james surowiecki

Why Lobster Isn’t Priced Like Chicken

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In 2005, Maine lobster was selling for almost six dollars a pound wholesale. By 2009, it cost just half that, and, in the past couple of summers, huge lobster harvests, believed by some to be a result of global warming, have glutted the market, sending prices tumbling further. This month, lobster off the boat is selling for as low as $2.20 a pound. So why hasn’t the price of lobster come down when you’re buying it at your favorite restaurant?

James Surowiecki explains in The New Yorker that lobster isn’t like a commodity, but rather is more like a luxury good. If it were priced like chicken, people would presumably enjoy it less:

Keeping prices high obviously lets restaurants earn more on each dish. But it may also mean that they get less business. So why aren’t we seeing markdowns? Some of the reasons are straightforward, like the inherent uncertainty of prices from year to year: if a bad harvest next summer sent prices soaring, restaurants might find it hard to sell expensive lobster to customers who’d got used to cheap lobster. But the deeper reason is that, economically speaking, lobster is less like a commodity than like a luxury good, which means that its price involves a host of odd psychological factors.

Lobster hasn’t always been a high-end product. In Colonial New England, it was a low-class food, in part because it was so abundant: servants, as a condition of their employment, insisted on not being fed lobster more than three times a week. In the nineteenth century, it became generally popular, but then, as overharvesting depleted supplies, it got to be associated with the wealthy (who could afford it). In the process, high prices became an important part of lobster’s image. And, as with many luxury goods, expense is closely linked to enjoyment. Studies have shown that people prefer inexpensive wines in blind taste tests, but that they actually get more pleasure from drinking wine they are told is expensive. If lobster were priced like chicken, we might enjoy it less.

Another additional point worth highlighting:

Restaurants also worry about the message that discounting sends. Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality. Since most customers don’t know what’s been happening to the wholesale price of lobster, cutting the price could send the wrong signal: people might think your lobster is inferior to that of your competitors. A 1996 study found that restaurants wouldn’t place more orders with wholesalers even if lobster prices fell twenty-five per cent.

Finally, having lobster on the menu is a boon for restaurants because its artificially high price makes other dishes on the menu comparatively more affordable. Cited in Surowiecki’s piece is a fascinating paper by Itamar Simonson and Amos Tversky concerning these context-dependent preferences:

The standard theory of choice-based on value maximization-associates with each option a real value such that, given an offered set, the decision maker chooses the option with the highest value. Despite its simplicity and intuitive appeal, there is a growing body of data that is inconsistent with this theory. In particular, the relative attractiveness of x compared to y often depends on the presence or absence of a third option z, and the “market share” of an option can actually be increased by enlarging the offered set. We review recent empirical findings that are inconsistent with value maximization, and present a context-dependent model that expresses the value of each option as an additive combination of two components: a contingent weighting process that captures the effect of the background context, and a binary comparison process that describes the effect of the local context. The model accounts for observed violations of the standard theory and provides a framework for analyzing context-dependent preferences.

The Financial Markets in 2011

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The best summary of what happened in the financial markets in 2011 comes courtesy of James Surowiecki at The New Yorker:

In 2011, the S. & P. 500 finished the year where it started. (To be precise, it fell 0.003 per cent.) But it was anything but a placid year in the stock market. Instead, there was extraordinary tumult throughout 2011, with a series of sharp rallies and brutal selloffs, the biggest of which sent the market down seventeen per cent in a couple of weeks. Even on a daily basis, stocks were startlingly volatile: the Dow Jones Industrial Average moved more than a hundred points on forty per cent of trading days, and there were more than sixty days on which the S. & P. index moved about two per cent or more (which in 2005, for example, it didn’t do once). Ordinary investors, who have watched the value of their 401(k)s yo-yo seemingly at random, have been left feeling understandably dazed and confused as they head into the new year.

Traders and professional money managers don’t seem to have any real clue about what’s going to happen, either. You might think that volatility would allow people with superior information and market sense to get ahead. But last year money managers did a very poor job of playing the market. According to estimates made by Goldman Sachs, as of the last week in December seventy-two per cent of core large-cap mutual funds had underperformed their market indexes. The average stock-market mutual fund was down almost three per cent for the year. And hedge-fund managers, who are supposed to thrive on volatility, did even worse, with hedge funds that focus on stocks falling more than seven per cent. Strikingly, some of the biggest flops came from superstars: Bruce Berkowitz, whom Morningstar named one of the money managers of the past decade, saw his flagship fund fall more than thirty per cent; the hedge-fund manager John Paulson, whose bet against mortgage-backed securities a few years ago has been called “the greatest trade ever,” saw one of his funds drop nearly fifty per cent.

