Web Firms Find Paths To Profits: Free Vs. Fees

Consumers love a price of zero — but it can be tough on the bottom line. That has led some companies to provide a lot of free stuff and only charge for certain things. Other companies are resisting the pressure to give their products and services away. Two software firms illustrate the dichotomy.

A Gaming Company With Many Rules

Seattle-based Big Fish Games is indeed a big fish in its industry. It distributes more online games than anyone else, at about 1 million a day.

Company founder Paul Thelen says the company’s approach to customers is based on a simple idea. “We call it ‘try before you buy,’ ” he says.

You can try almost any Big Fish game for free; many remain free indefinitely. Thelen says that with games like Bubblez — in which players shoot paint bubbles, trying to match colors — users can open an Internet browser and play as often as they like.

“This game probably cost the developer somewhere between $5,000 and $20,000 to build,” Thelen says. “It can be supported by ads, and it is.”

Having a large online audience brings in advertisers, and those ad dollars cover the costs. But ads alone won’t pay for Big Fish’s cinematic and highly produced games, like Drawn: The Painted Tower.

The game cost more than $1 million to create. And since the audience is smaller, all players need to pay to support the cost.

Another game, Faunasphere, can be played for free, but there are add-ons — things like extra animals to make the game more fun — that players have to pay for.

This approach to pricing is called “freemium” — some content is free, while premium content is not.

At some companies, a small number of paying customers essentially subsidize the free riders. At Big Fish, the model is more complicated, but it works: The company has grown from one employee to 400 in the past seven years.

Note To Customers: Pay Up

In New York City, Squarespace CEO Dane Atkinson favors a more old-school approach. As Atkinson says of his company, “It’s a publishing platform on the Internet that thankfully charges all of its customers.”

That’s right. Squarespace is proud to charge businesses, bloggers and others for its publishing tools that can create Web sites — even though there are companies providing similar services for free.

“We began with a free model,” Atkinson says. “Anthony, who’s the founder, was under a lot of pressure from the community at the time that said that everything has to be free. And he quickly realized that it just seemed like the wrong equation, so we started charging — and we’ve charged ever since.

“What it’s allowed us to do is really build a model that caters to those customers, and not feel any of the pressures the free business model puts against you,” Atkinson says.

For instance, Squarespace doesn’t have to worry about appeasing advertisers who are footing the bill. And because customers pay a monthly fee for hosting and other services, the company can provide customer support 24 hours a day. Free sites supported by ad revenue can’t afford to do that.

Succeeding, Fee Or No-Fee

Atkinson says that the privately held Squarespace is very successful. But, he adds, some so-called experts still prod them to offer a free service.

“And we know the reason we are succeeding is because we don’t,” Atkinson says. “So every time a book comes out or people expound on how free is the only way to go, it gets our hair standing up. There is another alternative; there is another way to run your business.”

If these two companies illustrate anything, it’s that running a digital business is tricky — and that finding the sweet spot between free, freemium and paid may be the difference between success and failure.

***

by WENDY KAUFMAN. (WWW.NPR.ORG)

Filed under: Business , Business, fees, free, profits

Should C.E.O.’s read novels?

The question seems to answer itself. After all, C.E.O.’s work with people all day. Novel-reading should give them greater psychological insight, a feel for human relationships, a greater sensitivity toward their own emotional chords.

Sadly, though, most of the recent research suggests that these are not the most important talents for a person who is trying to run a company. Steven Kaplan, Mark Klebanov and Morten Sorensen recently completed a study called “Which C.E.O. Characteristics and Abilities Matter?”

They relied on detailed personality assessments of 316 C.E.O.’s and measured their companies’ performances. They found that strong people skills correlate loosely or not at all with being a good C.E.O. Traits like being a good listener, a good team builder, an enthusiastic colleague, a great communicator do not seem to be very important when it comes to leading successful companies.

What mattered, it turned out, were execution and organizational skills. The traits that correlated most powerfully with success were attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours.

In other words, warm, flexible, team-oriented and empathetic people are less likely to thrive as C.E.O.’s. Organized, dogged, anal-retentive and slightly boring people are more likely to thrive.

These results are consistent with a lot of work that’s been done over the past few decades. In 2001, Jim Collins published a best-selling study called “Good to Great.” He found that the best C.E.O.’s were not the flamboyant visionaries. They were humble, self-effacing, diligent and resolute souls who found one thing they were really good at and did it over and over again.

That same year Murray Barrick, Michael Mount and Timothy Judge surveyed a century’s worth of research into business leadership. They, too, found that extroversion, agreeableness and openness to new experience did not correlate well with C.E.O. success. Instead, what mattered was emotional stability and, most of all, conscientiousness — which means being dependable, making plans and following through on them.

All this work is a reminder that, while it’s important to be a sensitive, well-rounded person for the sake of your inner fulfillment, the market doesn’t really care. The market wants you to fill an organizational role.

The market seems to want C.E.O.’s to offer a clear direction for their companies. There’s a tension between being resolute and being flexible. The research suggests it’s more important to be resolute, even at the cost of some flexibility.

The second thing the market seems to want from leaders is a relentless and somewhat mind-numbing commitment to incremental efficiency gains. Charismatic C.E.O.’s and politicians always want the exciting new breakthrough — whether it is the S.U.V. or a revolutionary new car. The methodical executives at successful companies just make the same old four-door sedan, but they make it better and better.

These sorts of dogged but diffident traits do not correlate well with education levels. C.E.O.’s with law or M.B.A. degrees do not perform better than C.E.O.’s with college degrees. These traits do not correlate with salary or compensation packages. Nor do they correlate with fame and recognition. On the contrary, a study by Ulrike Malmendier and Geoffrey Tate found that C.E.O.’s get less effective as they become more famous and receive more awards.

