Opal card value proposition

Sydney has rolled out a new multipass transport system (think Oyster card, for those of you cognisant with London) that will be active on ferries and trains very soon. Makes sense that buses take longer to fit out with suitable equipment, but I would guess that the bus network will be integrated before long, too.

Opals and opal card

The marketing for Opal cards has been quite clever. Apart from doing an excellent job of ensuring that every commuter in the city is aware of the change, the terminology used to sell the value proposition reflects some top-notch behavioural economics.

The chief example of this is the weekly ticket pricing. For infrequent commuters, the logic of using an Opal card is easy – the fare is slightly discounted, and you’re saved the necessity of buying a paper ticket. The only downside is the free loan you’re providing the NSW government of however many dollars you preloaded on to the card. For more frequent commuters, however, the additional convenience of an Opal card is minimal, and the cost savings are debatable – between $1 and $3.40 compared to a regular weekly train ticket depending on how far you travel, but compared to a monthly you end up going backwards.

So instead of talking up the meagre (or negative) cost savings, the Opal card is billed as giving you FREE travel after eight journeys. That’s right: “all further travel until Sunday night is free“! To really light up those flashing neon signs in your head, it’s also called the ‘weekly travel reward’, as though you’ve earned it for your clever decision to obtain an Opal card and spend lots of time on public transport.

And boy howdy does it ever work. I’ve had people enthusiastically extol the benefits of the system to me and explain their brilliant plan to travel to work every day using Opal and then take a long journey on the weekend, haha! They get the double rush of using a new technology and also feeling like they are cheating the system in a legitimate manner.

Trouble is, as I alluded to before, if you make the same journey every day by public transport, you’re much better off buying a monthly or quarterly ticket (don’t go to yearly, it’s a step backwards on quarterly once you factor in your holidays) than using Opal. Yes, the new system is cheaper than weekly tickets, but since there’s no provision for travel frequency over time periods longer than Monday to Sunday, you’re spending extra money in the medium term.

So wake up, Opal sheeple, and smell the toilet carriage – despite the clever marketing, the new card is really just another ticketing scheme, and should be used in a financially intelligent way.

Play Magnus Chess App

I just downloaded a new chess app you should check out if you play: ‘Play Magnus’. As the name suggests, you play Magnus Carlsen – the twist is, you can do so for every year of his life from 5 until 23 (the present). So far I’ve beaten five-year-old Magnus and been too scared to try any older iterations.

Play Magnus app

Clever marketing, and great publicity for the world number 1. The app includes a link to his Twitter feed, which I assume will pay dividends for his follower count.

Two main thoughts:

  • It’s a bit gimmicky, really – without knowing any of the underlying mechanics, I would put good money on the whole setup revolving around a standard chess engine set to different ELOs for Magnus’s different ages. Then again, I guess it’s nice to be able to put a (young) face to what you’ve just played, rather than just a number.
  • Remembering that he’s only 23 (younger than I am) always makes me slightly depressed…

International Education Results – let’s not panic

If you remember back a month or two ago, there was a lot of fuss about Australia’s results in the latest results published by the Program for International Student Assessment (PISA). Don’t think that this is a new topic, though – the organisation publishes a new set of figures at the end of every year, so the story comes up again and again. It’s an easy piece to keep writing, really – if the results are positive, cue nationalistic pride in our education system along with a few articles about how this shouldn’t fool us into forgetting the disadvantaged students who are doing it tough, and if the results are negative, bash the Australian education model vigorously.

In all the articles I’ve come across on the topic, though, none has mentioned the first thing that occurred to me – everything can be statistical noise and mean reversion. Noise -> confounding factors influence the results, so the change in score can’t be fully attributable to a decline in education quality. Mean reversion -> even with a long-term upwards trend in educational quality, sometimes there are going to be particularly good and particularly bad years for test results. And mean reversion predicts that a really good year will be followed by a less-good year – same for bad years.

Australia's education results from PISA
Source: http://www.oecd.org/pisa/keyfindings/pisa-2012-results.htm

So any dip in national test results, rather than indicating a sudden erosion of educational standards or practices, is really just a natural consequence of our string of good years in the past. Instead of fretting about the difference between this year’s result and previous year’s, the level-headed commentator should take heart from Australia’s above-average results (we are easily above the OECD mean for each category) and concentrate on more important challenges such as how technology is transforming students’ future workplaces.

Monopoly rents from graduation

As a recent university graduate, I’m now ready to air my views on what I’ve seen and experienced within various institutions of higher education. First on my list: university monopolies.

