RS 2: A Billion Dollar Bet

RS 2: A Billion Dollar Bet

            Herbalife is a company that sells weight loss shakes, teas, and vitamins.  Unlike other weight loss companies like Slim Fast and Hydroxycut, Herbalife does not spend money on advertising or sell their products in stores.  However Herbalife is still a company that has been around for thirty years and is worth 4 billion dollars.  In fact, their most competitive brand, Formula 1, is worth 2 billion dollars and competes with Slim Fast. 

            One day Herbalife held a conference to discuss the quarterly reports.  David Einhorn, a hedge fund manager, accused Herbalife of short selling.  Short selling is the “Sale of securities or commodity futures not owned by the seller (who hopes to buy them back later at a lower price)” (princeton.edu).  Once Herbalife was accused of this, their stocks dropped twenty percent.  Another hedge fund, Bill Ackman, heard this conference and made a one billion dollar bet against Herbalife, and the stock dropped even more.  Ackman and his colleagues then spent three hours attacking Herbalife.  Bill Ackman tried to prove that Herbalife was a pyramid scheme and was a company of fraud.  In defense of his company, Herbalife’s CEO, Michael Johnson took to TV to prove that his company was not a pyramid scheme. 

              To prove that Herbalife is a pyramid scheme, Bill Ackman began by explaining the questionable details about how the company works. He uses the example of the selling process.  It is very similar to Avon in the sense that the seller is in charge of selling the products and recruiting others to get involved in selling Herbalife products. One seller places his ads for the product on Craigslist, in order to collect his compensation.  Even another Herbalife seller recruited him, and she also makes money when he makes sales.  This chain continues on and on, which is how Herbalife makes money.  On YouTube another Herbalife seller explains how he went from totally poor to being wealthy just by selling Herbalife.  Bill Ackman stresses the point that it is this kind of action that makes Herbalife seem like a pyramid scheme.  If these sellers are selling products to people who do not really have a need or want for the product then they are committing an illegal action.  Ackman says that Herbalife is taking money from poor people and promising them they can make it by selling them on the hopes and dreams of becoming rich if they work hard and sell Herbalife products.

            To fight these accusations, Herbalife held a conference to explain that everything Bill Ackman was saying was false.  Herbalife’s main reason that Ackman was wrong was that they have small countries successfully selling Herbalife products; which would not be the case if Herbalife were a scam because everyone would know it was a scam.  Herbalife felt that it was wrong for Ackman to short their company.  Shorting a company is necessary because it helps bring companies that are fraud to the attention of the public.  For example, Bernie Madoff and his Ponzi Scheme would have continued going on if he were not shorted.  In the end, we cannot know whether Herbalife is a pyramid scheme because we cannot track where their products go and whether they are going to consumers who really want the product. 

Herbalife Commercial

            

RS1-UPDATED-How to be a Genius

RS1-"How to be a Genius" by David Dobbs-Reaction

            In his article, "How to be a Genius", David Dobbs writes about what he feels takes a person from being considered ordinary to a genius.  He argues in his article that it is not just genetics that make a person extremely talented or gifted, but rather it is hard work, determination, and drive that make them a true genius. After reading his article, I agree with Dobbs in that the emphasis on hard work and determination is really what makes a genius, a genius.

            Dobbs in this article starts off with a quote from Thomas Edison saying, "Genius is 99 percent perspiration."  Dobbs then adds that it is really, "One percent inspiration, 29 percent good instruction and encouragement, and 70 percent perspiration."  I could not agree more with these men.  An example in my life is the comparable talent that my sister and I have when it comes to playing softball.  I have been playing since I was 5, but I started off not as interested in the sport.  My little sister on the other hand started off extremely interested in the sport.  I work hard at practices and I am dedicated when I am playing but I do not practice as much as my sister does.  At the age of thirteen she practices four or five times a week and is pitching a 58 mph fastball, something that is rare coming from a thirteen year old.  It was not genetics that slipped and gave my sister more of the softball genes than I got; it is her hard work and passion for the game that makes her more talented and gifted than I ever was at her age.  Had I put in the time and effort that she does I could have been as talented as she is now, but I chose not to.

            Dobbs said in his article, "The elite are elite partly because they have some genetic gifts- for learning and hand eye coordination for instance- but the very best rise because they take great pains to maximize that gift."  At just thirteen, my sister dreams of going to college and playing softball for a division one team.  She works her hardest at every practice, hitting lesson, and pitching lesson to attain that goal; sacrificing some other things that she may want to be doing as well.  Dobbs also says that having someone to mentor you and motivate you is very important as well if you want to be a genius.  I like to think of myself as one of my sister's mentors.  Being six years younger than me, she would always come to my softball games and see me play, and I like to think that watching me encouraged her to play as well.  I know for a fact that when my sister needs help with something she will turn to me or my dad for help and that if we weren't there to guide her along her softball "career", she would not be the same athlete she is today. 

