Using Two-Tiered Canvassing to Generate Support Where There Previously Was None

In Influence: The Psychology of Persuasion by Professor Robert Cialdini, the author identifies how someone attempting to exert influence over another person can do so by getting said person to identify with a certain idea or group prior to the actual meat of the requested action.  In the book, the particular example involved the difference in agreement rates for putting up a massive "be safe and wear seat belts" sign in the person's front yard.  What was noted was people had dramatically higher rates of saying "yes" to the absurd sign in their front yard if they had previously been approached by a canvassing team asking them to sign a list that they felt seat belts should be worn for safety.

Are you anti-safety?

Signing the petition seemed pretty innocuous, and most people would not be too opposed to identifying as pro-seat belt and pro-safety.  With this simple action, however, those who signed in their minds began to identify with this cause and began to see themselves as agents for it.  Because of this decision and the personal identification which took place afterwards, the second request did not seem terribly ridiculous.  When approached and asked if they would put this sign up in their front yard, those asked did the mental equation of "I'm in favor of safety" and because of it were much more likely to agree to the large sign.

How This Can be Applied

With the California prop voting coming up in November, there are several special interest groups that will be trying to garner popular support for their proposition going in to the voting process.  For the sake of conversation, let us look at one of the the most polemic of these propositions: legalizing marijuana (Proposition 19).

Now how could Cialdini's identified phenomena be used to actually make the public more favorable to this proposition?  One methodology would be to first approach potential voters in a canvassing effort and request that they sign a pro-free choice or pro-freedom petition.  Reasons given for the request could be that the group is trying to help the people show the government that they feel that citizens should have the ability to make free choices without government interference.

Presumably, with this decision to sign the seemingly innocent "pro-freedom" petition,  individuals approached would be linking themselves in their minds to being pro-free choice and as agents for this cause.

When approached, ideally the next weekend, by another canvassing group asking them to sign a petition saying that they feel people should have the right to choose whether to smoke marijuana on their own without government interference, the suggestion should be couched in terms of freedom and personal choice.  The jump could potentially be too large for many to make, between "freedom" supporter and "freedom to smoke marijuana" supporter, but I would guess that one would receive much more positive responses to the second request after the initial one.

The Approach Can be Two-Sided

Continuing with the marijuana proposition, opponents to prop 19 could have a two-tiered canvassing approach of first approaching potential voters and asking them to sign an "anti-drugs" petition.  This seems incredibly innocent and simple, and I would be surprised if there was too much resistance to it.

By signing the petition, individuals would be creating a link in their minds between themselves and the anti-drug cause.  This could be exploited in a proceeding canvassing effort with the petition to be anti-legalized marijuana.

Why Do People Need to Sign Something?

One of the important items in Cialdini's book is the associative significance of signing your name, and even better, if your position is to be visible by other members of your community.  While simple, the act of signing your name creates a very strong link in your mind, much stronger than a simple verbal 'yes' or 'no'.

While it involves more time and resources, the two-staged canvassing process can be used to create supporters where there were previously none.

My Take on the Goldman Sachs Allegations

BACKGROUND: here is Felix Salmon going in to really great depth on the Goldman Sachs S.E.C. allegations for those of you unfamiliar with the story.

I'm personally long Goldman Sachs (GS) after they lost almost $13 billion in market cap today. The settlement is expected to be in the hundreds of millions of dollars, and GS as a whole only made $4 billion off of subprime bets in general.

Obviously the market is expecting this to have residual effects on their other lines of business, however when I look at the landscape for the business they're involved in I think they've got a pretty good lock down. I would expect GS to distance themselves from the ABACUS events, and potentially blame it on the actions of a few individuals rather than GS internal protocol.

They may end up being liable, however if the trial of the former Bear Stearns hedge fund managers is any indication, some times it's hard to get these charges to stick. Especially since Goldman is going to throw A LOT of money at this to try and make it go away.

This may be my own personal bias, but Goldman Sachs has the ability to snap up the best and brightest minds. If you get a job offer from them, you think long and hard about dropping everything to give it a shot. I'm not going to say I necessarily morally agree with the sorts of things they do, but in terms of having the capacity to make money, they certainly have it. When you have the best minds and a corporate culture that rewards you very well for making contributions to the P/L, you're going to continue to have success in the financial services industry.