What these traits do add up to is a certain ideal personality type. The C.E.O.’s that are most likely to succeed are humble, diffident, relentless and a bit unidimensional. They are often not the most exciting people to be around.

For this reason, people in the literary, academic and media worlds rarely understand business. It is nearly impossible to think of a novel that accurately portrays business success. That’s because the virtues that writers tend to admire — those involving self-expression and self-exploration — are not the ones that lead to corporate excellence.

For the same reason, business and politics do not blend well. Business leaders tend to perform poorly in Washington, while political leaders possess precisely those talents — charisma, charm, personal skills — that are of such limited value when it comes to corporate execution.

Fortunately, America is a big place. Literary culture has thrived in Boston, New York and on campuses. Political culture has thrived in Washington. Until recently, corporate culture has been free to thrive in such unlikely places as Bentonville, Omaha and Redmond.

Of course, that’s changing. We now have an administration freely interposing itself in the management culture of industry after industry. It won’t be the regulations that will be costly, but the revolution in values. When Washington is a profit center, C.E.O.’s are forced to adopt the traits of politicians. That is the insidious way that other nations have lost their competitive edge.

***

By DAVID BROOKS

Published: May 18, 2009. www.nytimes.com

Filed under: Business

Halal: Buying Muslim

Khalfan Mohammed has long been buffeted by culture shock while staying in five-star hotels. As a devout Muslim he has learned to ask staff to remove the minibar’s alcohol. He loathes lobbies with loud discos and drunken guests. When traveling with his parents, it is the bikinis that rankle most. “It was quite shocking for my mother to sit in a restaurant with undressed people,” the Abu Dhabi-based businessman says. “My mom and dad are not used to seeing people in public wearing their underwear.” To avoid such embarrassment, the Mohammeds took to renting furnished apartments.

FRESH LOOK: Malaysia-based El Hajj markets skincare products such as moisturizer and facial cleanser to pilgrims headed to Mecca

No longer. On a trip to Dubai last year, Mohammed stayed in the Villa Rotana, one of a growing number of hotels catering to Muslim travelers. In the lobby — all white leather, brick and glass, with a small waterfall — quiet reigns. Men in dishdashas and veiled women glide by Westerners who are sometimes discreetly reminded to respect local customs. Minibars are stocked not with alcohol, but with Red Bull, Pepsi and the malt drink Barbican.

Time was, buying Muslim meant avoiding pork and alcohol and getting your meat from a halal butcher, who slaughtered in accordance with Islamic principles. But the halal food market has exploded in the past decade and is now worth an estimated $632 billion annually, according to the Halal Journal, a Kuala Lumpur-based magazine. That’s about 16% of the entire global food industry. Throw in the fast-growing Islam-friendly finance sector and the myriad other products and services — cosmetics, real estate, hotels, fashion, insurance — that comply with Islamic law and the teachings of the Koran, and the sector is worth well over $1 trillion a year.

One reason for the rise of the halal economy is that the world’s 1.6 billion Muslims are younger and, in some places at least, richer than ever. Seeking to tap that huge market, non-Muslim multinationals like Tesco, McDonald’s and Nestlé have expanded their Muslim-friendly offerings and now control an estimated 90% of the global halal market.

At the same time, governments in Asia and the Middle East are pouring millions into efforts to become regional “halal hubs,” providing tailor-made manufacturing centers and “halal logistics” — systems to maintain product purity during shipping and storage. The increased competition is changing manufacturing and supply chains in some unusual places. Most of Saudi Arabia’s chicken is raised in Brazil, which means Brazilian suppliers have built elaborate halal slaughtering facilities. Abattoirs in New Zealand, the world’s biggest exporter of halal lamb, have hosted delegations from Iran and Malaysia. And the Netherlands, keen to maximize Rotterdam’s role as Europe’s biggest port, has built halal warehouses so that imported halal goods aren’t stored next to pork or alcohol.

Such arrangements cost, of course, but since the industry’s anchor is food, business is booming, even in the economic crisis. “What downturn?” asks Nordin Abdullah, executive director of the Halal Journal. “You don’t need your Gucci handbag, but you do need your hamburger.”

Not just hamburgers. Drug companies such as the U.K.’s Principle Healthcare and Canada’s Duchesnay now sell halal vitamins free of the gelatins and other animal derivatives that some Islamic scholars say make mainstream productsharam, or unlawful. The Malaysia-based company Granulab produces synthetic bone graft material to avoid using animal bone, while Malaysian and Cuban scientists are collaborating on a halal meningitis vaccine.

In the Gulf, the Burooj real estate company is carving out a niche, not just because it deals exclusively with Islamic banks, but because it designs spas and swimming pools that segregate the sexes. For Muslim women concerned about skin-care products containing alcohol or lipsticks that use animal fats, a few cosmetics firms are creating halal makeup lines.

The burgeoning Islamic finance industry is using the global economic crisis to win new non-Muslim customers. Investors are attracted by Islamic banking’s more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees) and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry’s value is growing at around 15% a year, and could reach $4 trillion in five years, up from $500 billion today, according to a 2008 report from Moody’s Investors Service.

