When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants

by Steven D. Levitt

  For $25 Million, No Way—But for $50 Million I’ll Think About It

  (SDL)

  At least for me, there are not too many questions that would lead me to respond, “For twenty-five million, no way—but for fifty million I’ll think about it.” Twenty-five million dollars is so much money that it’s hard to think about what you would do with it. It sure would be nice to have the first $25 million but I’m not sure why I’d need the second $25 million.

  The U.S. Senate is hoping there are some folks in Afghanistan or Pakistan who don’t see it that way. Frustrated by the failure of the $25 million bounty on Osama bin Laden to lead to his capture, the Senate has voted 87–1 to raise the bounty to $50 million. (The lone dissenter was Jim Bunning, a Republican from Kentucky.)

  At one level, you have to applaud this move by the government. To a Pakistani peasant, $50 million is an unthinkably large amount of money. To the U.S. government, which is spending $10 billion a month in Iraq, $50 million is next to nothing. If one of the major goals of the Iraq war was to get rid of Saddam Hussein, think how much cheaper it would have been to offer a reward of, say, $100 billion to anyone who could get him out of office by whatever means they saw fit. Saddam himself might have graciously accepted the offer and traded the hassles of running a country for a pleasant $100 billion pension and a well-appointed French manor.

  Indeed, we have written before about the virtues of offering big prizes to encourage people to work on problems, whether it is curing disease or improving Netflix’s algorithms.

  On the other hand, if I can’t tell the difference between $25 million and $50 million, I can’t imagine that upping the ante will push a wavering Pakistani over the edge of collaborating with the U.S. government.

  Much more important, but harder to do, would be to find a way to make it credible that we will actually pay the bounty. I’m sure there is plenty of discretion in deciding to whom and how much of that bounty gets paid. For instance, if I did some statistical analysis that somehow narrowed down his whereabouts to within one thousand yards, and then the Navy SEALs canvassed that area and found him, would I get the money? I’m not so sure they would give it to me. I’m guessing the Pakistani peasant who has some information on Bin Laden probably shares my doubts.

  Indeed, no bounty was ultimately paid. As reported by ABC News, “the raid that killed the al Qaeda leader in Pakistan on May 2 [2011] was the result of electronic intelligence, not human informants . . . The CIA and the military never had an al Qaeda operative as an informer willing to give him up.”

  How Much Would Pepsi Pay to Get Coke’s Secret Formula?

  (SDL)

  Some dastardly Coca-Cola employees recently got nabbed trying to sell corporate secrets to Pepsi. Pepsi turned the bad guys in and cooperated in the sting operation.

  Did the executives at Pepsi give up the chance to make huge profits at Coke’s expense in order to “do the right thing”?

  I had lunch yesterday with my friend and colleague Kevin Murphy yesterday. He made an interesting point: knowing Coke’s secret formula is probably worth almost nothing to Pepsi. Here is the logic.

  Let’s say that Pepsi knew Coke’s secret formula and could publish it so that anyone could make a drink that tasted just like Coke. That would be a lot like what happens to prescription drugs when they go off patent and generic drug companies come in. The impact would be that the price of real Coke would fall a lot (probably not all the way to the price of the generic Coke knockoffs). This would clearly be terrible for Coke. It would probably also be bad for Pepsi. With Coke now much cheaper, people would switch from Pepsi to Coke. Pepsi profits would likely fall.

  So if Pepsi had Coke’s secret formula, they wouldn’t want to give it away to everyone. What if they instead kept it to themselves and made their own drink that tasted exactly like Coke? If they could really convince people that their drink was identical to Coke, then the new Pepsi-made version of Coke and the Real Thing would be what economists call “perfect substitutes.” When two goods are essentially interchangeable in consumers’ minds, that tends to lead to fierce price competition and very low profits. Neither Coke nor the Pepsi knockoff of it would be very profitable as a consequence. With the price of Coke lower, consumers would switch away from the original Pepsi to either Coke or the new Pepsi-made Coke knockoff, which would be far less profitable than original Pepsi anyway.

