Economic Fallacies and Netflix

by Henry Farrell on July 23, 2004

Experimental psychologists are fond of pointing to examples of economic irrationality in every day life – for example, people respond in very different ways if an article is priced at $9.99 and if it’s priced at $10. Through detailed examination of my own and my wife’s behaviour, I think I’ve identified another such example – the “Netflix fallacy.” “Netflix”:, for those of you who aren’t familiar with it, is a subscription service where you pay a set amount each month to rent movies. You can have three DVDs out at any one time – when you are finished with one, you send it back, and receive a new DVD from your list of picks by return post. In theory, it’s an ideal way to make sure that you have the movies you want, when you want, and an excellent deal if you rent more than 3-4 DVDs a month.

In practice, it’s different – at least in my experience. Movies that we’ve rented sometimes sit there for two or three months before we watch them, or eventually, reluctantly, decide to send them back without seeing them. To my shame, this happens most often with the interesting, difficult films with sub-titles. I suspect that this is because we’re accustomed to thinking of DVDs as “stocks rather than flows”: Because we have physical possession of the DVD, we’re disinclined to give it back until we’ve actually watched it. Of course, this means that we face substantial costs – we may very easily end up paying more money to rent the damn movie than we would have to pay to buy it and keep it forever. Meanwhile, Netflix is laughing all the way to the bank. It’s much smarter to think of the rental service as a flow – you’re likely to be happier if you keep the movies coming along in a steady stream, even if you don’t watch them (the latter may be useful information about your actual preferences, as opposed to the preferences that you would like to have). I suspect that virtually any reasonable decision rule along the lines of ‘send the movie back if you haven’t watched it within two weeks’ is likely to produce better results than our current policy of watching the movies whenever we get around to it. Or, more typically, don’t get around to it.

Markets, Firms and Planning

by Kieran Healy on July 23, 2004

Some threads of the “ongoing”: “discussion”: about the Efficient Markets Hypothesis have begun to address the contrast between markets and planning, with the state as the prospective planner. As is often the case in such discussions, the implicit contrast is between a Hayekian information-processing ideal and, say, North Korea. To break down this assumption a bit, it’s worth drawing a link to a related debate in the economics and sociology of organizations about the existence of the firm. A long time ago, “Ronald Coase”: asked why, if markets are so great, are there so many firms? Below the fold is an “old post of mine”: where I examine “Brink Lindsey’s”: efforts to defend the virtues of free markets in the light of Coase’s ideas. It might be of interest as a sidelight to the EMH debate.

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On the Road Again

by Kieran Healy on July 23, 2004

After a year of leave in Australia (well, _someone_ has to act as a counterweight to all those Aussie backpackers), I just arrived back in the U.S. Three observations:

* It should not surprise you that making a c.1 year-old boy watch the in-flight TV system for six hours of a Sydney-to-Los Angeles flight would lead to emotional problems (viz, crying, screaming, kicking) for the following six hours. It seemed to surprise the parents of the c.1 year-old boy sitting next to us, however.

* A clear-eyed assessment of Los Angeles International Airport (e.g., by Martians) would conclude that it is a machine designed to produce unhappy, stressed-out people by means of multiple queues, unnecessary bottlenecks, pointless dumping of international transfer passengers out onto the sidewalk, and other more sophisticated methods.

* What the hell is “Hooters”: doing with an “airline”: When I saw the jet trundle by on the runway I thought I was hallucinating.

After spending the next few days recovering from jetlag, I’m going to drive from South Carolina to Arizona, probably along I-40. (I have to do this, for various reasons.) Any advice? Apart from “Book a flight instead”, I mean.

“Wave of guzzling”

by Chris Bertram on July 23, 2004

I’d planned to post on the obesity panic before “Belle’s latest”: , but no harm in making it theme of the day. I was reading John Ardagh’s “Germany and the Germans”: and was interested to come across the following passage, which suggests that the current obesity panic in the US (and the UK) has a precedent in postwar German experience:

bq. For centuries the Germans were famous for their hefty appetites — and their waistlines proved the point. The fat-faced, beer-bellied Bavarian, two-litre tankard in hand before a plate pile high with _Wurst_ or dumplings, was a stock character and no far from reality. In pre-war days, poverty often dictated diets, and potatoes, bread and cakes were staple items of nutrition. In the 1950s this pattern changed dramatically as sheer greed steadily replaced subsistence eating. The _Wirtschaftswunder_ period was equally that of the notorious _”Fresswelle”_ (“wave of guzzling”), when a new-rich nation reacted against the deprivations of wartims by tucking in more avidly than ever before — and this time to a far richer diet. This continued until about the early 1970s, when alarming medical statistics appeared suggesting that 10 million Germans were overweight, including 25 per cent of children (spas began to offer cures for fat children).

Ardagh recounts that in the face of this panic the Germans did succeed in changing things, and that consumption of potatoes fell from 163 to 82 kilos per capita per annum between 1953 and 1987. Meanwhile consumption of fresh fruit and green vegetables went up over the same period.

Reading the discussion of earlier posts about the efficient markets hypothesis, it seems that the significance of the issue is still under-appreciated. In this post, Daniel pointed out the importance of EMH as a source of pressure on less-developed countries to liberalise capital flows, which contributed to a series of crises from the mid-1990s onwards, with huge human costs. This is also an issue for developed countries, as I’ll observe, though the consequences are nowhere near as severe. The discussion also raised the California energy farce, which, as I’ll argue is also largely attributable to excessive faith in EMH. Finally, and coming a bit closer to the stock market, I’ll look at the equity premium puzzle and its implications for the mixed economy.

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Who is to blame for America’s obesity epidemic?

“Feminists and liberals have transformed a legitimate medical issue of the poor into identity politics for the affluent,” [author and friend Greg Christer] told me, “which I find the worst kind of narcissistic behavior.”