Those who define the halal market in the traditional sense — as a matter of meat, and no more — see the industry stopping at Islamic food standards. But the movement’s more bullish advocates envisage Muslim cars and halal furniture built in accordance with Muslim finance, labor and ethical principles. Citing the kosher and organic industries as successful examples of doing well by doing good, some entrepreneurs even see halal products moving into the mainstream and appealing to consumers looking for high-quality, ethical products. A few firms that comply with the Shari’a code — the religious laws that observant Muslims follow — point out that already many of their customers are non-Muslim. At the Jawhara Hotels, an alcohol-free Arabian Gulf chain run by the Islam-compliant Al Lotah conglomerate, 60% of the clientele are non-Muslims, drawn by the hotels’ serenity and family-friendly atmosphere. Dutch-based company Marhaba, which sells cookies and chocolate, says a quarter of its customers are non-Muslims, mostly people concerned not about religious edicts but about food safety. “People are always looking for the next purity thing,” says Mah Hussain-Gambles, founder of Saaf Pure Skincare, which markets halal makeup.

…

By CARLA POWER Thursday, May. 14, 2009  www.time.com

Filed under: Business

First, Know Yourself

When it comes to career reinvention, too many people make a fundamental mistake: They don’t know themselves.

So when I talk to people about making a career change, I always suggest first doing a few self-assessment exercises. Career self-assessment is the process of getting acquainted with what you like — and don’t like — in a work environment.

You can do this by simply making a list of your skills and interests, and asking yourself questions such as “What type of work would make me sit in traffic for hours just for the privilege of showing up?” and “What energizes me at work?” Increasingly, though, career changers are drawing guidance from more sophisticated tests.

Entrepreneurial Bent

After getting laid off from an investment bank in New York, 25-year-old Alan Katz worked with career counselor Claudine Vainraub to determine his next steps. He completed a 360-degree survey, in which he collected feedback about himself from friends, co-workers, and family, as well as assessments about his work behaviors and career interests.

“The assessments helped me understand my skills, specific roles I play effectively and career interests,” says Mr. Katz, who paid a total of $2,500 for the tests and professional consulting over a six-week period. “The results prompted me to investigate entrepreneurship, and I’m now developing a start-up company in manufacturing.”

Many experts agree that assessments are best used in conjunction with an experienced career counselor who can hand-select tests for you — and help you interpret the results. Ms. Vainraub, who is based in Miami, chose the 360-degree questionnaire for Mr. Katz to better define his work priorities. “We found that his personal vision of leading an enterprise forward was, in fact, quite different from his current career in finance,” she says.

People described Mr. Katz as enjoying managing and motivating others, and driven when involved in a project. “Those are very much the qualities of an entrepreneur,” Ms. Vainraub says.

Online Tests

If you can’t afford or aren’t sure you want to invest in a personalized assessment, start with free assessments online, including the Coach Compass Assessment (coachcompass.com) and the CareerLink Inventory (www.mpcfaculty.net/CL/cl.htm). Most take around 10 minutes to complete.

Ms. Vainraub recommends starting with free assessments from O*NET(online.onetcenter.org),a source of occupational information, and from Rutgers University (careerservices.rutgers.edu/OCAmain.html).

When completing these, make sure you keep your expectations in check. It’s unlikely that one test will result in career fulfillment, so take several and see if you can detect patterns in the findings. Should you need something more precise, it may be in your best interest to contact a professional.

Mr. Katz says he would go through the self-assessment process again. “Self-assessment is great for people who are unsure of the correct career move to make,” he says. “I now have a lot more confidence that I’m headed in the right direction.”

.

Alexandra Levit (reinvent@wsj.com)

CAREERS - www.online.wsj.com

Filed under: Business , assessment, recession, yourself

With Jobs Tight, M.B.A.s Head for Home

After working in public accounting for three years, Joe Fusco, wanted to become an investment banker. So he invested more than $70,000 and two years into an M.B.A.

But as he prepares to graduate from the University of Notre Dame in Indiana next month, Mr. Fusco, 27 years old, hasn’t had any luck landing a position in finance. The only solution he has is to go back to his accounting roots. “It’s a tough pill to swallow, but I’ve come to the conclusion that I can’t sit and wait and cross my fingers,” he says.

The majority of students at top business schools attend the programs as a way to boost their skills to change careers. This year, making that happen has turned into a nearly impossible task. And that means a significant number of soon-to-be grads who entered school back in 2007 are being forced back to their pre-M.B.A. careers in the hopes of finding a job.

“Career switchers are getting hit the hardest,” says Kristen Lynas, associate director of career management at Georgetown University’s McDonough School of Business. Those looking to switch fields make up the majority of each incoming class at the school, she adds. “When the market is hot, employers are more willing to take the risk … [now] employers tend to go with the safe choice.”

Steve Canale, manager of recruiting and staffing services at General Electric Co., in Fairfield, Conn., says that with so many applicants, previous experience is getting a bigger emphasis when the company weeds out candidates. “That’s the sweet spot — people who have industry expertise in the industries that we’re strong in,” says Mr. Canale, who hires about 120 M.B.A. students each year for a sales and marketing program.

In past years, GE would have been more open to M.B.A.s who were less of a match. But applications for the program grew 30% this year and Mr. Canale was able to be more experience-selective, he says.

With firms like Lehman Brothers and Bear Stearns — which used to bring on upward of 800 M.B.A.s combined every year — now defunct, and fewer finance jobs around, more business-school graduates are leaning on their experience to get them in the door. For example, the University of Chicago’s Booth School of Business has typically placed 50% of its M.B.A. alumni in finance, most at large investment banks. This year, students in all majors have been turning back to their previous fields to find work, says Char Bennington, Chicago’s senior associate director of career management. Ms. Bennington says other industries, like consulting and marketing, are also hiring fewer people and looking for experience.

