as one life finishes, the other one starts

So let’s see if I can put all my fancy talk about avoiding the sunk cost fallacy into practice.

My Roomba, Master Wong, no longer works. He will disengage from his cradle, roll forward about five inches, then power down as soon as he hits the first obstacle. This is most likely because I’ve overcharged him. The reason I overcharged him is because I took him off of his schedule (three times a week), and I took him off his schedule because I was forgetting to clean him regularly (once every three sessions). He needs to be emptied and wiped down and dusted off or else grit gets into his bearings. And in my busy weeks, when I have a show and jiu-jitsu and work and writing, I either won’t remember or won’t be inclined to clean up after him. This is why I should never get a pet or a child.

The reason I got a Roomba in the first place, aside from the novelty of owning a robot vacuum, was due to the fear of not having space in my studio for a real vacuum. Having lived here for twenty-two months, however, I know I could make room in my closet for one. And I don’t even have to shell out a lot of money: for less than $80, I can get a vacuum with superior cleaning power to my Roomba that I’ll only need to empty once a year. The new vacuum can hide out of the way, and my Roomba can go to that farm out in the country with all the other iRobots. “Couldn’t you get a new Roomba battery?”, you ask. I could, for about $30. However, that’ll be $30 for a part that might not solve my problem (I’m not positive this is an overcharging issue) and still leaves me with a vacuum that’s only sort of powerful and that I need to empty somewhat less often than a litter box.

roomba

“But you paid so much for Master Wong,” you say. I did, and there’s the rub. Because of the investment of cash – not just buying him originally, but also sending him away for repairs last fall – I might be tempted to throw even more money at him to get him fixed. Because otherwise that money is “wasted,” right? That’s the sunk cost fallacy, the notion that past costs justify future costs. Really, the only thing that justifies future costs is an expectation of future returns. That money is no less “wasted” if I get the Roomba repaired than if I ship him off to a happier home. Look at it another way: right now, I’m in the same place that I would have been if I’d never decided to buy a Roomba in May 2008 – in both timelines, I’m completely lacking a functional Roomba – except I’m also a few hundred bucks poorer. The other timeline is far superior, in that I’d still have that money, but spending more money won’t get me there.

I’ll still miss him, though.

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these words just come out with no gripe to bear

People asked me last week why Tiger Woods had to apologize to the world for his infidelities (well, they weren’t asking me so much as they asked the question within earshot, which is all the license I need). They advanced theories about Tiger being a role model, but that didn’t quite ring true. Tiger has never advanced himself as a spokesman for clean living and family values, in the way that conservatives who keep getting implicated in homosexual love triangles consistently do. He wasn’t on the President’s Council for Not Balling Softcore Pornstars. And while cheating on your wife isn’t behavior we want to endorse – think of the children, after all – neither are brandishing guns to settle office disputes, urinating in trash cans or cheating on your wife (oops). Yet the uproar over Woods’ infidelity dwarfs the uproar over Arenas, Iverson and Canseco, as Jupiter dwarfs its moons.

Woods occupies a different sphere than those athletes because of the money he makes. You could also argue he’s better at golf than Iverson is at basketball, but that’s incidental: he wouldn’t make as much money in endorsements were he not as good. It’s impossible to conceive of how much money Tiger Woods’ ability to smile and wear tight shirts is worth. He’s lost more money from cancelled endorsements over the last three months than many of us will make in our entire lives. Numbers like “six hundred million” don’t mean anything to humans; you couldn’t distinguish between six hundred million of a thing and two hundred million of it just by looking. Woods is no different. He couldn’t conceive of the amount of money he had. He’s human like the rest of us, with the same ambitions and insecurities and needs. Only he has super powers because, for him, money is no object. Are there any fantasies you’d act out if you had super powers?

In the classical economic model, wealth comes from three sources: labor, capital or rent. Labor all of us understand: it’s what you should be doing now instead of reading some guy’s blog. Capital, some of us get: we may feel in our hearts that the hedge fund owner doesn’t deserve $8,500,000 EBITDA, but we still aspire to that level of wealth. But rent’s hard to understand. It’s hard to sympathize with rent: the money you make simply by owning something that other people want to borrow. Mutual funds have to be managed, and labor is the sweat of one’s brow, but rent just comes to you. Tiger Woods made one billion dollars in his professional career by renting out Tiger Woods. He got paid to be himself in front of cameras. His wealth comes from alien sources and he used it to act out fantasies that few of us admit to.

fight the horde; sing and cry

Hey, guys. I figured out how to save Iceland’s economy the other day. Just off the top of my head. In case anyone’s curious, or anything; I dunno.

Oh, hi, still here? Okay, good.

Iceland can turn its shattered economy around by transforming the island into a giant server farm.