A quick primer for those of you unfamiliar with the topic (actually, your days playing Monopoly might be more relevant than you think) or who are a bit rusty:

Characteristics of a monopoly market

  • Me and my honours supervisorOne seller. If instead there are only few sellers (but more than one), then it is an oligopoly.
  • Pricing power lies with the monopolist. They set whatever price they choose, and customers must either pay that price or do without.
  • Rent-generation. Monopolists earn abnormal profit – unless, that is, this is whittled away by a fixed cost (see below).
  • Inefficiency. Further to the above – the monopolist’s profit is surplus taken from consumers. Not all of the surplus, except with some effective price discrimination, but certainly consumers are left worse off than they would have been with a more competitive market. And more importantly, the loss to consumers exceeds the gain to the monopolist – thus the inefficiency.


And now, what exactly am I talking about in the context of universities? Here are a few of the areas in which unis have a monopoly:

University Monopolies

  1. Courses taken towards your qualification. Although there’s always the prospect of obtaining credit for subjects completed at other institutions (e.g. on exchange), most universities have some minimum amount of courses that must be completed ‘in house’. Certainly that makes sense – it would be odd if someone could obtain a degree from Harvard having only completed their terminal semester there – but it nonetheless gives the university a monopoly over at least the majority of your education.
  2. Textbooks. Again, not a perfect example, particularly given the efficient secondary markets that arise once a textbook has been used for multiple semesters, but certainly one that will resonate with students. For many courses, to decline buying the prescribed textbook is to risk failure, so the incredibly high prices become an unfortunate but inevitable aspect of student life.
  3. Participation in your graduation ceremony.
  4. Photos of your graduation ceremony.

The last two items on my (certainly incomplete) list prompted me to write this post.

To attend my university graduation, graduands were required to fork out $100. Now, I understand that there are costs associated with graduation – staff labour and gown are the two that spring to mind – but $100 seems far too high to accurately reflect the marginal cost of including me in the ceremony. I have a pretty large melon and as such it took about an extra minute to fit me with a mortarboard, so I’m willing to add that to the labour cost, but even if the stench from my ego was so bad that they had to have the gown specially dry cleaned after I’d worn it, I still can’t come to a figure higher than perhaps $30-40 for my marginal cost. Hence I’m left with the conclusion that the uni is using its monopoly power over graduation attendance to extract rents.

PhotographerAs to the photos: although graduands were free to take their own photos, there was a photographer on stage during the ceremony whose company also had a vast labyrinth set up just outside the graduation hall where smiling students and loaded parents could purchase photo packs. But the cost – wowee, and ouch!

To be fair, they offered a very nice and very professional service, with photographers who obviously knew what they were doing, but boy did you pay for the privilege. To make it matters worse, the photographers presence on the stage lent the whole operation the air of being promoted by the university. Behavioural economics tells us that if this is the case, people will typically adopt the option implicitly suggested by the organisation, rather than taking their own photos.

Quick word on price – a comparison of the prices charged by the photography company with those asked by Officeworks for the same service (in terms of the finished product, at least) dispels any illusions that cost is the issue here. At least, not unless the photographers are being paid extraordinarily good wages.

So this company must be making a motza out of fresh graduates. But the uni isn’t stupid, and can pick and choose which company gets the spoils. So my bet is that the university is charging the company a fairly hefty fee for allowing them to cash in on the monopoly action.

But why is this all so bad?

That’s the million-dollar question, innit? My objections are two-fold.

  • Morally: I’m just not so keen on squeezing students, particularly in a world in which a university education is fast becoming indispensable for earning a decent living. Even if it ends up being the students’ parents who are squeezed (which is pretty likely in the case of graduation photos), it still seems like an organisation taking advantage of an emotionally-charged situation (who can think about cost when your little baby has just graduated?!).
  • Economically: as mentioned above, monopolies are inefficient. I, for example, would have liked some professionally-done photos to remember my graduation, but I was far from willing to pay what was asked. (I was even unwilling to ask my parents to pay, that’s how wildly out of the ballpark I thought they were!)

So to alleviate one source of students’ suffering and to decrease economic inefficiency in the world, universities should relinquish some of their monopoly power. Lowering the price of graduation to better reflect the cost and allowing more competition in the graduation photos market would be two good starting points.