A Justification for Government Interference in Pollution

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Although not a recent phenomenon, the particular flavor of the times (temporarily pushed under the rug over concern for the economy) is what should be done about global warming. Topics have included carbon cap and trade agreements, green energy grants and requirements, etc. One thing I think that is important to discuss is whether government regulation could effectively create a positive solution for the climate change problem.

To begin, I'll have to posit some assumptions, for which if one were to disagree with would inherently prevent the same conclusions I am about to draw from being reached:

(1) Pollution has a negative impact on everyone's health, yet remains unpriced because of a tragedy of the commons scenario and an incapability of observing its true cost

(2) Ceteris paribus, a firm earning a profit has positive externalities for society in so much that either through direct distribution or wealth trickle down effects, people are better off (i.e. profit seeking is positive for society, all other things staying equal)

(3) Earning a profit is not a zero sum game, in that if someone is making money someone else does not have to be losing money.

To start off, I think it's important to think of a basic scenario of two polluting companies, G and E. These two companies produce the exact same product for the same market, and the only two choices available to them are whether they're going to implement capital intensive pollution control devices, or not. This breaks out in to a game theory problem.

The picture above represents the payoff matrix for firms G and E in the market described earlier

We'll say that the market is fixed in terms of demand and whichever company can produce the product the cheapest is going to capture the entire market. In the case where the cost of producing the good is the same for the two firms, they will split the market. In splitting the market in the 'Not Pollute' scenario, both firms' payoffs are less than in the 'Pollute' scenario because of the cost of the pollution limiting capital expenditures, let's presume.

The payoff matrix is quite simplistic, but the goal is to convey that in a situation where the winner is the company that can produce the product the cheapest, the Nash equilibrium is going to be that the firms will pollute (in this case, [4,4]).

Now this might not be the most beneficial situation for society, based on the cost we place on pollution (or value on clean air). Let's say cost of pollution to society is 10, such that even though the firms in aggregate would be making a profit of 8 in any combination involving pollute, society as a whole would be incurring a negative payoff even with the addition of this 8 of profit.

In this scenario, it might be in the best interest of the society (of course not for the companies individually) for the government to require a certain level of pollution control, thus forcing the [2,2] payoff to be the Nash equilibrium by preventing the choice of pollution. Presuming this 10 cost is eliminated in this scenario, there's a positive 4 aggregate payoff where before there would have previously been a negative 2.

This can generally be summarized such that the government should intervene when the aggregate payoff from not-polluting is greater than polluting, or:

Er(Diminished G and E earnings, bureaucracy costs, no pollution payoff) ≥ Er(Heightened G and E earnings, pollution cost)

Conclusion

While this is a fun way to look at the problem, it doesn't address the fact that we still don't have a price for pollution. Some have tried in this department, but you will still have difficulty valuing some of the side effects not directly related to human health (i.e. how do you value things like biodiversity?).

In addition, although the bureaucracy cost of implementing said regulation should be a considered cost, it is very likely that the group determining if and how we should regulate (the bureaucracy) might not consider this cost or might dramatically undervalue it.

In light of this, while it is theoretically easy to determine whether to regulate, the inputs of the equation are still unknown. To an investor involved with the G or E firms of the world, a big chunk of the valuation of your investment is determining what the likelihood is that those making decisions will determine that the left side of the equation is greater than the ride side i.e. the value they and their constituents place on clean air. Perhaps this is why in a Democratic regime coal burning utilities and other environmentally questionable investments have gotten crushed.

The Selection Bias in Goldman's Argument Against the Obama Regulation

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The proposed Obama regulations that I'm referring to are the statements that came out today that he would:

"seek to prevent banks that have special access to low-cost Fed funding from operating or investing in hedge funds, private equity funds, or trading purely for their own benefit in a way that’s unrelated to serving customers." [Bloomberg]

While this is sure to be contentious, I think it's important to take a step back and look at what especially discounted Fed funding is intended for. I'm not talking about the funding that the Fed provides during a "business as usual" scenario, but in scenarios such as this recent credit crisis, when the discount window's possible term length was raised to 90 days and interest rates slashed, the goal was presumably to get some emergency liquidity out there to try and unfreeze credit markets and stimulate lending again.