… no, wait, come back.

This plan sounds insane, of course. But it makes perfect sense for the following reasons:

1. Power Is Cheap. Iceland gets 99% of its electricity from geothermal energy and dams. When you live on an island made of hot springs and glaciers, it’s hard not to find an easy source of power. Drill a hole into the earth and stop when you hit something boiling.

2. Cold Air Is Cheap. Server farms don’t just need electricity, of course. They also need easy ventilation in order to keep the massive racks of computers cool. Fortunately, temperatures in Iceland get no higher than 55° F on average (10° C). And that’s during the hottest portions of July. Forget climate control in your server room: just vent in some outside air.

3. Real Estate is Cheap. Iceland is one of the least densely populated countries in the world (230th out of 238). The interior of the country looks like the moon – so much so that the Apollo astronauts faked practiced lunar exploration on its rocky surface. Build a warehouse in the hills outside Selfoss for pennies.

4. Lots of Overeducated, Unemployed White Guys. The collapse of Iceland’s banks put a lot of college-educated people back on the job market. A few days of retraining, and voila! All the employees you need. Or better yet: don’t bother retraining them. Let them underbid each other. Sit back and take your pick of the most talented / least demanding.

5. Serviced by International Air Travel. Unlike other cold places where real estate is cheap (e.g., the Arctic Circle), Iceland is served by IcelandAir. Icelandair flies to Boston, New York, Seattle, London, Madrid, Stockholm, Berlin, Paris and Amsterdam (as well as a dozen other cities). Basing out of Iceland gives you most of the benefits of a global hub like Heathrow at a sliver of the cost.

6. Not Too Far From The Rest Of The World. Iceland’s only a few hundred miles from the UK, and from there it’s a short hop to mainland Europe. Lay a few fiber trunklines across the North Atlantic and you have a new, reliable connection. The project to lay this trunkline between Iceland and UK should be jointly financed, as a way of mending the bridges burned by the Cod Wars.

So, there’s the business case. Iceland’s a cold, geologically unstable country full of unemployed men: an engineer’s dream. Google or Microsoft could expand their global offerings overnight by buying up the Icelandic interior and turning it into banks of servers.

Questions? Comments? Bids on the initial shares will start at one million dollars euros.

Update: Joel points out that Microsoft and Google looked into building Icelandic server farms in 2007. The problem then, of course, was that 2007 was the peak of Iceland’s investment bubble, when real estate was at its priciest. The plan in 2007 was for Google to buy Icelandic real estate. The plan in 2010 is for Google to buy Iceland.

he drinks a whiskey drink, he drinks a vodka drink

Like most single Americans between the age of 21 and 36, I regularly go out and drink with large groups of people. Wait staff at bars accommodate large groups by ringing an entire table up as a single check. However, in an informal gathering, people come and go at different times. They order different amounts of alcohol and food – some folks get one drink, some get three, some get zero drinks but nibble on a communal order of nachos.

The problem: how do you ensure that everyone tips enough?

I don’t mean paying for the right number of drinks (though that happens, too – it happened to us on Wednesday, with a Bacardi, a Bailey’s and an Allagash walking off without cash, and only Mark M’s generosity kept us from getting barred). I mean that floating, hazy notion of “a proper tip.” Between the total cash value of all drinks and the highest potential gratuity, there’s a nebulous zone of loose change.

This problem persists, even among the closest of friends and the smallest of parties, for a few reasons:

  • Varying priors. Many people disagree on what a proper tip should be. Some are happy with 15%, some insist on 18-20%. So if everyone’s got a different notion of what to tip, the final total will be very hard to predict.

  • Poor incentive structure.. I wouldn’t feel terribly guilty about stiffing the final bill by 80 cents, and I imagine most people are similar. Plus, doing so might make my own finances easier (I don’t have to break a bill, for example). But if eight people feel the same way, the final total’s nearly six and a half bucks shy of what it should be. I have little incentive to be scrupulous. And groups comprised of people with no incentive to do good always produce bad results.

  • Lack of information. If the check is in cash, it’s easy to contribute in secret. Even if you’re not hiding the cash you put in, all those folded bills become anonymous once they enter the general pile. Also, it takes a rare type of paranoia to keep an account of what other people in a large party ordered. So anyone can claim to have put in enough money.

  • Aggregate preference. If you have Arrow’s Impossibility Theorem painted on the ceiling over your bed like I do, you’ll already suspect that there might not even be such a thing as “what the group wants.” Individuals have preferences, sure, but it might not be possible to aggregate those preferences into a single Leviathan. I bring this up here because there might not be one real number that everyone in a dining party wants to leave as a tip.