After Johnson & Johnson didn’t extend an offer to Jareer Oweimrin, a second-year M.B.A. at the University of Illinois Urbana-Champaign who worked as a strategic marketing intern with the company, Mr. Oweimrin is putting his plans to get a health-care marketing role on hold for the time being. He is now trying to capitalize on his background in pharmaceutical sales and is in talks about returning to a sales job at a former employer, a major drug maker. He hopes such a move will eventually help him move into marketing. “The motto here [at school] is ‘take what you’ve got,’” says Mr. Oweimrin, who spent about $70,000 on his degree. “You can’t be as picky as you want to be.”

Even consulting firms — known for hiring career switchers — are looking for M.B.A.s with previous experience to hire.

Brianne Shally, 29, who graduates from Northwestern University’s Kellogg School of Management this spring, says she feels safer going back to a consulting job in Chicago for Deloitte Touche Tohmatsu, her previous employer, rather than make a career change. “I have a proven track record, if it comes down to names on a board” for a layoff or hiring, says Ms. Shally. She says consulting jobs haven’t been easy to land for fellow classmates, though. This year, she says, firms “were not willing to take a risk on students who did not have previous consulting experience.”

Patricia Phillips, executive director of career management at University of Rochester’s Simon Graduate School of Business, says students are beginning to recognize that these days, it could take two or three career moves to make a switch.

That’s how Abhishek Sunkersett is approaching his first post-M.B.A. job. Instead of landing a job in strategy consulting or finance, Mr. Sunkersett, 28, a second-year student at the University of Texas-Austin McCombs School of Business, says his engineering background and technical experience working in the Mumbai office of Deloitte helped land him a position at the Chicago office of Infosys Technologies Ltd., an Indian information-technology services vendor. For now, Mr. Sunkersett says he’ll focus on consulting projects involving technology, with hopes of pursuing more strategy-related projects in the firm. “My experience was a big advantage,” says Mr. Sunkersett.

But the idea of returning to an old career has some soon-to-be grads questioning the value of their degrees. A traditional post-M.B.A. position increases a degree-holder’s salary by 74% according to an annual survey from the Graduate Management Admissions Council.

Besides being unable to use his newly honed marketing skills, Mr. Oweimrin, says he is worried that he’ll be earning the same as he did as a pharmaceutical rep — about $60,000 — instead of the $100,000 marketing job he expected to land after the M.B.A. program.

And Mr. Fusco says he is less certain his investment in the degree was worthwhile. Many of the auditing positions that he is finding don’t require a graduate business degree. “These are positions that I was pretty qualified for even pre-M.B.A,” he says.

By ALINA DIZIK

Printed in The Wall Street Journal, page D6. (www.onlin.wsj.com)

Filed under: student , home, job, MBA, tight

Bankers vs. Economists: Who deserves more blame for the global economic collapse?

This is adapted from Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation , which is now available in paperback.

Which profession bears more blame for the global credit meltdown and its ensuing gazillion-dollar bailouts: bankers or economists?

This isn’t a trick question.

So far, bankers have been getting most of the opprobrium. Yes, there are a few solid bankers who didn’t destroy their firms. But pretty much all the prominent bankers failed. And their failures are writ large on the pages of the Wall Street Journal every day. They’ve been hauled before Congress, deposed and fired, lost vast fortunes, and been the targets of populist rage. By common consensus, bankers (and by this I mean the term as it’s used in the tri-state metro area, to describe anybody who works at a relatively high level in the financial services industry) blew it.

But they couldn’t have created the Dumb Money debacle without a substantial assist from economists. Toiling in government and academia, at trade groups and Wall Street firms, practitioners of the dismal science provided the intellectual ballast and justification for much of the insanity of this past decade. At every step of the way, as an Era of Cheap Money devolved into an Era of Dumb Money, and then into an Era of Dumber Money, Ph.D.’s led the cheers. And when things started to go bad, they failed to grasp just how bad things would get.
In February, I recounted some of the economists’ most egregious errors. Alan Greenspan, chairman of the Federal Reserve system, was easily the most influential economist of the last quarter century. His intellectual virtues were many. So, it turns out, were his intellectual sins. Greenspan spent his career evangelizing for the Holy Trinity of low interest rates, deregulated markets, and the ability of financial innovation to insulate markets from calamities. Oops! The persistence of low interest rates sparked a speculative orgy in securities and derivatives. The tools that were supposed to help people manage risk instead created systemic risk.  And deregulated, free, and open markets blew up so badly they required massive government interventions. The disaster was a feature of the financial operating code Greenspan had helped write, not a bug. (Bonus Greenspan screw-up: telling borrowers in the February 2004 that adjustable-rate mortgages could help people save money—just as he was about to start boosting short-term rates.)  Greenspan wasn’t the lone academic economist at fault. During the credit bubble, Greenspan’s successor and many other prominent economists, provided intellectual cover for our vices, failure, and greed. Ben Bernanke helped assuage concerns that interest rates were dangerously low by arguing first that interest rates should be low if deflation is nearly as much a worry as inflation and then that low rates stemmed from a global savings glut. David Malpass, chief economist of Bear Stearns  said we shouldn’t fret about the pathetically low national savings rate at a time when everybody owned stocks and houses. Rising asset markets would do the heavy lifting of savings. Late into the housing boom, David Lereah, chief economist of the National Association of Realtors continually urged Americans to buy houses. After all, he promised, they’d rise in value at least through the end of the decade.

While the performance of many prominent economists during the boom was poor, their performance after it ended may have been worse. As a class—again, with significant exceptions–they failed to recognize that the fall of housing, which started in the summer of 2006, would have negative effects on the economy (“The worst may be over for housing,” Greenspan declared on October 9, 2006) and on the financial system. In November, 2007, Bernanke estimated the losses stemming from subprime as being “in the ballpark” of $150 billion  (Must have been a really big ballpark). Neither of the nation’s chief economists, despite spending their days poring over economic data and meeting with professional economists inside and outside the Fed, seemed to have a clue that the virus of bad lending had spread far beyond subprime, and far beyond housing, and far beyond America’s borders.

