Entertaining Economics

Celebrity vs. Paparazzi: The Kreps Wilson Chain Store Paradox

2011-10-10T07:50:00.000-07:00

Predation

Over the years several companies have been accused of unfair practises. During Margaret Thatcher's rule, British Airways was accused of lowering airline prices below their costs in order to push a new low-cost airline Laker Airways out of the industry. Freddie Laker was a pioneer of the concept of low-cost airlines. In 1966 Laker Airways was born by Freddie Laker, aggressive behaviour by British Airways led to the bankruptcy of the airline in 1982 (Margaret Thatcher and her relationship with Reagan was seen to be one of the causes of this bankruptcy. Watch the documentary here). Nonetheless, this didn't kill his dreams as he went on to operate his airline from the Bahamas. Laker Bahamas had two weekly flights to Florida and London.

Both the U.S. Department of Justice and the European Commission found Microsoft in violation of anti-trust laws in the 1990s. Some accusations included refusal to deal and putting restrictions in the use of their software. It is often hard to tell whether behaviour by a firm is anti-competitive or simply competitive.

The Arreda-Turner rule states that the firm is anti-competitive if its price is below marginal cost (i.e. making deliberate losses so as to steal consumers from the entrant to the incumbent). There are generally two core models reflecting firms strategies in anti-competitive behaviour. The Long Purse argument says that the incumbent (monopolist) has more money and can take losses for a greater period when lowering its price. An entrant into the market will exit as soon as the monopolist lowers its price, since it knows it cannot survive. Knowing that this is a possible strategy, a potential entrant would choose not to enter. The second is the Kreps Wilson "Chain Store Paradox" model. In this model, the incumbent will drive out the first firm that attempts to enter with lower prices, therefore creating a reputation and discouraging others from wanting to enter in the future.

Kreps and Wilson

The Kreps Wilson model is one of the most widely praised game theoretical models to date. Even though it is 30 years old it is still used in modern analysis.

A potential entrant has a choice of whether to enter into the industry or not. This decision is based on its belief about whether the monopolist will fight entry or accept entry. A monopolist that fights entry (i.e. by lowering prices) is known as a strong monopolist and a monopolist that accepts entry is known as a weak monopolist.

Conditional on an entrant entering, the monopolist has a choice of whether to fight or accept.

The full proof is in a sequential equilibrium paper but the conclusion is as follows:

If the entrant believes that the monopolist is weak and therefore has a probability of fighting entry less than a half.

In the early stages of the game, entrants do not enter as the monopolist will fight
In the later stages of the game the monopolist accepts entry with a positive probability. In particular, as it knows that the game will end soon - it considers accepting entry because it becomes too expensive to fight entry. When firms enter the monopolist has the chance to prove its strength. In this case if the monopolist accepts once, its reputation is lost forever.

If the entrant believes that the monopolist is strong and therefore has a probability of fighting entry greater than a half.

In the early stages of the game, entrants do not enter as the monopolist will fight. This period last longer than the case where the entrant believes the monopolist is weak.
In the later stages of the game, an entrant enters with a positive probability and the monopolist fights with a positive probability.

Nash Equilibrium:

The highlighted yellow line is the Nash equilibrium. The horizontal part reflects where the monopolist will always fight and therefore there is no entry. North east of the intersection with the curved line, the monopolist enters with a positive probability, In equilibrium, the monopolist is indifferent between fighting and accepting entry and the potential entrant is indifferent between entering and staying out.

It gives a strategy of each the monopolist and the entrant whereby neither player is willing to deviate from their strategy i.e. it is a Nash equilibrium.

Celebrity vs. Paparazzi

The story of the celebrity and the paparazzi is very similar. In the early stages of fame, the celebrity will fight the paparazzi regardless of whether the celebrity is aggressive (strong) or not (weak). In the later stages of the game when fame is fading and the celebrity is nearing the end of his/her career it will accept entry by the paparazzi with positive probability. If the celebrity is aggressive than this stage of accepting paparazzi into its private life will come later. Also, once a celebrity has accepted entry of a paparazzi into its private life - the celebrity has lost its reputation and the paparazzi is led to believe that any further attempted entry into the celebrity's private life will be accepted by the celebrity. In the last years of fame, the celebrity will always accept entry.