Fantasy Leagues in everything

Top econ fantasy league pick right hereSo today I discovered that there is an economist fantasy league. I kid you not – check out the link! It works in a similar way to your garden-variety fantasy football setup: buy and sell economists, and score points based on their performance (which, in this context, means publications). Unfortunately, the market for economists is not super deep, which means that my desire to create a dream team of economists with whom I have personally interacted was over before it got off the ground. New players are randomly allocated 30 economists, and only those currently in teams are available to be acquired. Also, caveat lusor: to get involved you have to create a profile with RePEc. Not difficult to do, and also free, but makes highly visible your status as a layperson (I have zero publications and zero affiliations listed, sad).

Apart from enabling me to spend a happy half-hour messing with a new nerd pasttime, this also got me thinking: what other unlikely fantasy leagues could exist out there? I figure that there are three elements that need to be present for a fantasy league to be viable:

  • Easily accessible data source. For sports, no problem – everything is tabulated and ready to go. Similar for economists – publication data is a big deal (hence readily available), and simple to measure. On the flip side, a politician fantasy league (I’m thinking something like: points scored for non sequiturs and backflips, points lost for public gaffs) would be great, but difficult to source data for.
  • Broad enough base of interested observers. Not much fun playing on your own!
  • Adequate heterogeneity between players (that is, the units being used in fantasy teams). Without this, it becomes an exercise in finding hot shots or acquiring inside info on who is likely to take off suddenly. Still fun, but misses the tension present in, say, fantasy football, where there is the constant trade-off factor. That is, I might take a chance on a player with a low goal-scoring record but a huge amount of ball-time, or else I might stick with someone safe who doesn’t make many mistakes. This seems to be where the econ league falls down a bit – including conference papers, working papers, or something other than just actual publications might make it more interesting.

Check out those mad stats!

With that in mind, my top pick for outlandish potential fantasy league is: blogs. Google Analytics means that data are easy to come by, there’s plenty of interest, and the heterogeneity is more than adequate. I’d like to go out on a limb and predict that a blog fantasy league doesn’t exist yet, but if I have one firm belief, it’s in internet arbitrage: if you can think of it, it’s already on the internet somewhere. I’ll get googling straight after I finish this post.

Over to my readers, though – what fantasy leagues do you follow or would you like to see brought into existence? I’m looking forward to reading some of the suggestions…

Beating time-inconsistency and tomorrow Daniel

Following in a similar vein to my posts on discount rates and betting on weight loss, my friend and fellow economist blogger posted recently telling of the constant struggle between today Frankie and tomorrow Frankie. As she puts it: “When tomorrow frankie becomes today frankie, we have the issue of time [in]consistency.”

I hear you, Frankie. The war between tomorrow Daniel and today Daniel has pervaded my whole life – although interestingly, I find that sometime today Daniel gets the raw end of the deal. For example, when I decide to save my money at an embarrassingly low interest rate rather than reaping the utility gains today, that seems a lot like tomorrow Daniel irrationally getting his way. For the most part, though, tomorrow Daniel gets regularly exploited.

A solution is at hand, though – commitment devices! I talked about one in my post on weight loss. Another great option if you’re looking for something of the sort is Stickk. The idea is that you set a goal, decide the stakes, nominate a referee, and then (hopefully) follow through.

Bringing the Stickk idea back to tomorrow Daniel (and Frankie), the strength of the plan lies in the incentive shift. Suddenly today Daniel has an extra weapon in the perpetual war: tomorrow Daniel doesn’t just have his own laziness/profligacy/general disinclination to consider – there’s also the threat of losing the stakes that today (yesterday?) Daniel set.

Best part is, the stakes don’t even have to be monetary. In fact, I figure that social rewards (or punishments) trump financial any day of the week. For example, you could rig a system up to tweet something embarrassing if you don’t fulfil your goal on a given day. Or, simpler still, you could organise a mutual accountability pact with a friend – each of you will hold the other to their intentions, meting out a dose of (good-natured but effective) public shaming if they fail.

So there’s your answer – got anyone who can help you tame tomorrow Frankie?

Gambling as socially useful: weight loss betting

A pound of flesh?Alongside prostitution, gambling is one of those moral issues almost guaranteed to evoke visceral responses. It cuts to the core of the eternal socialist/libertarian debate – do we allow, discourage, or outlaw an activity with such obvious negative consequences for individuals and families?

In some cases, however, gambling might not be as bad as it’s cracked up to be. I’ve written before about using betting markets as prediction tools, something that I think will continue to grow in the future. The success of such attempts hinges on the power of monetary gain as a mechanism for yielding individuals’ best efforts. Recently I came across another initiative using the same underlying incentive idea, but with a different purpose: betting on your own weight loss.