  In the end, both Coke and Pepsi would likely be worse off if Pepsi had Coke’s secret formula and acted on it.

  So, maybe the executives at Pepsi were acting morally and honorably when they turned in those suspected of stealing Coke’s secrets.

  Or maybe they are just good economists.

  Can We Please Get Rid of the Penny Already?

  (SJD)

  What began as a casual observation somehow turned into a crusade, with Dubner becoming an unofficial spokesman for the abolition of the penny. During a 60 Minutes segment on the subject, he said the U.S. suffers from “pennycitis,” and that the penny is about as useful as “having a fifth and a half finger on your hand.” Below are excerpts of various anti-penny posts.

  Whenever I get change for a dollar, I ask the cashier to keep the pennies. They aren’t worth my time, or hers, or yours. Sometimes the cashier refuses for bookkeeping purposes, in which case I politely accept the pennies and then throw them in the nearest trash can. (Is this illegal? If so, then I guess we should start arresting people for throwing money in wishing wells, too.)

  If I were the type of person who regularly a) loaded up my pocket every day with loose change or b) brought all my loose change to a bank or supermarket coin machine, then it might be worthwhile to keep the pennies. But I’m not, and so it’s not. These facts, coupled with the reality of inflation, have led me to wish for years that the penny would be abolished, and probably the nickel, too. (When we were kids, playing Monopoly, we never used the one-dollar bills; did you?)

  There are all kinds of reasons to get rid of the penny, but perhaps the only one you need to know is that it costs the U.S. Government a lot more than one cent to make a penny. Considering that we lose money every time a penny is made, and that they aren’t useful in any meaningful way, it seems like a no-brainer that we should get rid of the penny. Inflation has rendered it a bad idea, for both producer and consumers.

  But I am happy to see that there is a sensible alternative to throwing away loose change: “rebasing” the penny to make it worth five cents. The plan comes courtesy of François Velde, an economist at the Chicago Fed. I’d like to think that the serious people in charge of our nation’s currency will take this argument seriously, but considering what I know about the penny, and politics, and inertia, I’m not holding my breath.

  ■ ■ ■

  Why does the U.S. still use pennies? One big reason: lobbyists. I recently appeared on a 60 Minutes segment called “Making Cents.” I discussed the foolishness of keeping the penny; but 60 Minutes included the pro-penny position as well. Here’s an excerpt:

  Mark Weller is the voice of “Americans for Common Cents,” a pro-penny group that claims that rounding up will cost Americans $600 million a year . . . He says without the penny, charities, too, would suffer, on the theory that people are less likely to donate as many nickels. As it is, penny drives around the country collect tens of millions of dollars a year for medical research, for the homeless, for education . . .

  But as Weller freely admits, he’s got a financial interest in the high cost of penny pinching: Weller is a lobbyist for Jarden Zinc, the Tennessee company that sells those little blank discs for the mint to turn into Lincoln pennies.

  I guess instead of wasting my time arguing against the penny, I should just buy some zinc futures.

  ■ ■ ■

  The Great Penny Debate continues to limp along. One hundred million pennies, collected by schoolchildren, were put on display at Rockefeller Center. Meanwhile, lots of people continue to argue for elimination of the penny.

  I am firmly on
the abolitionists’ side. The only reasons I can think of for keeping the penny are inertia and nostalgia. Talk about deadweight loss!

  The most ridiculous pro-penny defense I’ve seen in a while appeared in a recent full-page ad in the Times. It was taken out by Virgin Mobile, which was promoting its texting service as so cheap to use that it made even a penny worth keeping. The headline read:

  “New Legislation Will Attempt to

  DO AWAY WITH THE PENNY.

  What’s Next, Puppies and Rainbows Too?”

