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The Economy as a Prisoner’s Dilemma

The current economic crisis can be modeled as an iterated (multi round) prisoner’s dilemma between firms and consumers:

 

 

Business

 

 

Keep Workers

Layoff Workers

Consumers

Buy

7,7

1,10

Don’t  Buy

10,1

3,3

 

In the chart above, 1 is the worst outcome and 10 is the best outcome. The best mutual outcome is for consumers to keep buying merchandise and for firms not to layoff workers (this is economic growth). However, individually, if consumers think they may get laid off, not get bonuses, or not get a salary raise, they will stop buying things. This will be better for them in the short run as the worst outcome is for them to keep buying things and then get laid off, but the same “saving money” behavior will hurt them in the next round of this model, when firms lay off workers. The reverse is true as well, where a firm would benefit by “trimming the fat” even if its competitors keep their workers for the first round, but if all firms lay people off, consumers will stop spending (they won’t have jobs) and more layoffs will be necessary as purchasing power drops.

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Going Against the Grain: Job Perks Edition

Besides mass layoffs that have started in the economy, there have been reports of job perks being cut back or eliminated. This of course lowers morale, which lowers productivity, which leads to less profits (or more losses), which leads to more layoffs and more  job perk cuts….

It’s easy to be good to employees when times are good, but it’s also not as valued. If every company has a free breakfast and lunch, and free massages on Wednesdays, then it becomes expected instead of appreciated. Employers right now have the ability to win loyalty and boost morale by increasing job perks as everyone else is eliminating them (without being frivilous of course). This is also the best time to poach other company’s best workers (assuming you can identify them), especially by convincing them you keep your word.

You should institute enhancing job perks even if you need to lay people off. It might be a bit Machivallian in the “do all the bad things at once, and spread out the good things” sense. You can layoff a few more employees then you need to, and increase perks gradually for everyone else. As long as those that are let go are the worst performers, the ones that remain will become happier and more loyal.

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Financial Mania

“I knew it was time to sell my stock when the taxi driver was giving me investment advice.” Said one of the robber barons during the great depression. (A google search failed to give me a more specific citation.)

I came across this article today while reading about Rutgers Football:

“I’m broke,” he shrugged, while munching on a tuna sub earlier this week in the Hale Center. “I realized this could be a way I could make some money.”

“I roomed with him and he was watching all that stuff,” Silvestro said. “I’m in an accounting class, so I guess I should be paying attention. All the time he tells me what he’s going to do (investment-wise). I listen and it sounds good what he’s saying. I think he knows what he’s doing.”

When he’s not digesting Rutgers’ defensive playbook, Tverdov is searching for investment tips on the internet.

“I read some articles on CNN Money, MSN Money, and then I’ll buy a book here and there when I have time,” Tverdov said. “It’s something I’d like to do when I graduate.”

Problem is, Tverdov majored in criminal justice.

“Coach Schiano told me I could guard money, that’s about it,” Tverdov quipped.

I love the football team and am not trying to make fun of them. I’m glad they have other interests and are eager learners. This is just more of an example of  when anyone and everyone starts to think they can get rich off the market, that’s when a you have the makings of a bubble.

If you’re interested in why this is happening (and why it’ll happen again) you must read The Black Swan by Nassim Taleb.

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The Economic Downturn’s Effect on the Net Gen

As much as I’ve heard about how the economic situation (shhhh don’t call it a recession) is affecting baby boomers who are getting ready for retirement, I’ve seen very little if any talk about how it will affect the Net Generation (those born somewhere between 1981 – 1994).

If this keeps going as it is, here are the circumstances many net genner’s may find themselves in:

  • Unable to find jobs after 16+ years of school work in the system
  • Losing jobs that they just started
  • Realizing how nonexistent job security is before they’re dealing with mortgages, marriages and other things which make you stay on the treadmill

When this is combined with the quick realization that most of the jobs they do don’t really matter, what will occur? My thoughts:

  • A large proportion of Net Genner’s will learn to hustle — they’ll make money by working free lance and starting their own small business
  • Corporations will be ever more hard pressed to find the next generation of leaders, as most of the true leaders will be creating their own company and not relying on others
  • Since big money jobs are no longer seen as secure, more and more people may start taking jobs doing something they believe makes a difference

Am I being too optimistic? Are net genners less likely to be laid off than older workers? Are there different effects I’m missing? Discuss.

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Hours are a poor measure of productivity for knowledge workers

Mike and Matt have the same title at the same company. Mike comes in at 7am and doesn’t leave til 9pm. Matt strolls in at 11am, takes a two hour lunch, and leaves at 4 pm.

Who is perceived as the better worker?

Answer: Mike. He gives up his social life to be at work the whole time. This must signal he’s dedicated.

Here’s the real question though, who is the better worker?

….

The correct answer is: you don’t know, there’s not enough information. Matt can get more done in 5 hours of focused work than Mike can do in 14 hours. Matt might also be working from home, or thinking about how to solve a problem when he’s not at the office. Hours worked and face time do not equal effectiveness or efficiency.

Imagine that both you and your grandfather are given the assignment of finding out the daily operating hours for 5 major museums throughout the country, and your grandfather doesn’t know how to use the Internet. Chances are, you’d be done in 15 minutes and it would take Grandpa 1-2 hours.

In a team or large organizational setting, what’s a better measure of productivity than hours?

  • Piecemeal work – Every 100 insurance claims (or whatever) that you process pays you x dollars. For longer, more project based work, perhaps completing the project with detailed requirements, on time, or ahead of schedule results in different payments. Hours can still be used as an estimate.
  • Payment as a percent of value added – If you bring in $10 million of business for your company, you receive a certain percentage of this amount. This might be harder to do at lower job levels as more menial things don’t necessarily add value but are still required…
  • Competition based – For tasks that are repetitive (i.e. accounts payable, etc) the person who does the most piecemeal based work (with the least amount of errors) gets paid the most money. The second most productive gets the second most money. These stats could reset every pay period, etc. It would be a tournament style environment.

What other ways of measuring value can you think of?