. The reason I hesitate raising the budgets is that both of those categories in both October and November were characterized by under budget spending for 90% of the month, and then way over budget spending for 1 weekend each month when I had friends visiting. In October I spent just over $100 on eating out and drinking in the last 2 days of the month when I had visitors, compromising about half of my spending that month on those categories. In November I spent $85 on eating out and drinking over 3 days when I had visitors.

I don’t think I will have visitors this frequently in the future, so I am not raising the budget yet. I’d also like to try to spend less even when I do have visitors. December is not going to be an informative month because I will not be in Chicago for half of it, but January and February should be more like typical months. I will probably wait until the end of February when I will have 6 months of expenses recorded to adjust my budget further. I suspect I will be able to decrease the groceries budget by $20 or $30.

My first act as president

Let me make it official that if I ever become president, my first act will be to ban the sale of opaque umbrellas in the United States. I see no reason why this would not cause a large increase in social welfare, and maybe even a Pareto improving shift.

I'm sure there are those of you who believe that markets are perfect and hence we need only make clear umbrellas an option. However, empirical evidence, as well as theory suggests this is incorrect in the umbrella market. First of all, clear umbrellas are already available and we do not see everyone carrying around clear umbrellas. Secondly, there is a stigma attached to clear umbrellas that imposes a social cost to males who use a clear umbrella. This stigma should be removed.

Theoretically, a situation in which everyone carries a clear umbrella can not be a Nash equilibrium, because an individual would be better off carrying an opaque umbrella which would act as a credible threat. The rest of the people with clear umbrellas would avoid the opaque umbrella, and the opaque umbrella would bare none of the costs of avoiding sidewalk crashes. Empirical evidence shows that nearly everyone carrying an opaque umbrella is a stable equilibrium, and my intuition tells me that almost everyone carrying a clear umbrella would not be a stable equilibrium, if an equilibrium at all.

Since the social optimum can not exist in equilibrium, it is the government's responsibility to impose laws which send us to the social optimum, and as president, I would pledge to do so.

Why can’t there be markets in everything?

Airlines have recently added charges for bag fees and extra leg room in bulkhead or the exit rows. I have one more request for a market relating to air flight, although it does not need to increase airline revenue.

I think people should have to pay for leaning their seat back, and those behind them should be compensated. I have a strong preference for the person in front of me not leaning their seat back, and am more than willing to trade my upright seat for theirs. I’m sure there are people who prefer having their reclined seat and the seat in front of them reclined. If the airlines sort people correctly, there would really only need to be transfer payments between a few people who have their seat reclined and the seat in front of them upright to those people who have their seat upright and the seat in front of them reclined. There can be some sort of market when you buy your ticket where you give your price for having the seat in front of you upright and your price for having your seat upright. Then the airline picks the price to clear the market, and transfer payments ensue.

I recognize airlines probably are not going to do this, I’m not sure their customers will get it. I’m not sure how other people feel about the choice between (upright,upright) and (reclined,reclined) but if it is close to 50/50, they could easily just make one side of the plane upright and the other reclined. As it stands now, there is a transfer of utility from selfish people to good honest altruists like me who keeps his seat up.

Fads and Morals

There was a 40 year old flight attendant on my flight today who had a fauxhawk. My immediate reaction to this was that it looked ridiculous. I understand they are all the rage today, but looking back at it in 20 years it will look as ridiculous as a beehive or a poodle skirt does today. Generally I, and I think people in general, tend to have a negative reaction to actions or acts that they deem to be a passing fad.

But it is as unfair to judge a fad as it is to judge a society’s morals, language, etc. in retrospect. I can’t say that it is ridiculous for the Romans to have spoken Latin, even though it is ridiculous for someone to speak Latin nowadays. Extending our moral code to people during most of history makes nearly all people immoral. And if you used the moral code that will exist in 100 years to judge morality today, nearly all people would be immoral. I think language is different from moral code and fads, however, because language is not something people think they choose, whereas participation in a fad or having certain morals appears to be more of a choice.

