I’ll Have Another Order of the Escalade, Please

My wife recently relayed to me an odd story told to her by a car rental agent. This agent told my wife about a woman who for months has rented the same Escalade over and over, renewing her rental agreement for a few weeks at a time. Escalades are considered premium/luxury rentals, so the bill has mounted quite rapidly. At this point, she could have easily taken all that money she spent and bought herself a new, albeit modest, car.

The question is why is she “wasting” so much money?

Given my past training in economics, I could not accept that this woman (let’s call her “Elaine”) is behaving irrationally – I searched the deepest corners of economic logic to explain Elaine’s behavior. One saving grace is that she has not spent so much that she could have purchased an Escalade outright. This condition allows me to create two key assumptions (every economic theory needs convenient, simplifying assumptions):

  1. Elaine’s, uh, business cannot be conducted without an Escalade. The style, the comfort, etc… is an absolute necessity to demonstrate to her customers that she is one of them, rich and powerful and ready to deal.
  2. Elaine’s business is very uncertain. She lives from deal to deal. She works hard to close every deal, but she cannot afford to count her chickens more than a few weeks out. (Maybe she sells real estate to high-end clientele?!?)

These rationalizations mean that Elaine cannot risk committing to a $60,000+ purchase or even a less expensive lease, but each deal earns her enough to generate the $500-1000/week it costs to rent the Escalade she requires for her business. When she closes another substantial deal, she happily skips to the rental car agency to ask for another extension.

So is there a point at which Elaine is better off purchasing the Escalade? Not at all. As long as she is never “sure enough” about a $60,000+ income stream, she is better off buying what she can afford and still conduct her business. (Not to mention few banks, if any, especially these days, would even consider loaning money to Elaine for buying the car or for funding the business given the looming uncertainties!) At some point, she may save enough money to buy the Escalade outright, but it is also possible she has other expenses that prevent her from saving enough Escalade-money.

In other words, Elaine may be doing what so many people do NOT do – buying what she can afford now and not burdening herself with debt she can only aspire to afford.

This parable reminds me of something Nassim Taleb – the famous author of “The Black Swan: The Impact of the Highly Improbable” – said about confidence and debt:

“…overconfidence translates 1-1 into accumulation of debt…I know I’m going to make an 8% return, and if I underestimate my error rate I will know with certainty I’m going to make an 8% return, so if I borrow at 5% I can leverage up the wazoo. (“Taleb on Black Swans, Fragility, and Mistakes“, interview with Russ Roberts on EconTalk, May 3, 2010).

Go Elaine! And happy deal-making!

A Cadillac Escalade
A Cadillac Escalade

Twitter’s “Tragedy of the Commons”

The “tragedy of the commons” (Garrett Hardin, 1968) is a concept in economics that describes how a group of self-interested individuals can destroy a shared (and free) resource. Hardin’s classic is example is a group of herders who destroy a pasture as each herder maximizes his/her number of grazing cows to make the most use of the shared (common) pasture. The tragedy is that the destruction of the pasture is in no one’s interest even as maximizing use of the pasture may be in each individual’s interest. It seems Twitter may have brought the tragedy of the commons to the internet.

In “Can Twitter Be Saved?,” Mark Gimein writes that Twitter will collapse from the sheer volume of users and messages if users do not focus and reduce the number of their feeds, and if Twitter does not develop some automated tools for helping users filter out the garbage from the useful. Gimein’s description of the typical Twitter behavior strikes me as a classic tragedy of the commons scenario: users (herders) barrage their followers with messages in an effort to attract the limited and finite resource of attention (the pasture). Access to this attention is free and messages effortlessly accumulate for all to peruse, so it is no wonder that many users liberally sprinkle “Twitter-space” with chatter and, in parallel, follow as many users as possible in an effort to attract as large an audience as possible.

While charging for anything on the Internet is tantamount to heresy, Twitter may be forced to set up some kind of fee structure to have any hope of constructing a more useful (and efficient) experience as the number of users appears ready to engulf the entire planet. Here is one example of what Twitter can do (my own unsolicited advice):

1. Charge a small fee to join, say $10/year; perhaps even charge $50-100+/year for corporate accounts where identity is authenticated and validated by Twitter. This fee mainly captures some of the immense value that people get out of the service and provides some funds to develop the automated tools that Gimein recommends. It also gives users one extra sense of ownership and, perhaps, an incentive to act responsibly. Of course, venture funding could easily replace subscription funding but only in the short-term. Someday, Twitter will need to generate sustainable revenues from something (even if it is charity!).
2. Charge a very small fee for messaging. There are many ways to do this, but the fairest method would be to charge something like a penny for each tweet past some high daily or weekly threshold. This provides the financial incentive to focus messages.

One might reasonably ask why Facebook does not face a similar problem with a tragedy of the commons. I suggest that Facebook is not a commons where anyone can and will attempt to siphon off a user’s precious attention. On Facebook, users typically only accept links to friends and family and people one or two degrees separated from that closed network. Because users either know or know of everyone in their network, there is an automatic incentive to ration attention-grabbing activity. Users are their to share their lives and to participate in the lives of others. There exists a huge incentive to focus one’s network on the things that really matter in one’s life and not to drown those moments and memories with trivialities and incessant self-promotion. Facebook does not need pricing to encourage self-regulation: it has self-interest working in lockstep with group-interest.