This is displayed graphically below:

Maximisation of Eating, Drinking and similarities with Tax Revenue

2011-10-10T07:49:00.000-07:00

So, I don't drink but I imagine that maximising satisfaction from eating and drinking have some similarities which is also reflected in some aspects of economics.

So, here we go. It is always tempting to eat more than what is sufficient to make you satisfied i.e. it is tempting to eat until you are full rather than until you are satisfied. I am a culprit in this, but why not...eating is the greatest pleasure in life - healthy food is something you should enjoy to the fullest. I find it interesting that drinking seems to have the same effect. It is tempting to drink beyond the point of being happy/tipsy and drink until drunk. It is my belief that you are less satisfied when full. Further, you are less satisfied when drunk (throwing up/forgetting what happened/potential hangover/making a fool of yourself) then when you are merry/tipsy. Knowing this, I guess we are too indulgent and still allow ourselves to reach a lower level of satisfaction.

There are similar concepts in Economics too. The tax rate to maximise tax revenue is often lower than the tax rate implemented. Politicians are aware that they receive votes to attempting a more progressive tax system and increasing tax on the rich (e.g. Buffett Tax) or equally market the notion of reducing budget deficits (very common in this economy) by increasing tax. Sadly enough, increasing taxes beyond the maximisation point reduces tax revenue because of agents evading and avoiding tax payments. Increasing taxes by too much distorts incentives to such an extent that without avoiding and evading taxes, agents do not have the incentive to continue at their previous level of productivity.

Bachelor Pad: Game Theory

2011-09-12T07:48:00.000-07:00

With the Bachelor Pad Finale out today, I thought I would give my prediction based on Economics and Game Theory.

Assuming the set up is the same as last year, here is the decision that the winning couple has to make:

it was the same exact ending as last season. Each player in the couple has to choose either “Keep” or “Share.”

If one chose “Keep” and the other chose “Share”, the one who chose keep gets all 250k.
If they both chose “Share”, they split the 250k.
If they both chose “Keep”, neither gets anything, and the remaining 14 contestants split the 250k.

There are two players in this game only, the remaining 14 contestants are not able to play this game. They simply get a reward as a result of the other players decisions.

In an ordinary circumstance, this is a prisoners' dilemma game. Where the two players simultaneously choose an action:

Cooperation would involve each player choosing "Share". Supposing that each player chooses share, given the other players' action as constant - each player has an incentive to deviate from his/her strategy. Basically, given that your partner chooses "Share", you would prefer to choose "Keep" rather than "Share" because you get 125k extra. Given that both players think this way, both players will choose "Keep" and end up receiving nothing.

The Bachelor Pad game, however, is different.

If they end up choosing Keep and seemingly greedy...the public persona of themselves will change. Of course, these contestants care hugely about the public opinion of themselves since they have appeared on Bachelor/Bachelorette and now Bachelor Pad.
Even though they are greedy for fame, they can still be greedy for money. Even though they did not receive compensation for Bachelor/Bachelorette, they did for Bachelor Pad and many of these individuals/couples throw public stunts to sell their story to a magazine. (Vienna is said to have sold her break up story with Jake to a magazine before even telling Jake!)
So which is more important to them fame or money? And surely they will still be famous having won Bachelor Pad anyway so, in that case, they can retain both fame and money.
Lastly, and importantly, most of these couples are actual together (possibly in love?) so there is another cost to choosing "Keep" - their relationship with their partner.

My opinion is that the bond of love/care is far greater than fame or money if it is genuine. So here are the couples and my prediction of the outcome if they reach the final:

Ella and Kirk - They are not in love neither do they care deeply for one another. They have both expressed the intense desire to have the money. "Keep", "Keep" will be the result and neither will receive anything if they get into the final. A typical prisoner's dilemma outcome.
Vienna and Kasey - It seems to me that Kasey's love for Vienna is far greater than that of Vienna. I predict that Kasey will choose "Share" and Vienna will choose "Keep" and walk away with the 250k having lost her relationship. However, Kasey is a schemer and has the capability to deceive, he might surprise us if we get to this stage.
Michelle and Graham - they are starting to be in a relationship...I don't think they feel strongly enough for each other to choose "Share"...this could go either way.
Michael and Holly - "Share", "Share". I predict they will split the 250k evenly. Even though they are not together any more and Michael is annoyed about her relationship with Blake - they care so much for each other. I can tell because Holly sent Blake home to spare Michael's feelings (well at least from that point on) and Michael is still in love with Holly. This is true love.