Economic forecasting is hard. But the dismal scientists collectively did a horrific job of prognostication as the economy shifted into recession and then plummeted into a sharp contraction. The recession, we now know, started in December 2007. The Blue-Chip forecasters surveyed by the Philadelphia Fed in the fourth quarter of 2007, when the recession was about to start, projected the economy would grow by 2.5 percent in 2008 and that the economy would add more than 100,000 jobs each month in 2008. (Instead, the economy lost jobs every month in 2008 and ground to a halt). In the middle of the fourth quarter of 2008, one in which the economy was shrinking at a 6.3 percent annual rate, they took down their forecast for the quarter from 0.7 percent growth to a decline at a 2.9 percent annual rate. They projected the unemployment rate would be 7 percent in the first quarter of 2009. By March 2009, it was up to 8.5 percent.

Clearly, economic forecasters weren’t asking the right questions, or looking at the right indicators. Economists also didn’t always help the private sector companies with which they were associated. Martin Feldstein, president and CEO of the National Bureau of Economic Research, the official arbiter of recession dating, sat on AIG’s board for two decades, and in 2008 was on the board’s finance committee and on its regulatory, compliance, and legal committee—areas in which AIG had catastrophic breakdowns. Legendary Wall Street economist Henry Kaufman was chairman of Lehman Brothers’ finance and risk committee when it went tapioca.

Is it unreasonable to expect that very smart—even genius—economists would have insights into complicated businesses that the CEOs and other bankers lacked? Perhaps. But the economists’ failures may have been less human ones than professional ones. It turns out that the worldview that many economists hew to—a system of efficient markets, populated by rational actors and by owner/managers who naturally take action to preserve the value of their companies—can’t really account for the actions during  the credit bubble (or in any other bubble, for that matter). The set of theories upon which many economists rely—again, I know I’m painting with a really broad brush here—is out of vogue, and is being replaced by a set of funkier ones, which draw from sociology, anthroplogy and psychology, as well as classical economics. The behavioral economists who are in the ascendance will tell you that the irrational behavior on display came as no surprise to them.

So, back to our original question. Bankers or economists?

Bankers have clearly suffered more financial damage—they had a lot more to lose. But when it comes to reputation, I think it’s a draw. One similarity between the two professions’ reaction to the meltdown is that it doesn’t seem to have occasioned much self-examination. The best Greenspan could muster was that he had “found a flaw” in his theories.

From Newsweek-Money Culture, www.newsweek.com

By Daniel Gross

Apr 14, 2009 | Updated: 12:13  p.m. ET Apr 14, 2009

Filed under: Uncategorized

It Doesn’t Have To Hurt

Government should use the lessons of behavioral economics to get us to invest more for retirement.

By Richard Thaler | NEWSWEEK

Published Apr 11, 2009

From the magazine issue dated Apr 20, 2009

Illustration by Edel Rodriguez for Newsweek

Aging Americans are facing a perfect storm when it comes to retirement. Many have done little saving over the past two decades and have now seen what they have saved, either in their 401(k) or their home equity, decline sharply in value. Once they face these facts, Americans will have to relearn the saving habit.

To figure out how, we need more than standard economic thinking, which is based on an idealized conception of behavior. Instead we need to focus on how people actually behave—a sensibility that defines the new field called “behavioral economics.” Traditional economists bestow upon humans the mind of a computer and the willpower of a saint; I like to call these imaginary creatures Econs. These Econs have no difficulty saving because they rationally calculate how much wealth they need for retirement, reduce their consumption accordingly and then invest optimally. Econs never splurge or speculate. But the world is not populated by Econs—and if we understand how humans really behave, we can come up with ways to get them saving again.

It wasn’t so long ago that Americans were good savers. From 1950 to the early 1980s the saving rate was a satisfactory 8 to 10 percent. But even then, Americans never showed much willpower for stashing away cash. The most important ways households saved were in pensions, cash-value life insurance, and by paying off their home mortgage. What these have in common is that the saving occurs automatically and effortlessly.

But institutional changes have made saving more difficult. Under old-fashioned pensions, employees didn’t even have to sign up—much less make investment choices. The new 401(k)-style plans require both the willpower to put money away and deliberation about how to invest it. Meanwhile, financial institutions have made it easier to borrow and more difficult to stick to a budget. The old habit of “saving up” for a purchase was replaced by the credit card. Likewise, home-equity loans and easy mortgage refinancing eliminated the social norm of paying off the mortgage by retirement—once a key source of automatic savings.

In getting us back on the savings track there are two basic principles of behavioral economics to remember. First, make saving automatic. Second, put savings away in a specially designated account, such as an IRA or 401(k). These accounts, like piggy banks, help reduce the temptation to spend. Families, companies and governments can all make use of these concepts.

Workers should make sure they enroll in their company’s retirement plan or arrange to have deductions from their paycheck deposited into an IRA. Also, those who take advantage of low-interest rates to refinance their mortgages should consider a shorter-term loan (15 years instead of 30), with the goal of reducing mortgage debt as much as possible before retirement.

Companies can help their employees get on the right path by good design of their 401(k) plan. Firms should make sure the plan has a solid, low-cost, diversified investment strategy that can serve as the default fund for employees who have no idea what to do. Then, employers should also automatically enroll employees, giving the employees the option to opt out. Next, give workers the option to increase their contributions automatically whenever they get a raise, a program my colleague Shlomo Benartzi and I have called Save More Tomorrow. Employees love this, and it works.