So even if everyone’s friends, had a great time and loved their waiter, they might not agree on what an ideal tip is. Even if everyone agrees on what an ideal tip is, there’s no way to compel an exact accounting from everyone. Even if everyone makes an exact account, there’s nothing compelling them to be honest. And even if everyone’s compelled to be honest, there’s nothing that says the final total reflects the group’s aggregate will (if such a thing even exists).

It’s a wonder waiters get paid at all.

Potential solutions? Let’s deal with the problems one at a time.

Varying priors :: Dictatorial control. One person at the table decides what the proper tip is. Everyone chips in until she says the pot is full. This may sound graceless – we have an ingrained hatred of the word “dictator” – but this is usually what happens anyway. The person counting the money decides when to stop counting.

Poor incentive structure :: Remove options. Incentives only matter if you have choices; in the absence of choice, no one needs incentives to do anything. Dividing the check evenly among all diners bulldozes over this problem. People may grumble at paying for things they didn’t eat, but that’s the price of an imperfect solution.

Lack of information :: Mandatory disclosure. I’ve never seen this method implemented before; as far as I know I invented it. When you put money in for the check, you have to wave the bills over your head and announce the total in a clear voice that carries. After everyone’s contributed, tally up the money. If you’re short on the bill, whoever put in the least amount has to make up the difference. This not only prevents secrecy, it adds an incentive not to be the cheapest person at the table.

Aggregate preference :: ??? No idea. If you solve this problem, you’ve fixed what’s wrong with democracy. I’ll buy you and all your friends a drink. You cover the tip.

it’s like nothing else to make you feel sure you’re alive

I’m in so many other media this week.

First, I have a post up on OTI comparing Burn Notice to John le Carre novels. If you like either, you ought to check out the other. Or, at least, my article.

Second, don’t forget this week’s podcast if you haven’t listened to it already: our 2009 summer movie preview. We also come to the consensus that we need a woman on the podcast – not out of any sort of affirmative action principle, but because several listeners have requested it and, really, it makes sense.

Finally, OTI and Eco-comics – the weblog that mixes economics and comics – swapped guest writers this week. I gave them a post about the Justice League and comparative advantage: how Superman illustrates the Ricardian principles of trade. You should check it out.

I can’t drive fifty-five

I put a high premium on convenience.

I value my time very highly. While I don’t mind taking the bus – it gives me time to read, or watch videos on the iPod – I’d prefer to drive if it’ll save me some trouble. In Boston – or Cambridge, where I live – this convenience comes very dear.

A little over a week ago, I dropped my car off at VIP Auto after the plunking sound coming from the wheel well had turned into a legitimate scraping. I mentioned the CV joint as I dropped it off, hoping I had nothing more to worry about. The call came: the right front spring and strut had come off entirely, and the left ones were rusting. Final bill: over one grand.

I paid. One thousand dollars (plus) stacks high, but I had the cash on hand. And in the grand scheme of things, it’s not that expensive of a repair. Provided I only have to make it once.

In the summer of 2008, I replaced my radiator, for about $700. Now, at the end of May, I’ve paid over $1000 for the front springs and struts. I rapidly approach the number at which Zipcar would make more financial sense than keeping my current beater.

(Actually, I’ve technically passed that number. But I’m not immune to the sunk cost fallacy, so I’ll hold onto the car I just sunk a grand into. For now. But the next time I get a repair bill totaling $300 or more and the car can still roll, I’m rolling it out of the mechanic and into my parking lot, where it’ll stay until I get Zipcar lined up)

let’s go to the mall! today!

Today’s sign of the continuing disintegration of the American shopping mall as a center of commerce:

Right next to SlapChop and the teetering boxes of Airborne!

Right next to SlapChop and the teetering boxes of Airborne!

Selling Snuggies in a mall sounds odd enough – the reversed bathrobe is one of those products that thrives on direct marketing and drop shipping, not herding massive quantities of inventory around. But no one’s selling these in a storefront or a mid-aisle kiosk. Snuggies are being sold directly by the corporation that owns the mall. The mall proprietor thinks that’s the most valuable use of her employees’ time.

And you know what? It probably is. Sure, the Snuggie’s one of those useless fads that’ll seem quaint in four years and comical in ten, but at least people want one. How many shopping malls still contain things people want? Malls survive on a fragile web of factors – cheap petroleum, suburban housing developments and the profitability of large inventories – that the 21st Century has already begun smashing.

I suspect malls will continue to deteriorate, becoming more a hangout for those marginal teens who don’t have a private place to drink and less a destination for young professionals, until they’re finally bought up, razed and turned into something useful like cemeteries. Then perhaps we’ll return to that period of urban development where shops appeared in neighborhoods to fulfill economic demand, rather than being planted in the middle of nowhere as if by mistake in SimCity.

(I’ve been reading Kunstler again)