Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985. Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand. She attended the University of Michigan and Wayne State University.
image from subversify.com
Trust is a major component of business transactions...but it is not always honored. Whenever anyone is trying to sell something--particularly if the product is "new" and "different"--there is some risk involved for the consumer. What if the seller is misrepresenting the product's attributes? One example: "Citing deception, critics put Your Baby Can Read out of business" [Durango Herald, July 20, 2012]. This company marketed a line of products designed to teach reading skills during a "small window of opportunity" during infancy and toddler-hood. Its marketing strategy capitalized on parental hopes for their children's futures, and the concomitant fears of not doing as much for their children as other parents might be doing for theirs.
But in 2011, a consumer-interest group, Campaign for a Commercial-Free Childhood, filed a complaint with the Federal Trade Commission and the company faced a series of legal battles.
The consumers who spent $200 for the deluxe version of the product are not blameless: they seemed to want to believe in miracles. (Wishful thinking seems to feed the never-ending stream of weight-loss products as well.) But did these consumers get $200 worth of value from their investment? It can be tough to assess possible value when emotions, and seller deception may be involved. And it is easy to make unrealistic assumptions about products one only sees at a distance.
That said, is value assessment any easier in the face-to-face arena of a flea market? The increased risk here is that each stall represents a private seller, so the rules can change drastically from booth to booth. Buyers don't know what other people are paying. For instance, some sellers expect a buyer to try to “talk them down” on price, while others might get offended at the very same suggestion. In unregulated markets, how can an individual tell if he or she is being deceived? Good instincts are crucial in a place like this, obviously--but are they enough? How do humans arrive at "fair market value"?Recent research indicates that the human brain is hard-wired to be constantly guessing at the value of things in the world. Our brains are working in background, roughly evaluating what we might be willing to exchange to obtain what we want. A face-to-face negotiation at an open market adds social dynamics to the mix. Our brains are constantly weighing options: Could we do better if we were aloof and disinterested? Do we have a fixed idea that we will never pay more than, say, $50 for a pair of jeans? Are we susceptible to offers of extras? Does the act of buying something fulfill another kind of need--like an addiction to acquisition? Researchers have discovered that these valuation decisions are complex internal negotiations. They involve multiple variables and require the ability to adapt in real time in light of new information. They depend on much more complex brain systems than even other primates have. The most abstract, higher order thinking skills are required for "purposeful deceit"--an "attempt...to create in another [person] a belief which the communicator considers to be untrue." [Journal of the Royal Society of Medicine, "The Deceptive Brain" January 2004]
Your “poker face,” for example, is a form of deceit, and this option is open to a buyer in a flea market, just as a seller might try to mislead potential buyers by spinning and withholding information. These forms of dishonesty make it even more difficult to value assets for sale.
image of "Canyon" by artist Robert Raushenberg from article linked below
Source: "Art's Sale Value? Zero. The Tax Bill: $29 million" by Patricia Cohen, NYT, July 22, 2012
I didn't think I could feel sorry for multi-millionaire heirs whining about paying taxes, but this situation seems to be extremely unfair. The IRS has appraised an artwork by Robert Rauschenberg at $65 million, and expects the children of art dealer Ileana Sonnabend to pay inheritance taxes of $29.2 million on the asset.
The problem is: the artwork, "Canyon," contains a stuffed bald eagle, and it would be a felony to sell the piece because of the presence of this dead bird. Thus, the fair market value of the piece is $-0-.
The heirs, Nina Sundell and Antonio Homem, are challenging the IRS in tax court regarding this matter. They have already sold off much of their mother's billion-dollar, art-filled estate to pay $471 million in taxes. They do not want to pay the $29.2 million in taxes plus penalties of $11.7 million on a piece that auction houses have valued at $-0-.
The parties will attempt to resolve this "luxury problem" some time this month. Estate planners and art dealers are concerned about the outcome, because "fair market value" has long been the gold standard for valuation, and this departure makes planning difficult if not impossible.
image from geoffolson.com
When we’re choosing among brands, our decisions are more often based on instinct than on logic. This makes sense, because the brain circuits that govern our shopping habits seem to be the same ones our ancestors used in hunting for food.Take, for example, your favorite energy drink. When you reach into the grocery store cooler, your choice is mainly determined by one question: “Which one looks good?” The answer to that question, though, is being calculated for you by brain processes that operate far beneath your conscious control.Researchers at MIT studied these brain processes by placing volunteers in an fMRI scanner, and having them make purchase decisions based on factors like price, advertising and so on. Surprisingly,
the scientists found, many of our financial decisions aren't based on logic at all, but on the same ancient gut reactions that taught our ancestors how to choose their next meal.For instance, if you’ve felt a joyous energy boost every time you’ve tried a certain drink brand, your brain’s microscopic structure has actually changed in response. An area known as the nucleus accumbens (NAcc) has grown new neural connections, which help your brain’s pleasure pathways light up with happy anticipation the next time you see the familiar logo.But if another brand has made you sick in the past--or even if it just tends to be overpriced--your brain has wired itself to avoid that logo like poison. Your amygdala, the same brain area that processes “gut-wrenching” emotions like fear and disgust (as well as emotional responses to physical pain), leaps into action, warning you to stay clear.In many cases, a choice between brands might not give you a rush of emotion at all, but just a certain “leaning” toward one brand or another. But that’s exactly what’s so intriguing about the process of decision-making: even your most subtle leanings are the results of precise calculations performed deep within your subconscious mind. It’s easy to take those hidden calculations for granted--but without them, we might not be able to make decisions at all.