What are your thoughts?

Hair Trade

2010-10-02T10:36:00.000-07:00

Good hair. Everyone wants good hair. Thick, long, strong and natural-looking hair.

Of all the hair types, African hair is by far the toughest to maintain therefore alternatives to maintaining natural hair have become more popular. Relaxing, texturising, straightening and perming are some of the lengthy processes that people endure all of the sake of good hair. Hours of boredom in the saloon is not an issue, it is considered a social event. In fact, several films such as The Barber Shop and The Beauty Salon amongst others have been created to depict the vibrant social activity in hair salons. Although, this makes the time less of a sacrifice but the financial sacrifice is still large.

The "Good Hair" documentary created by comedian Chris Rock showed that relaxing hair can cost up to $5,000 annually. A relaxer is a type of lotion or cream which makes hair more curly, and harder to straighten by chemically "hardening" the natural curls. The active agent is usually a strong alkali, although some formulations are based on ammonium thioglycolate instead. As unglamourous as the chemicals sound, the outcome makes hair more manageable. However, Chris Rock suggests, and I agree, that natural hair should be celebrated and the perception of White people's hair should not be put on a pedestal. But where does this hair come from?

Indian hair is the most desired hair. Tirupati Balaji Temple in Andhra Pradesh, South India is the hub of good hair in India. There is a unique ritual of tonsuring of ones head in the temple premises and on a daily basis more than a ton hair are collected from the temple. The collected hair are publicly auctioned to international buyers from time to time for cosmetic use and hair extensions. This fetches the temple a revenue of more than 6 million rupees every year. It may seem like it generates a great deal of wealth in this part of India, however, this is far from the truth. Corruption in India leads to greedy locals cutting peoples hair in their sleep. As extreme as it may be, it occurs since hair is as precious as gold there. The demand for Indian hair in other parts of the world is not at all to blame for corruption in India and this should not be considered as an argument against Hair Trade as Chris Rock depicted.

What are your thoughts?

Flowers: Trade and Auctions

2010-09-19T02:48:00.000-07:00

Interflora is the world's largest flower delivery network. It can distribute flowers globally even promising same day flower delivery with an extra charge. This industry has always intrigued me. For a good that consumes a great deal of container space, low life expectancy, relatively unpredictable supply and low value, it is extremely profitable.Interflora flowers range from £19.99 to £89.95. It is clear that they are able to make profit on highly price items, corporate sales and their Interflora membership, maybe this is what is covering a loss on the lowly priced goods.

Where do this flowers come from? Netherlands is the world's largest exporter of flowers.But what makes Netherlands so competitive? Kenya, amongst other countries are rich in flower supply but they lack in competitive advantage. There is a clear reason for this...innovation. Aalsmeer flower auction is the world's biggest commercial building which is open for visitors. Flowers are stored in the warehouse and cruised slowly by five auction houses in the building where over 1,000 wholesalers bid live for these precious goods. Buyers bid electronically for the flowers, following the prices on the circular displays dominating the hall.

The auction is called a Dutch Auction. Prices starts from high to low and the first buyer to press the button is the only buyer. Due to the short life expectancy of flowers, the process happens in lightening speed. The computerised auction begins at 6.30am and within three hours, 21million flowers are sold from freshly cut greenhouses in the Netherlands. By Noon, the flowers are on jets bound for shops around the globe, destined to make someone's day.

The games we play: Do you do dare to pick up the phone?

2010-03-10T13:11:00.000-08:00

Game Theory is economics at its best. We are constantly playing games with one another. I'll apply game theory to day to day situations. I'll look at 2 x 2 matrices and larger matrices if needed, i'll also look into signalling games and advanced game theory.

Who will pick up the phone? No one wants to answer the phone because of laziest to go to the phone and relunctancy to have small talk with someone who called for someone else at home. Unless a player is sure that the phone is for him/her, they'll not answer the phone. But there is a trade off. When the phone keeps ringing its annoying! At that point anger sets in!

Each player has two strategies, pick up the phone or let it ring. If he lets it ring and the other player picks up, he gains in utility. If he picks up whilst the other player lets it ring, he looses in utility. If neither player pick up, they both loose in utility since they miss the phone call and irritation kicks in.

