The tip of the iceberg

Should tipping be banned? That is the topic of a recent Freakonomics podcast. Listen to the whole thing.

Tipping expert Michael Lynn says if he had his druthers he would outlaw tipping. I found the reasoning for this conclusion lacking. Most of his research is based on survey data, which by its nature comes with a full shaker of salt. Of course many of the results of the survey research agrees with conventional wisdom priors, and this is a rare instance when I tend to agree with conventional wisdom. Hard to say that the surveys tell us much when they simply tell us what we already believed.

Confirmation bias is seductive. For example, we are told that physically attractive females earn better tips especially from men. What isn't so clear is if assuming they could earn more, the female servers actually deliver superior service to that target audience. Or perhaps they are take the game theory to the next level. Since the men are a sure thing, the female servers focus their attention on other patrons. The men appreciate them just the same while the other patrons get superior service. In this case tips rise from all patrons when compared to the alternative--non-attractive servers for the men and standard or inferior service for other patrons.

The major case Lynn finds against tipping is that it is de facto racially, et al. discriminatory assuming the survey results match reality. Here is where the reasoning is poor. Association with an outcome potentially undesirable, such as black waiters making less tips than white waiters when other factors besides race are supposedly held constant, is then construed as being the undesirable behavior per se. It is as if tipping were the cause of the discrimination rather than simply a correlated symptom of the problem. This is the logic of the disparate impact doctrine. Unfortunately, eliminating tipping even if it is truly used in a discriminatory manner including simply having a discriminatory result doesn't eliminate racial discrimination or disparate impact.

A bigot can exert harm in ways that may be more harmful if the tool of tipping is removed. This is true if the discrimination is done consciously (disparate treatment) or unconsciously (disparate impact). Without the ability to choose a restaurant blind to the color of the staff knowing the bigot can always tip less if the server is of an "undesirable" race (from the perspective of the bigot), the bigot may be lead to only consider restaurants that have low to no proportion of "undesirable" races employed within. In this thinking tipping is a more subtle tool for exerting bigoted behavior. Take away the tool, and the bigot is left with only more blunt means of acting out the bigotry.

Throughout the podcast there seemed to be an air of confusion about what the purpose of tipping is and a dismissiveness in the sense that a practice while long standing and ubiquitous was nevertheless illogical.

The purpose of tipping is to properly align incentives and minimize principal agent problems. It is not a gift. It is not a requirement. A tip should be understood as part of the compensation withheld until service is rendered to be delivered directly from the patron with potential variability depending on quality. It is an emergent solution to a knowledge and cooperation problem.

Some more thoughts:

• Those eligible for tips should be those with an ability to perform above or below the standard. 
• "They work for tips" is not adequate reasoning for how much one should tip. That is simply the definition of the service arrangement. 
• Inflation does not imply that the rate used for a standard tip should change, say from 15% as the old norm to 18% as the new norm. That is really bad math.
• For tipping to be effective, one must be willing to differentiate. At the least that means tipping a minimum amount (perhaps 10%) subject to upward revision if service is excellent. More desirably it means a willingness to tip zero for horrible service or negative (complaining to the manager) and a willingness to tip very well for excellent service.
• Tipping based on a percentage of the cost of goods is generally fine, but there is a floor and ceiling on this causing the rate to become an S curve rather than a straight line. If I order a Coke at the bar while my friends drink beer, I don't simply tip 15% on the $2.00 soft drink. Likewise, an expensive dinner for my wife and I where the before-tip bill is $300 might only rate a $50 tip even if service is excellent. 

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Deer are 1.75x more deadly than terrorists. That is not the main takeaway from this presentation at the Cato Institute on risk and cost-benefit analysis, but the fact remains that deer accidents kill more people than terrorists--something to think about the next time you're enduring a TSA feel up pat down.

I thought this photo project was touching and telling. The differences were touching--the differences in wealth. The similarities were telling--the similarities in toys.

Check out these trees.

This is based on survey data, so take it with a grain of salt, but it is nevertheless pretty interesting for the dating crowd. Now if we only knew how long to wait to call a girl who is in one's dating green zone . . .

Thoughts on The Tornado

It is hard to describe the feeling you get watching the news from work downtown helplessly miles away from your home and family as a storm bears down. Not that your presence could do much, but the distance adds to the agony. You watch as a system that had largely passed the area suddenly develops on the back end. Then a storm chaser identifies a funnel emerging from the cloud. It quickly takes structure. And builds from there. A moment later it has made contact with the ground. In complete opposition to both likelihood and desire, it strengthens and strengthens and strengthens. Its direction is along a probable path but with random veering. All that is certain is that it will move northeasterly. As the overly excited and less than informative storm chasers on the scene and meteorologist in the station alternate between calm but incomplete narration and screaming panic, you do math in your head. What are the chances it moves more north than east? Too much north too quickly and your home and family are more and more likely to be in the certain path. What are the chances it dissipates? What are the chances it reaches your neighborhood but only glances your home? What are the chances your family can survive a direct hit? How powerful is this monster?