  Here is the line that caught my attention:

  And what does America think? 66%* of our population wants to keep the penny and 79% would stop to pick one up off the ground.

  If you follow that asterisk to the bottom of the ad, here’s what you find:

  *Source: The 8th Annual Coinstar National Currency Poll

  For those of you who don’t know, Coinstar is the company that puts change machines in supermarkets, in which you can dump your coin jar and receive a receipt that you take to the cash register for folding money. Coinstar apparently takes a commission of 8.9 percent for providing this service.

  While the Coinstar National Currency Poll is said to be compiled by an independent market research organization, I am somehow not very surprised that a survey commissioned by a company that makes money from coin harvesting is able to produce a result saying that two-thirds of Americans “want to keep the penny.”

  ■ ■ ■

  I never set out to be anti-penny, but somehow it happened, and I now publicly rant whenever possible that the penny should be eliminated.

  While I stand by my belief that the penny is lousy as currency, someone has finally come up with a use for pennies that has made me reconsider my extinction argument: make a floor out of them!

  The penny floor can be found at the Standard Grill at the new Standard Hotel in New York, the one straddling the High Line. The Standard tells us that it used 250 pennies per square foot, or 480,000 pennies in all.

  For those of you thinking about a home renovation, that’s $2.50 per square foot in flooring materials. That stacks up pretty well against glass tile ($25), polished marble ($12), porcelain ($4), or even prefinished walnut ($5). It tells you something about the penny’s uselessness as a currency that, even though it is actual money, it is still cheaper than all these other materials to make a floor out of.

  Planned Parenthood Gets Freaky!

  (SDL)

  For a long time, the pro-life movement has had a keen sense of how people respond to incentives. Protesters outside of clinics proved to be a very effective strategy for raising the social and moral costs of seeking an abortion.

  Now a Planned Parenthood clinic in Philadelphia has come up with a very clever strategy for fighting back, called Pledge-a-Picket. As they explain:

  Every time protesters gather outside of our Locust Street health center, our patients face verbal attacks from them. They see graphic signs meant to confuse and intimidate . . . We are all called murderers, are lectured to about committing sins, and are told we will pay the “ultimate price” for our actions.

  Here’s how it works: You decide on the amount you would like to pledge for each protester (minimum 10 cents). When protesters show up on our sidewalks, Planned Parenthood Southeastern Pennsylvania will count and record their number each day . . . We will place a sign outside the health center that tracks pledges and makes protesters fully aware that their actions are benefiting PPSP. At the end of the two-month campaign, we will send you an update on protest activities and a pledge reminder.

  My prediction: abortion clinics around the country will soon be adopting this approach. What I think is so clever about this approach is the way it transforms the outrage, anger, and helplessness that ardent pro-choice folks feel toward the protesters into a financial incentive that works on behalf of the pro-choice people and against the protestors. On the margin, I think that donations will be higher because potential donors can then derive pleasure from the presence of the protesters, or at least less pain. It is empowering. On the other hand, if I am a protester, I will hate the idea that what I am doing may be making Planned Parenthood stronger, decreasing the utility of the protest.

  Lost: $720 Billion. If Found, Please Return to Owner, Preferably in Cash

  (SDL)

  According to the S&P/Case-Shiller index of housing prices, home prices fell by about 6 percent in the U.S over the course of 2007. By my rough calculations, that means that homeowners have lost about $720 billion in wealth as a consequence. That is about $2,400 for every person in America, and $18,000 for the average homeowner.

  Relative to stock market declines, however, that loss of $720 billion in a year doesn’t look quite so big. The total market capitalization of U.S. stock markets is the same order of magnitude as the total value of the housing market (between $10 and $20 trillion). In one week during October 1987, the U.S. stock market lost over 30 percent of its value.

  The $720 billion figure is also about the same magnitude as the amount of money the U.S. government spent on the war in Iraq for the first few years.