As for the federal government, many good steps have already been taken. One excellent example is the Pension Protection Act of 2006 that included a provision meant to nudge firms to incorporate desirable features into their retirement plans. Specifically, any company that includes a suitable match, automatic enrollment and a primitive form of Save More Tomorrow gets a free pass from an annoying compliance report. Going forward, the Obama administration has announced its blueprint to create a national 401(k) plan for workers whose companies do not offer such a plan, and to automatically enroll people.

Policies like these will help households navigate the complex financial world. If employers, financial-services companies, policymakers and individuals keep in mind that we are all humans, not Econs, we’ll have a better chance of restoring our economy to solvency and prosperity once the current crisis ends.

Thaler is a professor at the Booth School of Business at the University of Chicago and the coauthor (with Cass Sunstein) of “Nudge: Improving Decisions About Health, Wealth and Happiness.”

© 2009

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A Brief History of Mardi Grass

Mardi Gras isn’t all nudity and drunken debauchery (though, yes, there is definitely nudity and drunken debauchery). From King Cakes to Mardi Gras Indians, TIME takes a look at the unique traditions of New Orleans’ Carnival season.

Origins

Literally meaning “Fat Tuesday,” Mardi Gras is the culmination of a weeks-long Carnival season that ends on Ash Wednesday. While impromptu foot and horseback parades had been a regular New Orleans occurrence for decades, it was in 1857 that the first “krewe” — private groups with semi-mythological namesakes that organize thematic parades — was established. This 1879 picture details a parade by Rex, an all-male krewe whose leader is known as the “King of Carnival.” The Krewe of Rex established the official Mardi Gras colors of green, gold, and purple.

Let’s Mask

With it’s mixture of Caribbean, Spanish, and French influences, New Orleans’ Mardi Gras adopted the latter nation’s affinity for masked balls and celebrations. In a little more than 150 years, Mardi Gras has only been canceled about a dozen times, typically for disease (yellow fever in the late 1870s) or conflict (the Civil War and both World Wars).

Carnival Royalty

The hierarchy of New Orleans society is on full display during Mardi Gras. In the past, Krewes were often private organizations that held formal, ritzy balls closed to the public. When the city council passed a 1992 ordinance that required krewes to be more inclusive, three of the oldest groups disbanded rather than give up their exclusivity. One of the more inclusive — if ostentatious — traditions is the presentation of the Mardi Gras King and Queen, such as in this 1941 picture.

100 Years Strong

White New Orleans society wasn’t the only group that celebrated Carnival. The city’s significant African American community, subject to its fair share of segregation, started parading in 1909. Named Zulu, after the African tribe, it is said to have been founded in mocking response to the highfalutin Rex parades. In 1949, the Zulu Krewe was the first to crown a celebrity king, Louis Armstrong. And while it experienced a period of profound unpopularity among socially-minded African Americans in the 1960s — Zulu parade participants wore blackface — it effectively integrated Mardi Gras when its parade rolled down New Orleans’ main thoroughfares. Previously, it had been limited to back streets in black neighborhoods. Today, the Zulu Krewe, which rolls on Fat Tuesday, puts on one of the season’s most popular parades.

Light My Fire

Nighttime Mardi Gras parades feature flame-wielding “flambeaux carriers,” who harken back to days when streets were not as well-lit. Interspersed between the elaborate parade floats, which are now themselves brightly lit, the flambeaux carriers spin, twirl and dip their bodies — all while keeping their torches aflame. Most carriers were initially slaves and free African Americans, and the tradition of tossing them coins continues to this day.

A Family Affair

Many Americans associate Mardi Gras with drunken debauchery and women baring their breasts for cheap colored beads. But most of the season’s celebrations take place outside of the raucous French Quarter, in family-filled neighborhoods such as the tree-lined Garden District. There, parents and kids await daytime parades, many utilizing modified ladders with seats on top. There, children are ideally positioned to catch beads and other “throws” — plastic coins, stuffed animals, cups, Frisbees, etc. — from passing floats. During Carnival season, tree branches along popular parade routes are often covered with hanging sets of gaudily colored beads

A Rowdy Affair

OK, Mardi Gras’ reputation as an alcohol-fueled, nudity-filled bacchanal is not completely unearned. In 1973, a ban was established on Krewe parades in the increasingly rowdy and narrow streets of the French Quarter. In subsequent years, tourists and other drunken fools descended on the Quarter (especially the particularly saucy Bourbon Street) en masse, and the tradition of showing skin for beads began. Native New Orleanians despise the reputation, and rarely venture into the Quarter during Carnival season.

Don’t Eat the Baby

In a city well renowned for its food culture, the act of purchasing a King Cake is a beloved part of Mardi Gras. Sold only during the Carnival season, king cake is a large braided Danish pastry, typically spiced with cinnamon and covered with green, purple, and gold sugar, corresponding to Mardi Gras’ colors. Socked away inside the cake is a tiny plastic baby, and whoever discovers the little tyke in their slice is required to buy the next king cake (or host the next party).

Tribal Traditions

One of New Orleans’ more unique sights is that of two Mardi Gras Indian tribes facing off on a street corner. The Indians are said to be a way for African Americans to pay tribute to Native Americans who helped their slave ancestors escape their masters. New Orleans is home to dozens of Mardi Gras Indian tribes, who each have their own special chain of command and who spend an entire year working on their elaborate feathered and beaded costumes, each of which is worn only once during Mardi Gras season. When two tribes encounter each other, a ritualized, theatrical performance full of chanting, singing, dancing, and bluster ensues.