So far the game looks like the famous Prisoner's Dilemma but we haven't considered the last outcome. The top left hand corner shows a case where play do want to pick up the phone. In this case, I should this as a race to see who gets there first. A probabilty is assigned to getting there first receiving a positive utility. This probability is dependent on various factors including determination to get there first, proximity to the phone when it starts ringing, speed and alertness. There is ofcourse a chance that the play will not get to the phone first, and therefore have negative utility.

I believe that the need for picking up the phone or not is externally assigned by nature. If nature chooses that a player does not want to pick up the phone, they find themselves in a prisoner's dilemma where the likely outcome is when the call is missed because each player chooses the strategy of letting it ring (because of the positive utility gained in the top left hand corner and bottom right hand corner of the first game). On the other hand, if nature chooses that players want to pick up the phone, then its a battle of which player has the higher probability of getting there first!

Because film writers don’t do their research, and the producers, directors and actors don’t know any better, the public is faced with the pain of watching factually WRONG films!

2010-02-23T07:35:00.000-08:00

You’d think that if some was going to write a film based on economics, they’d do some academic research…you’d be wrong. A Beautiful Mind is a prime example where the game theory is WRONG! Starring Russell Crowe, this film is a reflection of John Nash’s life. John Nash pioneered Game Theory, a widely used concept today, with the introduction of the Nash Equilibrium. The idea of the Nash equilibrium is such that, each player plays the action that gives them the highest payoff (this is the best response of each player) subject to the expected action of each of the other players (assuming the other players are rational and also play their best responses). The Nash Equilibrium is where the best responses of all the players match.

Now, the bar scene of A Beautiful Mind shows four men notice a blonde attractive lady walk into a bar. Russell Crowe, as Nash, calculate that the best response of the four men is to go for the brunettes rather than try for the blonde, even though the expected payoff of getting the blonde is perceived to be higher than the expected pay off of a brunette. Click here to see the basic economic proof. How could director Ron Howard and screenwriter Akiva Goldsman get Nash’s theory so wrong?

Films that would make Darwin and Einstein blush! Source

DEEP BLUE SEA (1999)

Starring: Saffron Burrows, Samuel L Jackson

A scientist sticks a syringe directly into a shark's brain, extracts some cells, places them under a microscope, and watches as the cells regenerate... complete with computer-generated sparks. "When we're talking about neurons firing, there's not any actual lightning," notes Mr Le Comber.

THE 6TH DAY (2000)

Starring: - Arnold Schwarzenegger x 2

Cloning living organisms is difficult enough, but the man behind the "illegal" cloning also pulled off a scientific first by cloning a dead person (his wife). While noting this supposedly romantic gesture to be "a little bit creepy" Mr Perkowitz's main beef is with the science. It may also lead people to believe they can die and easily have their DNA harvested and cloned, he fears. In reality, DNA is fragile and quickly degrades after death - a point that even the fantastical Jurassic Park had nailed, a full seven years earlier. In it, the dino-DNA had to be preserved in sap.

THE CORE (2003)

Starring: Aaron Eckhart, Hilary Swank

When the crew reaches the Earth's centre and disembarks, their leader only breaks a slight sweat. But anyone who found themselves within spitting distance of the Earth's real core would find "instantly vaporise", Mr Perkowitz says.

A Fine Balance: The Economics of Efficiency Wages

2010-02-13T10:36:00.000-08:00

I travel on what I believe is the world’s most unreliable train service everyday! Drivers consistently “shirk” and waste much of their energy protesting against their wages with the support of the union.

Believe me, I am all in favour of unions supporting workers that have been victimised by profit-maxmising and morale-thrashing capitalist firms. Lets take China for example. Everyone knows Nike’s kafuffle (understatement of the year) in China. Employing child labour and charging less then minimum wage in unhealthy environments and harsh physical labour is a real situation where unions are more than entitled to step up and raise the voices of the employees. On the other end of the spectrum we have France where unions seem to enjoy their power and show this in the form of riots more often than desirable for producers!

Now we have my train network. Drivers have been protesting for months, a limited service ran for the entire month of December when everyone knows that drivers seem to be rolling in money given the lack of skill and knowledge required for the job. Given that we are in the midst of a recession, you’d think that the managing directors would just substitute these drivers for the ample cheap labour available due to high unemployment!