Of course there has to be some explanation for why passing fads of fashion or morals exist, and I think it is because people genuinely believe they look good or act morally in a timeless sort of way. When making choices relating to fashion and moral codes, the conscious mind seems to think it is making timeless and objective decisions, even though when looking at historical fashion and moral codes we come to the conclusion that they are certainly not timelessly or objectively chosen. People argue that moral codes “improve” over time, but what they are really saying is that our moral code is timelessly and objectively the best and moral codes in history have in general trended towards our best moral code. If you were to reverse the order of moral codes in history, we would come to the same conclusion.

Eagles Bears

I went to the Eagles Bears game tonight. It was a close game and the Eagles won, so a good game all around. I met up with my buddy Pete for tailgating before the game. At his hotel bar we met a bunch of bears fans who were having a party during the game, and we went to it after the game was over. They were as you would imagine bears fans, except not all of them had mustaches, and they never said polish sausage. Ditka's son was at the party after the game so that was interesting. I probably partied a bit to much considering I have class at 9am, but the Eagles were in town, so it's a special occasion.

Altruism

People often claim I am selfish because I have strong preferences for individual spending. I don't like tit-for-tat spending on rounds of drinks at a bar, or appetizers before a meal. I don't like the incentives it gives me, and I don't like the incentives it gives other people. I understand and am in favor of paying for national defense, police, and even healthcare for other people, I'm all for taxes for public goods. But how this extends to the repeated game of buying drinks at a bar or saying I got this one, you get the next one I don't know. If I go out with a bunch of friends I end up spending a lot more money than I would if we all just paid for our own stuff. This is not because I am paying more of a share than others, it's just that my consumption is increased to a point where marginal cost is higher than marginal benefit.

People claim they buy rounds, or bring something to share because they are altruistic, which I say is not correct. It's arguable whether even giving money anonymously to a charity is altruistic, but I think that depends on semantics. But buying drinks or something to share is all about increasing one's own reputation. I'm not claiming this is what goes through everyone's head when they decide to do it, but it is the base reason why it is a part of social norms and possibly part of human nature. If you are really altruistic, just give me a cash transfer and I'll use it on what I get the most utility from which given your altruism will also give you the most utility. If, instead, you are interested in your own reputation, make a public display of generosity.

</rant>

Article on the Eagles

This article on the Eagles has two inaccuracies. First, the Eagles can not sustain a drive for more than 6 plays. There is no limit to how far they can go in those plays, but 6 is the max. Also drives can't go across half time, but that is a technical point not essential to the story.

Empirical evidence shows...

that every odd numbered blog post of mine is about football. I read an intuitive proof to the fact that coaches are too conservative when making 4th down decisions. It goes as follows, consider how you feel when the opposing team trots out their punter when they have 4th and 2 at the 50 yard line. Most fans (including me) are relieved. Because I am rooting for the opposing team to do a certain action, and because in the end a football game is zero-sum, that action is bad for the opposing team. At first I bought this as a valid argument.

However, if fans are risk averse in probabilities of winning, then it could be that both sets of fans are rooting for the same action. Romer suggests that one explanation to the 4th down question is that coaches, fans, etc. are risk averse in probabilities of winning. They prefer a sure 50% chance of winning to a 50% chance of having a 70% chance of winning and a 50% chance of having a 30% chance of winning. The conscious part of the brain initially registers this idea as ridiculous, the team either wins or not, so that's all I should care about.

Consider the following thought experiment, ignoring how it would destroy sports. You think your team has a 49% chance of winning the game, and are given the option that the coin flip determines the result of the game. Then you are choosing between having a sure 49% chance of winning after the coin flip, and having a sure 100% chance with 50% probability and having a 0% chance with 50% probability after the coin flip. Now my conscious mind would probably prevail in this situation and take the coin flip, but my unconscious mind would be screaming bloody murder. And to be honest, if someone else was making the decision, I would probably be relieved if they chose the 49% sure thing. I would also have more regret if choosing the coin toss option over the 49% chance option.