Indomitable Spirit

After Hurricane Katrina slammed into the city in August, 2005, many thought that Mardi Gras would have to be postponed for the first time since World War II. Residents, however, would hear nothing of it. Absent all the fancy trappings, the city held an abbreviated Carnival whose official parades rolled through the less devastated areas of New Orleans. This unofficial parade, however, marched through the ruined lakeside neighborhood of Gentilly. While the city’s population has not yet returned to pre-Katrina levels, Mardi Gras celebrations have grown unabated.

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http://www.time.com

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The 10 people most reponsible for the recession

The global financial crisis has evolved into a worldwide recession of epic proportions. Analysts fear the sudden slump which has followed the credit crunch could even rival the Great Depression of the early 1930s and lead to global stagnation.

But who is responsible?

The bursting of the housing bubble and the collapse in confidence throughout financial markets was not caused by one individual or a single decision, so pointing the finger of blame is a near-impossible task. But Times Money has given it a shot anyway. Here are ten suggestions for the nine men and one woman responsible for the mess we’re in. Once you have read our notes, vote in our poll and make your own suggestions in the comment box at the end of the piece. 

1. Dick Fuld

Multi-billionaire and US squash all-star Dick Fuld, 62, was CEO of Lehman Brothers when it went bust in September last year. Dubbed the “scariest man on Wall Street”, Dick Fuld is blamed for a litany of mistakes that include leaving Lehman Brothers heavily exposed to toxic US sub-prime mortgage debt and other assets that collapsed in value in the wake of the credit crunch.

His secretive work ethic, which rewarded loyalty over all else, has been criticised for silencing potential whistleblowers. In its final months a series of interested buyers surfaced to save Lehmans, but Mr Fuld would not sell at the prices offered. Had he acted sooner, he would have been able to avoid bankruptcy. Institutional Investor magazine named Dick “America’s top chief executive” in 2006. The collapse of Lehmans triggered the second destructive phase in the credit crunch and laid the foundations for a full blown global recession.

2. Hank Paulson

If Dick Fuld is responsible for the collapse of Lehman Brothers, Henry Paulson, the former US Treasury Secretary, is the man who let it happen. Anatole Kaletsky, of The Times, says: “The global banking collapse could perhaps be described as a bullet in the head, since its proximate cause was a conscious decision by the US Treasury to jeopardise the stability of the world economy in pursuit of an essentially political objective – to show that the Bush Administration was willing to act ruthlessly against at least one big Wall Street investment bank. Until that point, savers and investors around the world had assumed that financial institutions such as Lehman were “too big to fail” and would always be supported by their governments. By shattering this belief Henry Paulson triggered a run on every important bank in the world and caused the sudden implosion of consumer and business confidence seen in the past two months.”

Hank didn’t just let Lehmans fail. He made a series of mistakes in the run up to the Lehmans collapse. He also proposed a £700 billion package to boost the US banking system. And how did Hank come up with a figure of £700 billion? “It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com, the US financial website. “We just wanted to choose a really large number.”

 

3. Alan Greenspan

Alan Greenspan was feted for his management of the US economy while he stood in charge of the US Treasury, but has since been put under the spotlight. He was responsible for cutting interest rates to near zero in the US in the aftermath of September 11, flooding the world with cheap and easily available money. Did this pave the way for a “once-in-a-century credit tsunami”? In October last year he said: “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.” 

Allan Meltzer is a professor of political economy at the Carnegie Mellon University in Pittsburgh, said: “Alan Greenspan was much too afraid of a slowdown or other recession…he allowed the credit to expand too rapidly.”

 

4. John Tiner/Hector Sants

John Tiner was in charge of the Financial Services Authority, the watchdog that polices the UK ’s complex financial services industry until 2007, when it was taken over by Hector Sants. The FSA failed to keep a close eye on Northern Rock, the Newcastle-based ex-mutual which gorged on wholesale mortgage securitisation and came a cropper as a result. A key parliamentary committee has said that the FSA was guilty of a “systematic failure”. Mr Sants accepted that the organisation under Mr Tiner failed to stress-test the business model of Northern Rock and spot signs that the bank was dangerously dependent on interbank funding to remain in business. “We should have been in more intense dialogue earlier”, he has said. 

5. Fred “the shred” Goodwin

The “world’s worst banker” has brought the Royal Bank of Scotland (RBS), Britain’s second biggest bank, to its knees. Last week it announced humiliating losses of £28 billion, the biggest in British corporate history, and economists and analysts have concluded that it could soon ber fully-nationalised. In mid-January, taxpayers saw their stake in the banking giant increase from 58 per cent to 70 per cent.

Sir Fred joined RBS in 2000 and promptly embarked on a spending spree, acquiring 26 banks in seven years for more than £35 billion. These included NatWest and stakes in America and the Bank of China. In 2006, its share price stood at £13. But at the close of trading on January 28, RBS shares were trading at a near-worthless 15.9p.  

In 2000, after the takeover of NatWest, RBS’s board rewarded Sir with a £2.1 million annual salary, including a bonus of £814,000 for the takeover — more than any other UK bank chief received that year. It paled in comparison with his £2.86 million bonus in 2007. Three months ago, in October, Sir Fred left the bank under a dark cloud that has now mushroomed into a thunderstorm. On the day his departure was announced, Sir Fred said he was “sad”, adding: “Nobody will ever tell you that they feel good the day they have to step down.” The Prince’s Trust recently dumped Fred The Shred and the campaign to strip him of his knighthood is gathering pace.