Now, I’ll look at why it is that people shirk. The Shapiro-Stiglitz model shows this perfectly. I won’t go into the mathematics of the model since that might bore most of the readers but if anyone wants the proof please message me and I’ll send you my proof.

The Shapiro-Stiglitz model is in informational structure of employer-employee relationships and the results of imperfect monitoring of workers effort on the job. This relationship is shown in the Principal-Agent problem. The principal is the employer and the agent is the employee. The principal will tell the employer to do a piece of work but given that there is imperfect monitoring there is a risk that the employee will not carry out the work.

The Shapiro Stiglitz model estabilishes a No-Shirking Condition, where the gap between the principal and the agent is eliminated. The firm must pay enough such that the workers choose not to shirk such that:

Workers strictly prefer employment to unemployment

Thus, workers receive rents (salary).. The Shapiro-Stiglitz model models an efficiency wage i.e. a wage such that the employer pays the least possible amount such that the employees does not have the incentive to shirk.

The efficiency wage is:

Increasing in the cost (disutility) of effort
Increasing in the ease of finding new job
Increasing with the likelihood that the job would be lost soon anyway (due to exogenous factors e.g. the company getting taken over, going bankrupt, moving branch plants etc.)
Increasing in the discount rate (less emphasis placed on the future)
Decreasing in the probability of shirkers detection

Read more of my articles on Economics:

The Economics of Committing Adultery: I formed my own model showing the supply and demand of committing adultery.

Price discrimination in Indian Markets: A reflection of the price charged to native Indians as compared to that charged to tourists visiting India.

Price discrimination on Airplanes : Why travel by First and Business Class as compared to Economy Class?

For all the articles that I've written on Economics click here.

Price Discrimination in Indian Markets

2009-12-31T10:31:00.000-08:00

Whilst writing about price discrimination on airlines I thought about price discrimination for the same product. My discussion about airlines concerned the price discrimination between economy, business and first class. These three catergories are inherently different services and therefore understandably have different prices. However, often the same good can have an entire range of prices reflecting how much each consumer is willing to pay.

The Economist illustrates this idea on a global level. The Big Mac Index shows the differing price of the MacDonalds burger across the globe.

The Law Of One Price (LOOP) suggests that in this case, where prices of the same good vary globally trading would result in the price levelling out over time. The LOOP breaks down here due to transportation costs, storage costs, non-tradable goods and also because of the fact that this reflects a small percentage of one's income that generally the consumer would not search for a lower price.

However, there can be cases that the same good in the same shop is sold to customer A to a price 6 times higher than to customer B. I travel to India every Christmas and this Christmas I did the same. As usual I spent most of my time in Mumbai (Bombay) shopping in markets and malls. I went to a market on Linking Road in Bandra and a market in Colaba. Since I am Indian and know what the local price should be and can negotiate in Hindi - I have a great deal of bargaining power, but not nearly as much as kids who were born and live in India (and yes the sellers can tell who belongs into which catergory immediately). Tourists, on the other hand often try to bargain and bring the price sound significantly enough that they think they are getting a good deal but such that the seller is still making a much larger profit than he/she would on an Indian. I noticed two tourists that were interested in a braclet in a stall in Colaba. The seller's first price was 250 rupees and after some haggling, the tourists pulled the price down to 180 rupees. They were ectastic to get the braclet for 70 rupees less than the asking price and at a very cheap price than what they'd usually pay at home. I was interested in the same braclet and the vendor offered it to me for 20 rupees.

Price Discrimination on Airplanes

2009-12-31T10:05:00.000-08:00

All big commercial airlines use price discrimination as a large source of income. All passengers will travel from location A to location B but the experiences may vary. Price discrimination allows airlines to charge different prices for a service. On airlines the varied experiences are:

Economy Class - the most common and least luxurious service

Business/Premiere/Club Class - the Intermediate service

First/Upper Class - the premium service

I am a strong believer of enjoying luxuries using your hard earned money. I honestly can't understand why people who have worked so hard count their pennies and do not enjoy life. Of course, it is important to give to charity too but life is short and you should take time out from work to enjoy yourself. Yes, travelling First Class may not be how you'd like to spend your money, of course a lot of people find it to be an unnecessary expense. After all, a flight only lasts of a limited amount of time and one may prefer to spend their money of something more permanent like a house which is sensible and understandable.