It seems a bit strange for football fans to get utility out of the probability of their team winning rather than just the end result of winning or losing. But if the Eagles are winning by 30 points at the beginning of the 4th quarter, my happiness does not increase very much throughout the 4th quarter and after the game when they win. This does not seem as strange. The probabilities of winning are acting as value proxies for the ultimate desired outcome of winning the game. Just as the bell becomes a value proxy for Pavlov's dogs, the probability of winning becomes a value proxy for a fan base.

There are easy evolutionary reasons for both risk aversion and value proxies. I do not see an evolutionary reason for risk aversion in value proxies themselves, but given that evolution works in a series of kludges, it is plausible that we developed value proxies and risk aversion independently, and that having them both is better than having just one, even if it means we sometimes make sub-optimal decisions when being risk averse in our value proxies. In addition to being able to understand run-on sentences, maybe the conscious mind of humans is the closest thing evolution has come to eliminating risk aversion in value proxies.

Links

Lab worm to Scientist: "A phaser, whooda thunk it?"

The old people are coming, the old people are coming! - My generation is the only one that will have their online identities invaded twice, currently by their parents, and in the future by their children.

Anti-herd medical advice: Angry proclamations ensue

More on 4th downs

I've been thinking more about 4th downs and how I could test my hypothesis that Belichick goes for it on 4th down because his job is secure, and other coaches do not go for it because their jobs are not as secure. The most enlightening paper I have found on 4th down decisions is David Romer's paper (pdf) which analyzes whether coaches make win maximizing decisions in the 1st quarter of games. The paper uses standard Macroeconomic methods, I never thought they could be useful, but apparently they are. The conclusions are worth a read even if you don't read through the model.

The paper hypothesizes several reasons for the departure from win-maximization, but does not test any of them. As a refresher on my hypothesis, I supposed that coaches who are concerned about job security do not go for it on 4th down as much as they should because it is an unconventional move. In terms of job security, an anti-herd decision is much higher risk than the typical herd decision. If they make a conventional decision, even if it fails, their job security does not change much. If they make an unconventional decision, and it fails, then their job security is likely to decrease significantly. The expected benefits from the anti-herd decision are minimal (Romer estimates win-maximizing decisions on 4th down would result in one additional win every three years). The expectation of one additional victory every three years is nothing compared to the expected several instances a year in which the anti-herd decision fails and results in a loss. When this happens, the fans, media, and owner can look back and say what if we had a conventional coach without considering the fact that the decision actually was win-maximizing.

To test my hypothesis empirically, I considered analyzing anti-herd win-maximizing choices. It might be that coaches who make win-maximizing anti-herd decisions end up being better coaches because they are better at win-maximizing. Alternatively, it could be that good coaches have good job security, and then feel more comfortable making anti-herd decisions. To test this, one could compare the correlation between the propensity to make anti-herd decisions and coaching performance strictly after the anti-herd decision with the correlation between the propensity for anti-herd decisions and coaching performance strictly before the anti-herd decision. If coaches are good because they make anti-herd win-maximizing decisions, we would expect these correlations to be the same. If coaches make anti-herd win-maximizing decisions because they have good past performance and hence good job security, then we would expect the second correlation to be higher.

I would be very eager to start this research if not for several issues which would likely cloud any results. The first is that there is a relatively small sample of anti-herd win-maximizing decisions. In Romer's data covering three years of play, of the 1068 times going for it on 4th down would have been win-maximizing in the first quarter, only 109 times was the win-maximizing anti-herd decision made. Another confounding problem would be if coaches have consistent performance over time then strictly past performance and strictly future performance would be correlated and weaken any difference seen in the correlations we want to compare. Additionally, there are other reasons a coach might make an anti-herd decision, for example maybe coaches who have very little job security will become risk loving in job security in an effort to raise their job security above some threshold and begin to make unconventional moves purely because they are unconventional. This last problem might be caught in my proposed comparison of correlations though because it is based on past job performance and independent of future job performance.

Romer suggests two alternatives for how coaching decisions will evolve. The first is where they stay the same, because of some preferences which are not based solely on win-maximization. However, if coaches don't win-maximize just because they are imperfect optimizers, then 4th down decisions should evolve towards win-maximizing decisions through trial and error, use of statistical modeling, etc. I think I have seen this happening over the last 10 years anyway (and Bill Belicheck is often the one being emulated). A couple years ago he intentionally took a safety when it was a win-maximizing decision. Since then a couple coaches have emulated it, when they probably never would have considered it before. If these anti-herd decisions become more popular, then perhaps the data will become robust enough to test my hypothesis.