  If you are a homeowner, how bad do you feel about this? You should feel pretty bad, but I’m guessing you would feel a lot worse in the following scenario: home prices did not fall at all last year, but one day you took $18,000 out of the bank to pay cash for a new car, and someone then stole your wallet with the $18,000 in it. At the end of the day, your wealth would be the same (down $18,000, either from depreciation of the value of your home or because the money was stolen), but one loss is psychologically far worse than the other.

  There are many possible reasons for why it doesn’t hurt so much to lose money on an asset like a house. First, it isn’t very tangible, since no one really knows what their house is worth anyway. Second, it hurts less whenever everyone else is also losing on their houses. (I once heard a very rich person say that he didn’t care about his absolute wealth, only what his ranking was on the Forbes list of richest people.) Third, you can’t really blame yourself for house prices falling, but you could second-guess your decision to carry around $18,000 in cash. Fourth, the fact that a thief has your money might make it worse than the money just evaporating into space, like it does when house prices fall. There are probably other reasons as well.

  More generally, the economist Richard Thaler coined the phrase mental accounts to describe the way in which people seem to treat different assets as non-fungible, even though in principle it seems like they should be. Although my economist friends make fun of me for it, I definitely use mental accounts myself. For me, a dollar made playing poker means much more than a dollar earned from the stock market going up. (And a dollar lost playing poker is likewise far more painful.)

  Even people who deny that they are affected by mental accounts often fall prey to them. I’ve got a buddy in that category who won a big bet on NFL football (big relative to his usual football bet, but very, very small relative to his overall wealth) and the next day he spent the proceeds on a fancy new driver.

  What does this all mean for housing prices? Well, if prices start going back up, it would be a lot more fun if the price increases came in the form of little packets of cash dropped outside your front door with the morning newspaper, rather than via house appreciation. I suppose all those people who took out home-equity loans figured this out a long time ago.

  How Is a Canadian Art-Pop Singer Like a Bagel Salesman?

  (SJD)

  Much like Paul Feldman, the economist-turned-bagel salesman we wrote about in Freakonomics, the singer-songwriter Jane Siberry has decided to offer her wares to the public via an honor-system payment scheme. She gives her fans four choices:

  1. free (gift from Jane)

  2. self-determined (pay now)

  3. self-determined (pay later so you are truly educated in your decision)

  4. standard (today’s going rate is about .99)

  Then, cleverly, she posts statistics on payment rates to date:

&n
bsp; % Accepting gift from Jane: 17%

  % Paid by determining price: 37%

  % Paying Later: 46%

  Avg. price per track: $1.14

  % paid below suggested: 8%

  % paid at suggested: 79%

  % paid above suggested: 14%

  Even more cleverly, Siberry posts the average payment rate for each song as you pull your payment option from the drop-down menu—another reminder that, hey, you’re more than welcome to steal this music but here’s how other people have acted in the recent past.

  It seems that Ms. Siberry grasps the power of incentives quite well. This allows for at least a couple of interesting things to happen: people can decide what to pay after they hear the music, and see how much it’s worth to them (it looks like people generally pay the most per song under this option); and it takes the variable-pricing scheme that economists love and puts it in the hands of the consumer, not the seller.

  I think record companies will need a lot more convincing before they’re willing to try this model on a large scale. Presumably, Jane Siberry fans who go to her website to get her music are a deeply self-selecting lot, far more devoted than the average downloader. But as desperate as the record companies are, I wouldn’t be surprised to see more of this in the future.

  TWO DAYS LATER . . .

  Jane Siberry Snaps

  (SJD)

  Apparently, Jane Siberry doesn’t appreciate people calling attention to her website, which allows people to pay as they wish to download Siberry’s music. I liked the idea, and blogged about it. But here’s what Siberry wrote on her MySpace journal today:

  The “self-determined pricing” policy of the store is in the spotlight again, freakonomics has an online article; abc news emailed. I don’t want the attention. I think I’ll change the pricing to “you can pay me all you want but i’m not going to let you hear it.”