Anyway, I diverted away from my point. I wanted to ask whether you think whether the service is worth its value? This Christmas I travelled by Business Class. Honestly, I loved it. Normally, happiness kicks in once I reach the destination but hate the ride to the destination! This time, I actually looked forward to my flight,. Having said that, I wouldn't spend even more money on First Class. The extra luxurious on First Class on the flight I was flying I did find to be unneccessary. In my Business Class seat I was able to lie flat, I could have my bed done for me (they'd put a mattress on the seat), great food (I never normally eat plane food but I munched it all up), popcorn, haagen-daaz ice-cream, big TV screen etc. The additional services that First Class offered were more space (which I found to be unneccessary), a touch screen remote control for the TV, even better food and a private cabin in which you couldn't be disturbed (which would probably make me feel lonely). The danger now is that I could get used to Business Class...

Bonus Tax

2009-12-13T03:42:00.000-08:00

Unless you've been living in a cocoon you'd realise that a bonus tax has been imposed on banks in the UK last week. The French shortly followed with a similar strategy a few days later. UK banks will be taxed an extra (on top of income tax) on 50% of any bonus over £25,000. The bonuses will be pooled and taxed before it is distributed to the employees, therefore it is a tax on banks rather than bankers.

There had been a great deal of critcism regarding this tax since it is only implemented until April 2010 and there are various ways banks can avoid paying the tax. In many ways it seems to be more of a political move to gain votes in the next election rather than reduce national debt. They can simply hand out bonuses after April 2010, make the basic salaries bigger or deferr bonuses till next year. Anyhow the government predicts that only £550m will be obtained in revenue by the government as a result of this tax. Although I believe that this is immoral and would never support it myself, a 1% increase in the lower tier income tax would generate £25bn.

Since the upper tier of the UK Income tax is now 50% of income above £150,000, this combined with the bonus tax makes the UK banking and finance less and less competitive. When talks were underway of a bonus tax, many bankers threatened to leave the UK in pursuit of banking jobs globally with high remuneration. The many attraction for graduates to the banking industry in the high remuneration and the high level of competitiveness and challenging environment which is as a result of the remuneration. It would be a shame for graduates to not aim for challenging jobs as a result of less pay.

Paul Krugman, my favourite economist and author of "Conscience of a liberal", supports the tax imposed by Alistair Darling. He writes in his blog:

Darling, I love you

OK, that’s way too strong. But Alistair Darling’s new super-tax on bank bonuses sounds like a good idea, on first read. Or as Justin Fox puts it, why the heck not?
Are we afraid that the best and the brightest will leave high finance and pursue other occupations? That strikes me as a good thing: everything we know suggests that the rapid growth in finance since 1980 has largely been a matter of rent-seeking, rather than true productivity. (As Paul Volcker says, it’s hard to come up with any clearly productive financial innovations of recent decades other than the ATM).
Or are we worried that it’s just unfair to discriminate against high-earning bankers? Bear with me while I stop laughing. More seriously, the whole sector has just been bailed out at immense taxpayer expense. Some payback seems entirely reasonable.
So, the details need analyzing. But on the face of it this looks entirely reasonable.

The Economics of Adultery

2009-12-12T10:57:00.000-08:00

The press have been having a field day with the unraveling of Tiger Woods's mistresses, and rightly so, but underneath all the scrutiny will he manage to keep his marriage? We've seen this same story multiple times, most recently with David Letterman too.

First lets look at the economics of commiting adultery. Each individual aims to maximise utility within their lifetime. Utility or happiness is a function of health, wealth, knowledge, emotional love, physical love,and other factors.

Utility = F(Health, Wealth, Knowledge, Emotional Love, Physical Love, Other)

Physical Love = K(Variety, Other)

Within this, physical love is a function of variety as well as many other factors. Women have higher resistance to temptation than men. In addition, celebrities have a great deal more opportunity to obtain physical love due to their wealth and fame. One element that is crucial to point out is that there are diminishing marginal returns to physical love as borne by higher variety. By this I mean that the more people one experiences physical love with, the lesser the utility that is derived from it.

