An Economist Measures the Fear of Letting Go

Here is a fascinating report from the International Herald Tribune:

‘Predictably Irrational’: Keeping (too many) options open

MIT economist Dan Ariely’s new book Predictably Irrational identifies various patterns of behavior in which people — not just a few people, but basically everyone — can’t endure the discomfort of making a rational decision. The article focuses mainly on one experiment based on a video game with three doors. Players wasted effort and lost out on points — which in the experiment translated to real money — just trying to keep all the doors open.

I believe this is the same pattern I see in people who keep too many possessions — clothes they have no reason to wear, movies they don’t want to watch, food that no one wants to eat, and so on. The resulting clutter comes with costs that are hard to ignore, yet somehow people do ignore the cost of clutter and focus instead on the value of the possessions, even when that value is entirely imaginary.

Castro’s Quiet Exit

For half a century, there were people who talked about ways to get Fidel Castro out of office. There were plans for invasion, civil war, and assassination. Today, Castro is quietly retiring from his various positions as leader of Cuba. It is better that it happens this way.

It’s easy to say now that the people who thought war was necessary to unseat Castro were mistaken. Cuba never did become a disaster zone under Castro, nor did it become an ongoing threat to its neighbors. Its economy may have progressed at a painfully slow pace, but it never crumbled.

It is easy to criticize the Cuban government’s management of the country in recent decades, yet whatever faults they had were not so costly as to justify a war. Patience has its price, but the price of war is much greater. With the benefit of hindsight, if you imagined a war undertaken in Cuba just to hasten this day by a few years, you would say, “For what?”

No one knows what will happen next in Cuba, and the people who want a more effective government for that country are not satisfied with the mere departure of its longtime leader. I imagine that some are saying that now would be an opportune time for the war they have been waiting for. Yet uncertainty and impatience does not add any weight to the case for war. If there were a war, the aftermath would be more uncertain and could easily take longer to clean up than the current situation. Those who are foolish enough or desperate enough to seek the aid of the god of war never know what their reward will be.

Sharper Image Bankrupt As Consumers Turn Cautious

Sharper Image’s surprise bankruptcy filing yesterday seems to be the result of the same trends in consumer spending that emerged elsewhere around November and December. Consumers are cautious and trying especially hard to spend wisely and purchase things that have clear practical value. We saw this, for example, in the sudden shift toward gift cards after Black Friday, then in the fact that consumers have been unusually slow to spend the gift cards they received in December. Now Sharper Image faces a “severe liquidity crisis,” in the words of its CFO, meaning it finds itself with way too much inventory and not nearly enough cash.

I have to guess that Sharper Image overextended itself for the holiday season, perhaps relying on the economic reports during the early fall that said the economic slowdown did not seem to be affecting luxury goods at all. By December, luxury goods were tanking, and the bloated markups that made Sharper Image profitable in the past were driving customers away. In the end, holiday sales could not bring in enough money to pay the bills.

If this scenario is correct, then Sharper Image’s troubles are a classic boom-and-bust story. People in a hurry to get ahead of the competition (“boom”) go too far in the wrong direction and are forced to come to a sudden stop (“bust”). In this case, it seems Sharper Image was betting too heavily on gimmicky image-boosting products (well, that’s their name, after all) in a time of uncertainty that led consumers to look for practicality instead.

Reports from two other retailers are consistent with this picture of consumer sentiment.

Wal-Mart reported a nice gain in revenue for the fourth quarter — a gain that came right after the retail giant gave up on a two-year campaign to raise its prices. Wal-Mart’s move back to lower prices came at just the right time to catch up with consumers’ move in that direction, and the higher profit shows that it was the right decision.

Lillian Vernon, a painfully unattractive gift catalog that got by for years on its homey style and low prices, has also filed for bankruptcy. Lillian Vernon today is featuring ceramic Easter baskets and fake-rose mailbox decorations, and items like these are a tough sell, despite their low prices, when consumers turn cautious.

After eBay, Online Sellers Hope the Auction Format Is Still Alive

EBay, a name that was once synonymous with online auctions, has taken further steps to shed its auction business with dramatic fee increases that seem designed to give an advantage to its largest sellers. The 15 percent discount for most large established eBay sellers is enough to make it impossible for a new seller to compete. And even for the most successful sellers, the handwriting is on the wall: they have to convert to the store format or risk being marginalized and eventually eliminated from the site.

Some sellers are planning a boycott of eBay next week, but others are just leaving for greener pastures. Stories in AuctionBytes.com and CNNMoney describe a mass exodus from eBay to other auction sites — a process that actually began when Yahoo shut down its auction site last year. These are online auction sites that some sellers are moving to:

• eCrater
• Tazbar
• ePier
• Bidville
• OnlineAuction.com
• Vegbay

Each of the competing sites has at least one key advantage that eBay could never match, should it decide to return to the online auction business. Some of the sites have no seller fees, a much lower cost structure, support for swapping, flat monthly fees, Google Checkout support, etc. And after this month they’ll have another advantage that eBay won’t be able to match: shoppers who like the online auction format. After eBay pulls the plug on its auction search interface, which apparently it is ready to do any day now, auction fans will still be able to find the online auction experience on these other sites.

Don’t Put Your Retirement Savings in One Bank!

Many people assume U.S. bank deposits are safe because they’re FDIC-insured. That is true up to a point, but more people than ever are going beyond that point and I’m afraid that not everyone understands the risks involved.

FDIC insurance for any one bank is limited to a maximum of $100,000 per account owner. That means if your bank goes under and you have less than $100,000 in all your accounts combined, the FDIC will make sure you get your money. If you have your IRA in a bank, it is insured separately up to $250,000. That’s a lot of money, and more than most of us have in the bank on any given day. But it is not nearly enough to live on for the rest of your life, so when you put your retirement savings in the bank, you need to think about it differently than the checking account you use to pay your bills. It is worth the trouble to make sure your life savings is insured.

Bank failures are rare — at least they have been in the United States during the 75 years since the FDIC was created. The mere presence of insurance makes bank failures unlikely because people don’t have to panic at the thought of the bank running out of cash.

Yet banks continue to fail. Two weeks ago, Douglass National Bank in Kansas City, Missouri, was shut down. Read the news about banks, and you may come away with the impression that bank managers are not the brightest people you will ever meet. You can’t count on your fingers the number of large corporations that have had multibillion dollar lines of credit from multiple banks for months after they were effectively bankrupt. Or look at Bank of America, already in distressing financial condition itself because of bad loans, spending an enormous sum last month to buy a failed lender that was thought to have the largest concentration of bad loans in the world. It’s important to remember that there are thousands and thousands of banks, and it’s mainly the banks that get themselves into trouble that get in the news. But as long as banking executives make bad decisions, there will be banks that fail. And in 2008, with the global financial system in crisis, it’s fair to expect that more than one or two banks in the United States will go under.

But you don’t have to lose any money from a bank failure. It’s really very simple to have all your bank deposits fully insured by the FDIC. Put them in more than one bank, making sure that each bank is on the FDIC’s list. This can be as simple as going into five, ten, or fifteen banks, if you have that much money to put in the bank, and buying a $100,000 certificate of deposit at each one.

Everyone should have at least two banks — it lets you continue spending money in the event that the bank has a problem. For most of us, it’s enough to have a checking account at one bank and a credit card issued by another bank. But when your savings start to spill over the $100,000 mark, and it’s money you can’t afford to lose, it’s time to move some of it to a second bank.