I won't try to quantify the potential for ruin that hedge funds, private equity, and proprietary trading might potentially represent to a bank, although this is certainly possible. If the goal is to stimulate lending, however, having all these components as parts of banks that have the discount window available to them would make it difficult to monitor where these emergency funds might be going once they leave the Fed. While these other activities no doubt have the potential to be economically important, I don't think there would be significant objection that the Fed's primary objective in a crisis, is to funnel funds to firms that are going to use that money to lend and keep credit flowing, might be hindered if these funds are instead going to any number of other activities available to some of the firms that received emergency Fed funding.

This leads to the Goldman comments coming from Chief Financial Officer David Viniar. He argued:

"If people are focused on things that caused, or were real contributors to the crisis, it wasn’t trading...Most trading results were actually pretty good, not just at Goldman Sachs but at most firms and that’s not really where the problems were." [Bloomberg]

Looking at the results of trading from the crisis as a sample of typical trading is a vivid example of selection bias. It seems that Viniar would like us to think that because most trading was profitable during the crisis, it will be profitable in the future and doesn't doesn't pose systemic risk to banks. While on average trading profits might be positive, that says nothing for the skewness and kurtosis of trading profits/losses. By that I mean that proprietary trading could be negatively skewed or with fat tails (positive kurtosis) in the negative end of the distribution.

This is an example of a positively skewed, positive kurtosis, positive mean distribution. While it will be on average positive most of the time, the long negative tail creates the possibility for financial ruin when returns end up in that part of the distribution.

I'm not going to take sides on this issue, since I can see the validity in both. That being said, I think that Vinair's argument regarding proprietary trading is mistaken. For example, while fund managers can on average beat the market by holding a portfolio of the S&P 500 and writing puts (insurance against a fall) on the S&P 500, when it does go bad, it's ruinous. This is the "picking up nickels in front of a steamroller" scenario.

While I don't claim to know the distribution of trading profits or the absolute level of risk these firms are taking on (they might not know either), I can understand why Obama and his administration would want to prevent artificially-lowered interest rates from fueling these types of activities. Especially since it's meant to stimulate lending, allowing firms that have access to the Fed's discount window to engage in hedge funds, private equity and proprietary trading could be a usage of funds not best for unfreezing financial markets.

That being said, Obama needs to be careful when he talks about "curbing excessive risk taking". Lending to small businesses is one of the riskiest types of loan a consumer bank can do, and since stimulating the flow of credit to areas of the economy such as this seems to be an Obama administration priority, curbing risk taking shouldn't be his goal.

I'll Take Obama's Bank Fee Plan Over the U.K. Banker Tax Any Day

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Yesterday I talked about the choices that faced U.K. banks following the 50% bonus tax levied on them. Today, in light of the news that Obama is going to levy a fee on U.S. banks of over $50 billion in size, I felt it well fitting to discuss this current development.

The fee, which is expected to raise "$90 billion over 10 years", is geared towards trying to pay back the money lost under the TARP bailout system. The apparatus for determining the fee per bank:

The fee would be approximately 15 basis points, or 0.15 of a percentage point, of covered liabilities, or total assets minus Tier 1 capital -- common stock, disclosed reserves, retained earnings -- and excluding FDIC-insured deposits for banks or insurance policy reserves for insurance companies, the official said. [Bloomberg]

In terms of the financial system, I am of the opinion that it will regularly experience shocks of confidence, since by it's nature most financial firms rely on the investor and counterparty's confidence that they will remain a going concern to earn a profit (the FDIC helps). Since I am of the opinion that crisises, especially in vulnerable sectors like financials, are an inevitability due to human nature (i.e. the ability to suspend rational thought once the "panic" button has been depressed), operating under the perspective that this will not be the last bailout of financial institutions is, I believe, a good idea.