6. Gordon Brown

Apparently Gordon Brown predicted the global financial crisis ten years ago, in a speech he made to Harvard students. Sadly he did little to prevent it. James Gordon Brown was Chancellor of the Exchequer during “the longest period of growth” in the UK ’s history, but economists blame Mr Brown for encouraging soaring house price inflation and the spread of credit which fuelled the years of boom and led eventually to the current bust.

In a recent speech to the London School of Economics, George Osbourne, the Shadow Chancellor, said: “Our competitors used the fat years to prepare for the lean years. Britain did not. We are the least prepared country in the developed world to cope with the current financial turbulence. Our financial reputation has been badly damaged by the only run on a retail bank in the world. Our double deficits – external and fiscal – are worse than any other European economy. Taken together, they are worse than the United States.” The blame “lies squarely and fairly with Gordon Brown”, he concluded.

7. George Bush

The former President was in charge during the boom years when the seeds of the sub-prime implosion were sown, but has failed to take any responsibility for the financial disaster which occurred on his watch. In a speech last year he blamed the bankers in New York for the problems facing his country’s economy. “Wall Street got drunk…The question is, how long will it [take to] sober up and not try to do all these fancy financial instruments?” 

8. Kathleen Corbet

The credit rating agencies have been blamed for failing to ask tough questions about the collateralised debt products containing so many toxic sub-prime mortgages, which investors traded for millions of dollars during the booming housing years. The three biggest agencies have been accused of taking the word of investors and not properly assessing the risks involved in securitisation. Mrs Corbet was head of the biggest credit rating agency, Standard & Poors, before she quit amidst heavy criticism in 2007. Critics argue that S&P and its main rival Moody’s, as well as other agencies, face an inherent conflict of interest, in that many of their clients issue securities that are rated by its analysts.

9. “Hank” Greenberg

Another Hank. This one was head of AIG, the insurance giant that had to be rescued in an £47 billion US government bailout just days after Lehman Brothers was allowed to go bust. Hank was in charge between 1967 until 2005, during which time the insurer got heavily involved in the murky world of credit default swaps. Mr Greenberg appealed to the US Government to save the company last September, saying: “It’s a healthy company financially except for liquidity. No organisation around the world has the spread of risk that AIG does. It’s a company that opens markets – letting it go down would be a dramatic mistake.”

10. Angelo Mozilo

Mr Mozilo was head of the largest sub-prime mortgage lender in the US, Countrywide, until July 2008. Sub-prime lenders in the US have been accused of using misleading marketing to push unsuitable mortgages on sub-prime homeowners who could not afford to service the debt, the root cause of the credit crunch. During the housing boom, Mr Mozilo reportedly earned $470 million in salary and other income. Mr Mozilo has also been under the spotlight for a VIP programme in which politicians and senior officials in the Government were offered favourable mortgage deals. Earlier this month Bank of America agreed to buy Countrywide for about $4 billion (£2 billion). Meanwhile, Mozilo unloaded $141m in stock options before the company’s share price collapsed.

(Money Central - January 30, 2009, http://timesbusiness.typepad.com)

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Efficient market hypothesis is dead – for now

I have to report the sad passing of the efficient market hypothesis. The theory was officially declared dead yesterday at the World Economic Forum in Davos. There were no mourners.

The announcement was made at a brainstorming session that involved many of the world’s top economists, politicians and business leaders … together with a few bankers wearing dark glasses and false beards.

Asked which policy assumption had most contributed to the global financial crisis, the most popular answer by far was the belief that markets are self-correcting. (Nassim Nicholas Taleb, author of The Black Swan, said it was that markets “robustify” themselves, which amounts to the same thing … I think.)

In recent years, the belief in efficient markets has dominated economic policy and financial regulation in the Anglo-Saxon world and increasingly across the globe. Its death, if confirmed, is a momentous event. At the very least, it will cause anguish among countless MBA graduates who have paid good money, worked long hours and consumed large quantities of cold pizza to learn about something nobody now believes in.

The efficient market theory (or more precisely, the closely related efficient banks theory) has already been given a bit of a kicking by one of its greatest supporters, Alan Greenspan. The former Federal Reserve chairman has said that the big mistake he made was assuming that banks’ self-interest would prevent them doing anything that would threaten their own survival.

It was a good thing Mr Greenspan wasn’t at Davos yesterday. He would have been set upon. When it comes to the sins of bankers and regulators, the mood among Davos types is just as ugly as it is among the general population.

John Neill, chief executive of Unipart, was given one of the day’s biggest rounds of applause when he declared that bankers who were involved in developing toxic products that caused massive damage to the global economy should be punished. If you knowingly make other kinds of toxic products, you go to jail. Why should bankers be different, he asked.

Regulators also came in for a battering. But the Davos consensus on what needs to be done was concerning. Asked what the top priority should be in terms of financial regulation for the forthcoming G20 meeting, half the delegates at the session said it was addressing the lack of an international regulatory framework.

This echoes the oft-repeated call by politicians, including Gordon Brown, for better international regulatory co-ordination.

Yet, as Lord Turner, chairman of the Financial Services Authority, told me yesterday, international standards and better co-ordination would have made little difference to the course of the credit crisis. It would not have improved the Federal Reserve’s regulation of Citigroup or the FSA’s regulation of Northern Rock.

Moreover, coming up with an international regulatory framework will be extremely difficult. Unlike in trade, for example, there is no treaty-based international organisation in which such a framework can be hammered out.

It will take a very long time. So long, in fact, that it is unlikely to be finished before the efficient market hypothesis rises again from the dead. As it surely will.

 

David Wighton: Business Editor’s Davos commentary.

 

From The Times - January 29, 2009

http://business.timesonline.co.uk/tol/business/columnists/article5607960.ece

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