One last interesting part of Romer's paper was when he asks how could it be that NFL coaches who are paid millions of dollars in a very competitive market are imperfect optimizers. He concludes that there are many other things that are much more important for an NFL coach. After all, under proper optimization if a coach can only expect one more win every three years, then that effect is not an important one. As an example, I think I would be far better than many NFL coaches (including Andy Reid) at making most gameday decisions. However, I'm pretty sure I would not be nearly as good at motivating the players or running a practice, and those things are more important than one win every three years.

I'd like to embark on leisure research of the NFL at some point, so attempting this would probably be a good start. Even if I don't get results, at least I'll have a good dataset to do future research. None of this is likely to happen before I pass prelims, though.

It's hard for me to turn down a challenge

Today I was chatting with a friend and former coworker who said he wished I was there because he had a question he thought could be answered theoretically, but that he could only think about testing it empirically. I asked if it was about work, and he confirmed. I have been making it a point to distance myself from thinking about work, so I said I didn't want to help. To which he responded it was too complicated to explain anyway.

It's safe to say the fact that he couldn't figure it out and the statement that is was too complicated to explain really made me want to try to figure it out. But I was able to resist offering help. I'm uncertain if this was all a ploy to get me to help, or if it was just innocent chatter, I guess we'll find out if he reads this. My sister regularly tempts me in this way, but usually (I think) I can see through her ploys.

I get immense satisfaction from doing things others think I can't do or are hard to do in general. I think it's a good thing that I like a challenge, but in some respects I think it stems from some unhealthy desire of mine for people to tell me I'm smart.

4th and 2 Decision: Maximizing likelihood of victory?

Last night there was a very interesting and controversial coaching decision in the Patriots v. Colts game. Here is the setup: there are 2 minutes left in the game, the Patriots have a 4th and 2 on their own 28 yard line, and they are winning 34-28. Conventional football wisdom says to punt it. And by conventional wisdom I mean that's what coaches have always done in the past. But that does not mean it is right. Belichick ended up going for it on 4th down, not getting it, and the Colts proceeded to get a touchdown and win the game.

Making the decision is actually really easy after you come up with some subjective probabilities. Basically if you estimate the probability of converting the 4th down, the probability of the Colts scoring a touchdown if they don't make the 4th down, and the probability of the Colts scoring a touchdown if the Patriots punted, then you can say what the best decision is to maximize the Patriots chance of winning. A calculator was created to make this analysis http://belichick-decision.heroku.com/. (The check box is by far my favorite part of this calculator) By my estimations (60%, 70%, 33%) going for it gives you a 72% chance of winning and punting gives a 67% chance of winning. So going for it maximizes the Patriots chance of winning. Any reasonable percentages make the call a close one, although it seems to me going for it is probably better.

Since the decision to go for it on fourth down backfired, as would be expected, the high-paid commentators on ESPN, etc. are almost unanimously saying this was a horrible coaching decision without any cogent analysis. I spent much of this afternoon being frustrated by the commentary on ESPN on what seemed to me to be a pretty simple decision under uncertainty problem. This episode did allow me to discover http://www.footballoutsiders.com/, a nice website which had spot on analysis of the Belichick decision.

Of course all of the above analysis assumes the coach is trying to maximize the likelihood of winning. Given the agency problem and the nature of the NFL, this is probably not true. Fact is, Belichick is probably the only coach in the league that would have gone for it on 4th and 2. He also happens to be the coach in the NFL with the most secure job. Other coaches probably would have been trying to minimize regret/ex post criticism. If the Patriots had punted and lost, no one would have blamed the loss on that decision. As we have seen, losing after going for it, an unconventional move, is blamed on the decision. A coach worried about losing his job would be most interested in making decisions that would not be subject to ex post criticism and hence would have punted even if it did not maximize the likelihood of winning.