I see the Obama plan as doing two positive things: recouping bailout funds from an industry that greatly benefited from its support and will likely need it in the future and providing incentives for firms to decrease in size. These large firms are the ones that pose a systemic threat were they to collapse, so I think means by which to gently encourage shrinkage would be a net positive for the system. Ignoring, of course, the obvious political rhetoric ("when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people" etc. etc.), which I see as mostly trying to rustle up voter approval in the face of mid-term elections, this plan to me is very solid.

This of course stands in juxtaposition to the U.K. bonus tax plan. One of the things that I found most distasteful about that plan was the perspective that all bonuses, no matter whether or not they were deserved, were evil. I think that's dangerous territory to step in to, because financial firms are not the only ones that pay bonuses. While one might make an argument that financial firms are in a league of their own because of the size of their bonuses, I still feel that it's a slippery slope to be walking on. I see the 50% tax as a populist measure at trying to strike down select human beings.

In contrast, I feel the Obama measure, while assuredly being unpopular at banks, will actually help discourage firms from reaching the TBTF stage. I think that recognizing the frailty of the financial system is paramount to learning from the mistakes of the credit crisis.

I know myself, a current student looking for employ in the financial sector, would be exposed to the operational risks of financials. That's why my retirement and savings plan would be of a much lower risk quotient than the average American to offset my increased employment risk.

Was Flipping the Bird to the Treasury a Good Idea for U.K. Banks?

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Referencing of course the ongoing drama involving the City and the British government, RE: a 50% bonus tax. This had the intention of reducing oversized banker bonuses, but recently it has been noted that most banks will simply take the hit of the 50% tax and pay their employees anyways. Evidently, some banks chose to go heavier on deferred stock bonuses, which only incur the much lower capital gains taxes rather than the lofty 50%.

For the budget deficit ridden U.K., which estimates the tax may generate as much as 2 billion pounds, this provides quite a nice little windfall for them. Obviously it's not accomplishing what they hoped it would, but for taxpayers incensed by high flying bonuses for companies they feel they saved from the brink of destruction, it's a decent consolation.

This is of course what the banks have chosen as the short-term fix to what might prove to be a long term problem. As it were, the banks don't have the option to move over night as they please (for the lack of flexibility in office space leases for one thing), so they really could only answer the question "to pay or not to pay".

In terms of extending the time frame out a little farther, banks have much more freedom in terms of choosing where to do business. As I look at it, since they went ahead and took the hit of the bonuses, the tax is going to stay in place as long as people are willing to pay it. So as a bank, you either have to do one of two things: move your office, or hope that enough other people move their offices such that the government drops the tax to retain jobs.

Could it have been different? I'm of the opinion that was the City to have laid low for a little while until the public outcry died out, potentially the tax might have been dropped. But as it were, I don't think there's any incentive to drop the tax since government officials likely figure that they have a captive market, willing to pay the necessary amount as a cost of doing business.

That being said of course, human capital is much more mobile than businesses. So perhaps paying the taxes was the only option they really had to retain top performers.

How Legitimate is Ben Bernanke's Concern Over a Weak Dollar?

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Or to rephrase: what actions will the Fed potentially take to stop a sell off of USD? A few months ago Bernanke mentioned that they were "monitoring" the dollar's strength. Presumably, this statement was to suggest that the Fed would help protect the dollar if it kept getting slaughtered in Forex markets.

The layman looks at the exchange rate of the dollar as a bearing on the strength of the U.S. economy, and I've anecdotally seen it take on a national-pride role. In more complicated terms, a weakening dollar can either mean changing inflation expectations (toward higher inflation), an exodus from dollar denominated securities and/or U.S. debt, or simply more dollars entering circulation (i.e. "actual" inflation).

When the dollar starts to falter, dollar holders, but especially foreign dollar holders, start to get concerned. Take for example China. A large chunk of their sovereign wealth is denominated in dollars. This works for trade reasons (they do a lot of trade with the United States) and to help ensure confidence in the Yuan, which is unofficially pegged to the dollar. But it has led to public concern on the part of China (specifically PM Wen Jiabao) as to the security of their investments.

On the plus side, when the dollar is weak, exports and manufacturing get a boost. For example, the market moving story today was the Institute for Supply Management’s factory index rising to 55.9 where above 50 indicates expansion (this is the highest the index has been since 2006). After having done research on steel companies, Goldman Sach's conviction buy rating for U.S. Steel Corp. was partially because of a weak dollar environment.