Now, it is a different story with commitment is incorporated, the equation changes. Without commitment, utility is unconstrained and only affected by the diminishing rate of returns derived from variety. When commitment is involved, one maximises utility derived from physical love ceteris paribus (assuming all other factors remain constant) subject to the loyalty and love for your partner, the love for one's mistress, guilt felt to oneself, the risk of getting caught and thus the hurt felt from one's partner and offspring and other repurcussions. The level of loyalty and love for one's partner, guilt felt to oneself and the love for one's mistress fs known and the other factors are estimated by the potential adulterer. However, if the potential adulterer feels little guilt and the estimated risk of getting caught is low or if he/she is indifferent about how his/her partner and offspring feel, he/she will continue with the act of adultery. Where risk and guilt are high and loyalty is low, the probability of commiting adultery is higher.Of course some do pay to commit adultery but for those who don't pay, I assume that the price is the level of risk that they incurr.

Having looked at the demand side, i'll now take a look at the supply side. As I mention earlier, celebrities tend to have a high supply of potential mistresses, as compared to the "normal" person. I assume that the level of supply is correlated with fame, good looks and wealth. Of course, even when supply is low i.e. there is only one person with which the adulterer would consider having an affair, the likelihood of having the affair can be high but the "quantity" or variety is still low. This concept is demonstrated using simple supply-demand diagrams.

The supply is greater for a celebrity. Indeed, a "normal" person can be rich and good looking and therefore supply would increase for them as well. The repurcussions are much larger for a celebrity than I "normal" person, this would effect the demand function as mentioned earlier. Tiger Woods's affairs have led to his biggest endorsers pulling out and a destruction of his reputation and public persona. Just yesterday it was announced that Tiger would be taking "an indefinite leave from golf to focus on his personal life". Unlike Tiger, David Letterman has managed to maintain his career as a talk show host. I believe this is mainly because it is no surprise that Letterman cheated on his wife, however Tiger has a "good-boy" persona.

Now we will take a look at the otherside, the partner who has been betrayed. It is honestly beyond me why they continue to commit to their partner after such an act (or multiple acts in the case of Woods and Letterman). For this I was unable to think of a formula. I thought it must've been for money but they would almost certainly get half in the event of a divorce. So maybe it is love. Maybe they are able to forgive their partner, even after cheating on them multiple times, because of love.

The world’s most expensive objects: by weight

2009-12-01T12:27:00.000-08:00

I found this chart (above) on The Times a few weeks ago, it still shocks me! I started thinking about how often we use these goods and what we would consider the value to actually be.

I think we can immediately discard a satellite and the extremely rare stamp has purchases most people would never make. For those with an addictive personally, recession or not you should remove cocaine and wine from your shopping list. Simply doing that will remove a significant portion of your debt and of course make you healthier. Those two are also good that I never plan on purchasing.

Now Jewelry such as platinum ranks high on this list but I think this is justfied since it has a high and growing re-sell value and it lasts a lifetime. Gold, Silver and Platinum can always be melted and sold on or moulded to make other jewelry adapted to changing preferences and tastes. The Intel chip is probably the most valuable item on the list to me. This chip is responsable for the availability of knowledge and vast communication networks globally.

Saffron and Printer Ink are the most shocking on that list. I use these two goods daily and I feel that both have a short life span. I have always felt that saffron is the best smell in the world and I have saffron in my milk every night during Winter. Although I have a printer at home, I mainly use printer ink at work at the expense of the company! What is the biggest expense for you? and which would you quantify as being the most valuable?

Corrupt World

2009-11-18T01:54:00.000-08:00

Transparency International came out with their annual Corruption Perspections Index ranking 130 countries on a scale from zero (high corruption) to 10 (low corruption), according to their level of corruption.

New Zealand was on Wednesday named the world's least corrupt nation out of a list of 180 countries, unseating Denmark after a year in which the global recession and ongoing conflicts proved challenging. In second place was last year's leader, Denmark with 9.3 followed by Singapore and Sweden tying at 9.2 and Switzerland at 9.0.

Countries at the bottom of the table were those which are unstable or impacted by war and ongoing conflicts that have affected the public sector and torn apart governance infrastructure. Somalia had a score of 1.1, Afghanistan was 1.3, Myanmar ranked 1.4 and Sudan tied with Iraq at 1.5.

Rounding out the top 10 least corrupt nations were Finland, the Netherlands, Australia, Canada and Iceland. Britain came 17th in the list and the United States was 19th with a score of 7.5.

More than 130 of the countries scored below 5.
Source: Reuters