            Dobbs stresses in his article that it is not genetics that makes a genius but it is rather hard work, determination, and help that make a genius.  My sister may not be the next Jenny Finch, or a softball legend, but it is the hard work and love for the sport that makes her as good as she is. More so than just her talent and physical attributes for the sport.  After reading this article it is very clear to me as to why this was our first assignment for the class. The lesson was to teach ourselves that A's aren't just going to be handed out in this class. We are going to have to push ourselves and work for them to the best of our abilities in order to obtain the grade that we desire.  I know that I just want A's, and I know that I am going to have to push myself and work for it, but I can get help and that I am not alone on this journey of Economics. Dobbs said, "Geniuses are made, not born".  I know that I am not going to be the next master of Economics by the end of the semester, but I do plan on working my hardest and getting the most out of this class as possible.

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           My first time reading this essay by Dobbs, I related it to my own life and the experiences my sister has had with softball.  Now, after taking Microeconomics, I realize that this essay is more than just telling us that practice and effort is what makes us “genius” not genetics or a high IQ.  This essay can also relate to two of the eight guideposts: incentives matter, and secondary effects. 

            One of the eight guideposts is incentives matter.  That is saying that a decision is influenced on the possible outcomes of the situation. For example, a person would not bend over to pick up a penny but would bend over to pick up a twenty-dollar bill.  In the situation of this article, a person has the choice to excel in life or breeze by.  If they choose to excel then they are going to have to practice hard and put a lot of effort into the things they do.  However if they choose to breeze by in life then they can do whatever they want with little effort.  In the article they mention Mozart who started playing the piano at the age of three and started composing symphonies at the age of seven.  The one thing Dobbs stresses is that the Mozart we know did not come about genetics or by being blessed with a talent, but by practicing and putting his total effort and attention into music.  By knowing a situations outcomes or incentives, a person can make the proper decision and follow the steps needed to achieve that incentive.

           

            Another one of the guideposts is secondary effects.  Secondary effects are the relationship between an action and its effect.  For example, a person eats too much cake and pies at dessert.  The secondary effect is that he has a really bad stomachache and gets sick.  In the case of this article, a person has the ability to work hard or to relax and let genetics and IQ take charge.  If a person works hard, then the secondary effect is that he can become extremely skilled and talented in a particular area.  However, if a person just uses his natural talents and abilities, and doesn’t challenge them, then he will just bottom out and never excel in that area.  For example, the article mentions Tiger Woods.  Tiger Woods has been playing golf for his whole life.  When he was younger he was good at golf, but never as good as he is today.  Woods became as good as he is today with the help of drive to excel and constant practice.  Had he not practiced as hard when he was growing up, he would never be as good as he is today.  In order to become a “genius”, it takes a lot of effort, practice, and hard work.  Secondary effects can help explain the difference of becoming a “genius” and just being talented.

            The eight guideposts of economic thinking do not just apply to economic situations, but it can relate to everyday life as well.  After reading “How to be a Genius” by David Dobbs for the second time, I realized that the guideposts can also be applied to the difference between being a “genius” and just being gifted with a talent.  Incentives matter and secondary effects are the two guideposts that best relate to Dobbs article and can explain his point that it takes more than just natural talent to become a true genius.  

RS 9: Why The Price Of Coke Didn't Change For 70 Years

RS 9: Why The Price Of Coke Didn't Change For 70 Years

Coca Cola 1953 Advertisement

            Everyone knows the infamous soda drink company Coca Cola.  Coca Cola has been around since 1886, and within that time they managed to keep hold of a secret recipe that makes their soda different from all other competitors.  Although that seems pretty interesting, the most interesting thing about this company is that they did not change the price of coke for 70 years.  This is rare because in a normal economy prices are supposed to fluctuate depending one what is available, how many people want it, and how much it costs to produce the product.  The fact that Coke got away with selling its soda for the same price of five cents for 70 years is economically very interesting.

            From 1886 to 1959, Coca Cola was able to sell its product for only one nickel.  Today that sounds outrageous because an average 20 ounce bottle of Coke costs on average $1.50.  So how did this nickel trend start, and how did it manage to last for seventy years?  That question was answered by Daniel Levy, an Economics professor at Emory University, after he toured the World of Coca Cola Museum.  When he was there he found it interesting that during times of economic depression, war, prohibition, and many laws being enacted that Coca Cola was able to maintain its cost at a nickel.  So he went to the Coca Cola archives where he got all of his answers.

            The five-cent Coca Cola started as an attempt to attract customers.  The nickel Coke was a competitive advantage for Coca Cola because at that time most fountain drink soda companies were selling for seven or eight cents.  By marketing itself as an affordable soda, Coca Cola was set for success.  In 1898, two lawyers from Tennessee were trying to buy bottling rights from Coca Cola.  In this contract, Coca Cola had to charge the bottlers a fixed rate for the rights to bottle Coke.  This meant that even though the prices of ingredients could increase, Coca Cola could not charge the bottlers any more for the syrup.  Technically this was not a good move on Coca Cola’s part because they could possibly lose money with deal.

