June 11, 2007

The Economics of Gift Cards and Irrationality

Filed under: Books,Market,Observations,Public Choice — admin @ 6:56 pm

This is Josh Hendrickson commenting on Jennifer Pate Offenberg’s article about gift cards in the Journal of Economic Perspectives.

Essentially, this welfare loss arises from the stigma of giving cash. I have always been fascinated with the fact that giving cash is viewed as inappropriate, yet gift cards are somehow more acceptable. The gift card, as Offenberg points out, is simply a cash gift with a restriction on where the gift can be spent.

An explanation of the aforementioned observation occurred to me while currently reading “The Myth of the Rational Voter” by Bryan Caplan. Caplan explains that voters are more willing to make irrational decisions as the cost incurred from the decision decrease. Because voters face practically no cost for believing whatever makes them feel good (rational or not) they are more likely to pick bad policies.

Possibly gift cards are way of gifting the the psychological benefit of irrationality to recipients. Here, enjoy some extra coffee or a book from Borders that you would not normally buy because you act rationally in the market. In addition, the restrictions ensure that the gift card cannot be spent on something more useful (e.g. gas for the car).

Read more:
The Economics of Gift Cards ┬ź The Everyday Economist

June 30, 2006

Fusing Organizations and Market Knowledge

Filed under: Aggregation,Market — admin @ 5:31 pm

Information technology is undoubtedly changing the way the live, but the most radical shift will be in the way organizations connect with the market’s knowledge. We can already see this already occurring. The market supplies Amazon with preferences, and in turn Amazon processes it into relevant recommendations. The market supplies Google with hyperlinks, and in turn Google processes it into better search results. There are two recent incarnations that follow this same pattern. First, Crowdsourcing is where the market actually supplies an organization with goods (e.g. Photography) via the web and in turn the organization redistributes it to those who want it. Second, Freedbacking is where the market supplies an organization with constructive feedback, and in turn the organization can process and make better decisions about product updates.

The market as a vast resource of knowledge isn’t exactly new. In 1945, F.A. Hayek proposed that market price was an aggregation of the market’s knowledge on the scarcity of a resource. Within the last couple of decades there has been an explosion of research and commercial applications of this concept (usually called Information Markets). The most notable example is the Iowa Electronic Markets, a market for predicting economic and political events. A more interesting example is the experiment between HP and Charles Plott where an internal information market was able to forecast future sales better than top sales executives. And now, as mentioned beforehand, we are seeing even more interesting dynamics linking market knowledge and organizations.