Surowiecki then mentions that ordinary investors “chase performance” and suggests:

The sensible solution would be for investors to put their money into low-cost index funds and just keep it there. But that’s hard to do when the market is extremely volatile. Most of us find it difficult enough in normal times to take a long-term approach. So when prices are rising and falling two per cent a day, and when it seems like getting in or out of the market could be worth ten per cent of our portfolio’s value, the temptation to try to time the market is hard to resist.

Here’s where I don’t agree with Surowiecki. What’s so hard about choosing to allocate a certain percentage (or a set sum of your savings/salary) per year to index funds (regardless of market volatility)? You can’t time the market, so you might as well invest in an index (or a fund) that tracks the S&P 500 and let your cash sit there for as long as possible.

I had a positive return on my portfolio in 2011, the majority of which consists of index funds. The key is diversification and a “buy and hold” strategy.

On Procrastination

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I generally don’t link to book reviews, but The Thief of Time is outside my price range, and I really enjoyed James Surowiecki’s piece on how procrastination works.

Surowiecki’s piece is a bit long, but by the end of it, you’ll have a better answer to this question: “Why do we procrastinate?”. I highlight notable passages below…

What is procrastination and from where does the term come from?

Procrastination is a basic human impulse, but anxiety about it as a serious problem seems to have emerged in the early modern era. The term itself (derived from a Latin word meaning “to put off for tomorrow”) entered the English language in the sixteenth century, and, by the eighteenth, Samuel Johnson was describing it as “one of the general weaknesses” that “prevail to a greater or less degree in every mind,” and lamenting the tendency in himself: “I could not forbear to reproach myself for having so long neglected what was unavoidably to be done, and of which every moment’s idleness increased the difficulty.” And the problem seems to be getting worse all the time. According to Piers Steel, a business professor at the University of Calgary, the percentage of people who admitted to difficulties with procrastination quadrupled between 1978 and 2002. In that light, it’s possible to see procrastination as the quintessential modern problem.

I like Surowiecki’s humor, who mentions that he procrastinated in writing this article. I procrastinated writing this post, even though I planned to do it more than a month ago:

Academics, who work for long periods in a self-directed fashion, may be especially prone to putting things off: surveys suggest that the vast majority of college students procrastinate, and articles in the literature of procrastination often allude to the author’s own problems with finishing the piece. (This article will be no exception.)
On the essence of procrastination (this may be a surprise to you):
The essence of procrastination lies in not doing what you think you should be doing, a mental contortion that surely accounts for the great psychic toll the habit takes on people. This is the perplexing thing about procrastination: although it seems to involve avoiding unpleasant tasks, indulging in it generally doesn’t make people happy.
Surowiecki highlights notable philosophers in his piece, and I liked this passage about the “divided self”:
Viewed this way, procrastination starts to look less like a question of mere ignorance than like a complex mixture of weakness, ambition, and inner conflict. But some of the philosophers in “The Thief of Time” have a more radical explanation for the gap between what we want to do and what we end up doing: the person who makes plans and the person who fails to carry them out are not really the same person: they’re different parts of what the game theorist Thomas Schelling called “the divided self.” Schelling proposes that we think of ourselves not as unified selves but as different beings, jostling, contending, and bargaining for control. Ian McEwan evokes this state in his recent novel “Solar”: “At moments of important decision-making, the mind could be considered as a parliament, a debating chamber. Different factions contended, short- and long-term interests were entrenched in mutual loathing. Not only were motions tabled and opposed, certain proposals were aired in order to mask others.
I was really pleased that Surowiecki highlighted one of Dan Ariely’s experiments on procrastination (Ariely writes about it in his Predictably Irrational, which I highly recommend reading):
A few years ago, Dan Ariely, a psychologist at M.I.T., did a fascinating experiment examining one of the most basic external tools for dealing with procrastination: deadlines. Students in a class were assigned three papers for the semester, and they were given a choice: they could set separate deadlines for when they had to hand in each of the papers or they could hand them all in together at the end of the semester. There was no benefit to handing the papers in early, since they were all going to be graded at semester’s end, and there was a potential cost to setting the deadlines, since if you missed a deadline your grade would be docked. So the rational thing to do was to hand in all the papers at the end of the semester; that way you’d be free to write the papers sooner but not at risk of a penalty if you didn’t get around to it. Yet most of the students chose to set separate deadlines for each paper, precisely because they knew that they were otherwise unlikely to get around to working on the papers early, which meant they ran the risk of not finishing all three by the end of the semester. This is the essence of the extended will: instead of trusting themselves, the students relied on an outside tool to make themselves do what they actually wanted to do.
Last but not least: this is my favorite video on procrastination. It’s really well done:
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Now that you’ve learned more about procrastination, has your perception of procrastination changed? What are you going to do today that you have been putting off for days, weeks, or months?