Here is what it looked like as neighbors watched it pass.

It was less than 2 miles south. It moved east more than north. My family was spared. Others were not so lucky of course. Their agony was realized in a crashing horrific wave. My heart is heavy for them.

The best I can do to describe the horrible, random terror is to say it is like a plane crash. Or perhaps like knowing that a few planes today will crash. You're in a plane; your family is in another; there are hundreds that will survive, but some will not...

Some other thoughts:

• The fear of price gouging raised its ugly head not long into the tragedy. Although this tragedy was more isolated within a larger, unharmed community, the importance of letting the price system allocate goods and services was still as always very relevant. Hotel space, dump trucks, and pod storage units are just a few examples that come to mind. Immediately after the storm as sirens echoed as they would for hours, my neighbor told me that he was going to rush to the store to get ice as soon as his wife made it home. I had been home only about 30 minutes after the storm. Our power was out and would be out indefinitely. Once his wife got home he indeed went to the store returning with a very large camping cooler full of ice. This made me think of Munger's great example using ice (bottom of page 4) showing why anti-price gouging laws are very bad. In researching the link for that ice example I immediately found that Munger was already on the case. Because of the limited nature of this tragedy, the ice example may not apply here as well as in other cases. Yet it may still considering how bad traffic is in the area and how limited supplies may be over a short, critical period. I also don't know exactly why my neighbor with two young children felt the need to get the ice--might be for insulin, might be for beer.
• These types of events challenge the lifestyle I live. I contend with two strong forces in my psyche: between being a minimalist and being a librarian/museum curator. I both long for an existence of commoditized possessions--easily replaceable, without sentimentality but at the expense of authenticity and personality--as well as an existence surrounded by things that tell a unique story. 
• The conventional wisdom on storm shelters is based on weak cost-benefit analysis. The probability of need is very low, much lower than commonly felt, and the cost is high and non trivial, both the explicit cost of purchase and implicit costs of inconvenience and risk. 
• That said . . . here is an idea of my own that borders on spending other people's money--gotta love that. Schools seem to be a way people (children mostly) are particularly vulnerable. Kids are a dependent group. Hospitals fall into this category as well somewhat. Retrofitting existing structures is most likely cost prohibited. But why not design new structures with intentionally collapsible hallways? This might work either in a basement structure or on a first level. The idea is basically a cylindrical-shaped long hall where the end walls are designed to fall into it to seal it off. Perhaps actual doors could be used or a staggered design to segregated the cylindrical hallway. 
• The signs of generosity are amazing as is how freely and naively people will give money in support of the cause with little or no accountability.

I wish peace to those who have lost so much in this. And let perpetual light shine upon those who never emerged to see the Sun after the wind had passed.

Rule of democracy: politicians don't lead, they follow.

I've thought about this idea for some time, and I continue to see examples of it. It isn't original to me except maybe to the extent I find it nearly ubiquitous.

I believe a rule of democracy is that politicians do not tend to lead but rather tend to follow the common view. This is true in a general sense and in most specific instances. On the surface it shouldn't be surprising, after all democracy is should give rise to this, and it is unclear if in aggregate it is a feature or a bug. I believe it is a bug on net, but only slightly, and I assign low confidence to this view. Say what you will about the results of totalitarianism, at least it is an ethos of leadership.

The most recent example I found was this one from Todd Zywicki of the Volokh Conspiracy. It the piece he is pointing out that traffic fatalities were falling for a steady and long period before the formal introduction of the National Highway Traffic Safety Administration (NHTSA) in 1970. His discussion is a bit richer than just that as he considers the merits of liability law and regulation versus market forces. Here is the graph that caught my eye (original source):

A similar graph can be plotted for nearly every regulatory agency. The one above reminded me of one I saw back in college, which led me to get out my old Economics of Regulation and Antitrust textbook. In that example workplace safety is shown to be steadily declining prior to and after the creation of OSHA.

I think Robin Hansen would be in agreement with my view--"Politics isn't about policy".

The reason I think this is a net bug is that government isn't well suited for many of the tasks it takes on. The incentives are bad, perverse, or at best non existent. Government is highly subject to regulatory capture. Government's one-size-fits-all approach, which is a natural and good product from equality before the law, is antithetical to evolutionary adaptation.

The reason I think this is only a slight net bug is that what we see generally is just a codification of the mores and demands society otherwise possesses. Hence, my libertarian problems with the 1964 Civil Rights Act with its limitations on freedom of association are mitigated by the virtues the law sought to create and the fact that society was moving that way anyhow. Government then just becomes a clumsy way to achieve what we are otherwise moving toward.

I'm sure I'll have more examples and more thoughts on this. Suffice it for now to summarize that while regulatory approaches to problems are suboptimal solutions (at best second-best if not third-best approaches) they are in fact more solution than new problem. But of course when opportunity cost exceeds benefit at the margin even slightly, the makings for compound disaster are created.