Here is one diet casino site, although the simplicity of the idea makes me think that there are probably at least a handful floating around the web. The arrangement is quite simple: set your weight loss target, choose your bet, and provide some self-info. Then the company will tell you how much you stand to win, and check up on your progress at regular intervals (with a mechanism to prevent cheating).

The theory behind this is straight out of behavioural economics – betting is an excellent commitment device. Humans use these devices all the time to bridge the gap between long-term payoffs and short-term pain. Dieting, studying for tests, or being nicer to idiot co-workers all yield dividends sometime in the nebulous future, whereas the associated suffering happens now. The temptation, therefore, is to allow ourselves to cheat. Commitment agreements impose some sort of penalty for doing so (e.g. forfeit your stake in the weight loss betting scenario), to counter the short-term temptation. There is a good paper reviewing commitment devices here.

If it helps people lose weight, it must be a good thing, right? Well, weight loss is certainly a noble goal, and socially useful (fill in your favourite alarming statistic about obesity here). There’s more to it than that, however – some of my thoughts on the idea:

  • Returning to the casino analogy, the odds must be stacked in favour of the company. Although the site I mentioned early claim that they make money from “corporate and government clients who are interested in creative solutions to weight loss”, they still want to make a profit (on average) from each client. Thus those questions you are asked at the beginning (which include the strategy you are planning to use, your reason for wanting to lose weight, your gender and your height) will give the company’s actuaries a pretty good idea of how likely you are to succeed, and therefore how large the prize you are offered should be. Apparently in a normal casino the house edge ranges from 0.5% to 20%+, but since people have the dual goals of fiscal gain and weight loss in this scenario, I would be surprised if this company doesn’t skim even more off the actuarially fair payoff.
  • This flies in the face of standard microeconomic theory regarding risk aversion. Weight loss is an uncertain outcome, so you may end up disappointed or happy. Far from wanting to compound this by then betting on their desired outcome, risk averse consumers should in fact want to take out insurance against the possibility of them not achieving their goal. Any such insurance market would suffer from huge moral hazard problems, though, which is probably why (to the best of my knowledge) no such one exists…
  • Anecdotal evidence suggest that programs with one big weight loss goal and associated payoff (e.g. ‘The Biggest Loser’ TV show) work quite well to induce people to hit that target, but that the improvement is difficult to sustain – i.e. individuals often return to their previous weight. My guess is a crowding-out effect – the extrinsic motivation reduces the individual’s need to develop the intrinsic motivation that would have helped them continue the good habits they began while working towards their goal. I’m guessing that these weight loss bets will suffer from the same problem.
  • Further to the first point above, there’s a bit of an incentive misalignment operating. Individuals are signing up with a company that promises to help them with their weight loss goal (even going to far as promoting the services of their ‘Chief Fun Officer’ in doing so). The company only makes money, however, when their clients fail – something of a problem there.

If anyone has tried such a program as this or knows someone who has, I’d be fascinated to hear about your experience – tell us about it in the comments section below.

What I’m browsing 18/12/13

Some links for your internet pleasure:

Monopoly for finance enthusiasts

Did your family go down the Monopoly road? I think you can tell a lot about family dynamics from measuring Monopoly frequency, at least when the children are between the magic ages (between 8 and 15, by my reckoning). The game is notorious two things: causing fights and lasting for hours. I recently read an article suggesting how to make the game more interesting – go check it out.

My thoughts on Finance Monopoly:

  • Only the British Monopoly - don't give me this crap about 'Boardwalk'!A few more rules are probably needed to clarify the suggested additions. For example, order of debt repayments (does rent owed take priority over debts from previous turns? who gets first claim on a bankrupt player’s assets?), and timing of financial transactions (can you only deal on your turn, or does the engine of finance march on relentlessly?) are two that spring instantly to mind.
  • Boy would these rule changes allow the game to get fiendishly complicated, fast. Not sure about your typical family game on a Sunday afternoon, but if we played this at an Economics and Finance Society meeting, the game would probably last at least a few days.
  • On that note, there could be a role for a dedicated banker and ‘government’ – to hand out money, administer contracts, etc. I actually dreamed up a Monopoly variant like this a few years back, where players would be able to take on roles like ‘builder’ (gets the money from any construction) and ‘tax collector’ (gets a cut of any taxes). Watch this space – I may write a post about it at some stage…
  • For some added game theory fun, the rules could explicitly state that no contracts are enforceable – that is, players are completely free to tell their creditors to go to hell. You’d quickly discover whether a loss of reputation and access to the in-game credit market acted as sufficient deterrents.

My interest is now piqued – I’d quite like to see how a game of Monopoly Finance-style plays out! Anyone got six hours to spare?