            In an attempt to cover up their contract mistake, Coca Cola decided to use advertising to its advantage.  By constantly advertising Coke as five cents, Coca Cola prevented the bottlers from raising coke to any other price.  This also allowed for Coca Cola to establish brand loyalty with consumers.  This allowed for current consumers to continue purchasing the soda, as well as attracting new consumers.   Even though prices for ingredients were increasing, the advertising campaign was so successful that the higher costs of ingredients did not matter.  Coke was still selling at five cents, and Coca Cola still managed to make profits.

            The next thing that continued to trap Coca Cola in their five-cent price was the invention of the vending machine.  Vending machines were great because they made Coke more readily available for consumers.  The only problem with the machines was that they could not create change; therefore the price of Coke had to remain at five cents.  In an attempt to create more of a profit and raise prices without having to change the 400,000 Coca Cola vending machines, Coca Cola asked President Eisenhower to create a seven and a half cent coin. Clearly that idea was never successful.  However, what Coca Cola did end up doing was make every ninth bottle in the vending machine empty, so that person would have to put in another nickel in order get a full bottle of soda.  On average, a person would pay more than a nickel for a bottle of soda.

            During the 1940s inflation was inevitable because the US decided to go off of the gold standard.  As the amount of money continued to rise, prices had to increase.  This meant that Coca Cola would not be able to keep the five-cent Coke for much longer.  By 1947, Coke began to go on sale for six or seven cents.  By 1959 there were no more nickel Cokes. 

            Prices vary, and it is normal that they do so.  When prices become constant for so long, we get stuck within them.  Coca Cola could have increased their prices many times however they didn’t because it was their promise to their customers.  Prices are a psychological promise.  When a customer sees a product sell for one price and then a couple of months later the price is higher, they think that they are guaranteed to the lower price.  Companies will choose to shrink a price before they raise their prices because of this psychological promise.  Today, the nickel coke is still around, just in bigger bottles.

RS8:Manufacturing The Song Of The Summer

Manufacturing The Song Of The Summer

Rihanna's "Man Down"

            Some people may think when they are purchasing a song on iTunes that they are paying a lot for something that they just listen to.  I understand that $1.29 adds up per song; but out of the total cost it takes to produce and make a song, we are only paying a small fraction of it.  There are many economic factors that contribute to making a top song, all of which were discussed in this podcast.

            Planet Money takes Rihanna’s song “Man Down” to explain all of the costs that go into producing the most popular song of the summer.  Hit summer songs are important to people because it reminds people of the good memories from that summer.  I know that I categorize my summers by songs that were my favorite at that time and where I was when I listened to them the most.  For example, in the summer of 2009 my favorite song was “I Got a Feeling” by the Black Eyed Peas.  During that summer I was playing softball in Florida for a nationals tournament.  Every time I here this song now I constantly think of that summer.  That is why I was surprised Planet Money used “Man Down” as the song of the summer for 2011.  It is definitely not the song that reminds me of Summer 2011.  Regardless that is the song they chose to represent the hit song. 

            Creating an album starts in little sweat shops known as hit factories where writers spend two weeks trying to create lyrics to melodies that are handed to them.  At the end of the two weeks, the singer, in this case Rihanna, will come in and pick the lyrics that she likes best.  This part along cost approximately $25000 per day, which includes the cost of the writing space, room and board, salaries for the writers, and other expenses.  This alone totals to $18000 per song.  After that, the songwriter is paid around $15000, the song producer is paid around $20000, and the voice producer is paid around $10000.  At this point the total cost per song is $53000, and that is even before Rihanna’s voice is recorded on the song.

            After RI RI’s voice is recorded, the next thing record labels have to do is get the song out to the public.  This is done with marketing to radio stations and getting the singer our there to promote their own album.  Approximately $1.8 million dollars goes into marketing and promoting one song.  That does not include any extra money that record labels slip into the pockets of radio DJ's.  It has been said that in the past record labels have tried to slip radio station bribes so that there song can be played more than other songs.  Although this has been deemed illegal, it is still being done in other, not as obvious ways. 

            All together, it cost Rihanna’s record label $1,078,000 to create “Man Down”.  Once they created the music video to go along with the song, it raised the cost to $1,250,000.  A lot of money goes into producing a “hit” song.  Most of the time record labels take a chance by spending that much money to produce the song, and never end up making a profit off of it.  In this case the record label did not make as much as they hoped they would with “Man Down” because the song did not last as long in the number one spot as they thought.  The profit that these labels make is also diminishing because people do not have to purchase a whole album to listen to the one song they actually like.  With inventions like iTunes, people can pick and choose which songs they want to purchase.  Not to mention people can also illegally download music online, which also lowers profits for record labels.  Music is more than just listening to music and the singer making money.  Economics plays a big role in the production of music, a bigger role than most people would think.