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Don Boudreaux and John Cochrane deliver a one-two punch at the idiocy that wrapped up in anti-free trade "energy policy".

The War on Drugs is evil: example #207.

Europe is super cool, BTW.

From Megan McArdle, example #336 why the current tax code including taxing capital hurts us. Sure, it doesn't hurt like jumping on a bicycle with the seat missing, but it hurts.

Escape from New York

I've returned from a jam-packed trip to NYC that was part business and part pleasure. I always find it hard to leave New York without feeling that leaving is a mistake. It is such an amazing place. Very few places on Earth can boast the same wide-range of risk/return opportunity sets. Here are some thoughts:

• To my impression, by a wide margin no other American city is as much an international city. This is an underappreciated quality.
• It is a shame people tend to be too uncreative to appreciate experiences that are not "tourist traps". 
• The success of the city, largely a reflection and exacerbation of the success of American free enterprise, disguises and minimizes the drag of being in the People's Democratic Republic of Bloomberg [insert any prominent former or future mayor as well]. It is hard to see the forest of unintended consequences when dealing so directly with the trees of real-world problems. Viewed in this lens, it becomes easier to excuse the frequent acquiescence to bureaucratic and technocratic power.
• If your only impression of life in NYC was from television sitcoms, you would be missing 75% of it. If it were only from movies, I'd say you are still missing 50%, and most of that corresponds to the prior missing 75%. 
• Goldman Sachs, the business portion of my adventure, is a first-class organization. I am often a critic of the revolving door between government regulators of GS and executive positions at GS along with other regulatory capture issues. Being in the heart of the dragon, one sees clearly how that cozy relationship maintains harmony. Literally, the janitors at GS exude more confidence and professionalism than I've seen among bank presidents. Uniformly both in informal conversations and formal presentations, every representative of GS was quite impressive--not cocky or arrogant, but definitely assured of themselves and their organization and certainly serious. They can and do laugh (when appropriate), but I am certain they physically lack the ability to giggle. 
• I appreciate Goldman for having me as a guest at what was a very good conference filled with good information and entertainment. I now have more respect for them as a money manager, and it is with more confidence that I consider investments with them for my clients. 
• Here is a random thought I had during the conference: Does corporate paternalism and generosity breed acceptance for governmental paternalism? This is similar to the forest/trees thought referenced above. People in these companies are very well taken care of with all ancillary needs provided or sourced, they are used to showing ID cards and having limited access within their firm and even on their floor or in their business group, they work in "safe" environments insulated from the "chaotic" world outside, etc. 
• Depending on your perceptive sensitivity to any given behavior, you can get the feeling that "everyone" in NYC matches that given behavior. For example, everybody jogs. Of course, everyone doesn't. But it is easy to be misled being that there are countless examples of any behavior, activity, etc. to be found. That is one thing >60,000 people per square mile will get you. This goes a long way to explain misconceptions visitors come away with.
• Being in the beautiful jungle of so many choices, a thought I have had previously occurred to me again. A key to happiness is being easy to please. If you can see the good in things (be optimistic) and if you can refrain from pickiness (see things as highly substitutable), you can greatly expand your happiness. In economic terms, the flatter your indifference curves and the looser your budget constraint, the greater your utility potential. 
• Nearby our hotel was a Whole Foods grocery. We have a Whole Foods store in Oklahoma City, but the store in NYC, as a microcosm of so much else, is quite different from the store in OKC. The selection was larger in scope and scale, and the services included delivery for a flat $10 fee. No such delivery option is available in OKC. Discussing this with my wife dovetailed with other grocery economics discussions we have had. We've thought before about the intrinsic differences among stores like Whole Foods and Central Market versus Safeway and the local Crest Market versus Sam's Club and Costco. Not to get too far off on tangents, but this thought problem brings up the difficulty of finding a comparable basket of goods for inflation as well as other comparisons. Back to the central idea, what are people getting out of food shopping? The joy of bargain hunting (optimizing $/calorie) versus the joy of elegant shopping (optimizing the experience per se) could be generalized extremes along what seems a reasonable dimension of quality/quantity tradeoffs (optimizing selection and discovery). At what point is the only physical grocery shopping we do that done as an entertainment (elegant shopping) with the remainder done online including preprogrammed? 
• Enough random thoughts. Here are some pictures from a great trip. Enjoy!

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We begin with a couple of strong ones from Bryan Caplan. Here he goes to the mattresses with free-market economists on the "grave evil" of unemployment.

Next he delivers a one, two punch on the issue of public (especially federal) versus private compensation.

David Friedman weighs in on and perhaps settles the infamous and riling post from Steven Landsburg--that's the post that sounds like New York's hottest club . . . it has everything: pornography, rape, environmental destruction, a midget named "Wharhol" who'll throw Campbell's Soup cans at you . . . Okay, I made that last part up.

Bob Murphy, who often challenge's Landsburg on the topic, discusses one of his amusements in the "science vs. religion" debates.