After the market's positive reaction to the manufacturing report, and Bernanke's previous concern that unemployment might erode a U.S. recovery, I would not be surprised if the Fed put dollar strength on the back burner except in extreme cases, in favor of promoting job creation and strength in the manufacturing sector. In light of the U.S.'s forays into car companies (read: Chrysler and GM), a weak dollar climate might be great for taxpayers, too. Because of this, I see the positive manufacturing report as a signal of more to come rather than a one time event (in terms of monetary policy implications).

Too-Big-To-Fail and Psuedo-Government Agencies: Do You Wind Them Up or Wind Them Down?

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It's hard for me not to have some burst blood vessels when stupid actions by people that cause a lot of damage go unpunished.

Socially, I'd say the job is pretty much done. If you were calling the shots at any of the really government entrenched companies (Fannie Mae, Freddie Mac, GMAC, GM, AIG, etc.) or the meh-government entrenched companies (big banks like BofA, Citigroup, and then to a lesser degree any of the other institutions receiving TARP), you probably don't talk about your job history much outside of the house. Whether it be for fear the Barista at Starbucks might not secure the lid on your coffee as she hands it to you (read: throws) or that the townspeople might burn you in effigy in front of your house a lá the KKK, I feel that socially and culturally a lot of decision makers have likely suffered their backlash.

But I feel like there's an "eye-for-an-eye" principle, where if you lose money, you want the person that lost that money for you to lose more. This is more of a gut instinct than a rational, thoughtful consideration. With the financial system, where everyone is fishing from the same lake, it's hard to tell who might have polluted the lake with sketchy fishing tactics, and who is a victim of the polluted lake now and didn't really cause it. Nancy Pelosi would probably say all the major actors (read: banker fat cats) were responsible. I think the right answer is more nuanced (sweeping generalizations, while helpful for making quick decisions like who to get behind in line, rarely work on the national policy level).

When it comes to GMAC, Freddie and Fannie, all recent newsmakers for their profit making difficulties, it's hard not to get upset about the situation that got them to where they are: sucking at the teet of the Federal government. Fannie and Freddie: ok, having the essential guarantee that they would never go under probably led to some moral hazard. My question is whether making this at one point implicit guarantee explicit, along with the commitment to offer unlimited assistance for the next three years, is actually making things any better. Did GMAC need their recent $3.8 billion infusion? Yes. But did the United States need GMAC to receive that $3.8 billion infusion? That's a really difficult question.

Which of the governmentally held companies offer hope at one day/soon making a profit and being resold, and which need to be broken down and the pieces sold off? I might stick AIG and GM in the "hope" category, and GMAC, Fannie and Freddie in the "no hope" section. I think a lot of the changes that have been happening at GM have been very positive, and AIG, presuming it serves more to be a holding company of subsidiaries whose names don't ring of "AIG", is on the right-ish path as well.

But do you give GMAC the ability to go on making new loans when they've established a track record of being terrible at it? I don't think so. I would say you service the loans you've already made, do your best to salvage what you have on your balance sheet, sell off the chunks that people want (Warren Buffet spoke of acquiring a part of ResCap, GMAC's real estate lending division), and then wind it down. Otherwise, my concern is that congressmen, stuck with this black hole, look at it and say: "well, let's promote lending for the common good so I can get something out of it". This would probably be loans to people in serious need at below market levels and people that typically do not fall under the umbrella of "credit worthy".

There is a huge threat that this will happen at Fannie and Freddie, who basically make the mortgage market work. I see the value in Fannie and Freddie underwriting a lot of the mortgages out there, but not if it's in a way that's negative NPV. With governmental agencies, in perpetuity I would see it being very difficult for them to be profit making as they become a more established part of the bureaucracy. For this reason, I think the government and the Treasury Department need to look at their portfolio and say "wind up" or "wind down". Not all bailout companies should be treated equally, since they don't all equally have shots at being profitable. The status quo doesn't work. If it continues, these companies will simply become a part of the sausage making process.