As consumers and business-persons, we can use this knowledge to make decisions that will maximize our satisfaction in our personal spheres, and increase our effectiveness on the job. I've been told that even a reaction to a font style (what?!?) can make a difference in the level of acceptance of what one has to "sell." (Maybe you have noticed how I have changed things up lately.)
Additional source: The Connectome
image is the book cover, from the first link in the list below
I'm going to start this list of books with one that I haven't read yet...because it was recently published, and it is good to keep current. I'm also including two books that appeared on the NYT list I talked about in a post last week, as well as one movie. The rest of the items on the list have either helped my business students in the past, or have helped me develop my own basic literacy regarding business and finance concepts.
image from netflix
cartoon image from rummuser.com
What if you inherited a large sum of money while you were in the middle of college? Would you know what to do with the money? Would it influence decisions about how you would live your life?
These are some of the questions posed by Paul Sullivan in "What To Tell the Children About Their Inheritance and When" [New York Times Wealth Matters, July 20, 2012]. Some of the situations he explored included those of:
This may be a problem that might seem to effect only the 1%, but a vast amount of wealth will be inherited over the coming years:
Nevertheless, there doesn't seem to be very much discussion between the generations about how much money there is in the family, and how to manage wealth. More conversations seem to be occurring with the tax accountants in setting up the transfers than with the potential recipients.
image from blackenterprise.com
It is difficult to learn about money management on a grand scale in a short period of time, and it is always difficult to know whose advice to trust. In addition, inequities in inheritance can create problems among family members and can use up resources to resolve. Gradually accepting more responsibility for to-be-inherited wealth might be difficult, but could be the most effective approach.
IFRS vs FASB: cooking the books? image from LINK
Last week, the Security and Exchange Commission (SEC) basically said "NO" to IFRS, which are the standards that are meant to line up with those promulgated by the London-based IASB: International Accounting Standards Board. This was reported widely, but one link was in an article by Ken Tysiac in the CGMA online Magazine. [July 13, 2012]Actually, the SEC's "no" was couched as a "not yet." The areas that need further investigation include:
Granted, these are the most complicated of accounting issues, but the reality is: most straightforward accounting issues are the same for GAAP and IFRS already. Only the GAAP issues that have been influenced by corporation-lobbied IRS legislation (depreciation and revenue recognition) and the international standards regarding valuation in specific industries are basically at issue. Many people, particularly in the international community, would like to see US GAAP merged with IFRS standards.
The reason for this probably speaks to the central purpose of accounting standards: to provide a third party reader of financial statements some assurance that a "reasonable person" can draw conclusions from the statements that are accurate and informed.
I think that the SEC is probably correct: there is more to discuss on these issues, particularly regarding assets that are very difficult to evaluate from an "arm's length" perspective...and that are beyond the understanding of most "reasonable persons."
image from Amazon.com
Students spend a lot of time with textbooks, but lively and creative adults who are "lifelong learners" read currently published books. The New York Times publishes lists of both hardcover and softcover business-related bestsellers each week, in addition to its well known lists for fiction and general interest.
Last week's Business bestseller list included the following books:
I've only read two of these books--Steve Jobs and The Power of Habit--but several books look good to me. My own personal "best business books" list has some other titles on it. I will share it next week.
image from blogs.indium.com
Recently, in Texas, one of the political parties included in its platform the following: "We oppose the teaching of Higher Order Thinking Skills (HOTS) (values clarification), critical thinking skills and similar programs." [from "Texas...rejects 'critical thinking' skills. Really" by Valerie Strauss, July 9, 2012] As a business educator, I pondered the implications this might have for students as they enter the workplace. It seems to me that critical thinking skills make an employee more valuable.
But what are critical thinking skills, really? And how to they relate to workplace tasks? I asked Ben Thomas, who writes about neuroscience on the Connectome website, to illustrate what the latest scientific research might have to say about the special critical thinking skills the human brain brings to solving workplace problems. Here's what he had to say:
"Let's say you’re handed a big box of paperwork, and you’re asked to shred all the documents that look outdated. When in doubt, your boss says, just use your best judgment. You could start by shredding every sheet with a 20th-century date, or every page with an obsolete logo - but if you suddenly came across a handwritten sheet of crumbling yellowed parchment, you’d know instantly that it was something special (maybe the map to a lost treasure).Unlike a computer, though, you’d know this without having to be told. And scientists are getting closer to figuring out just how your brain stays so far ahead of the computing curve. This year, a team of neuroscientists at UC Santa Barbara scanned the brains of 18 volunteers as they searched for objects in common among hundreds of photos. Though none of the objects looked quite the same in any two of the photos, the exact same region of each volunteer’s brain lit up with a similar pattern of activity whenever he or she recognized a familiar object.What I mean is, your brain doesn’t need a separate area to recognize every logo you come across, every kind of paper you find, and so on - instead, you can decide which aspects of a particular page (its logo, date, parchment, etc.) are most relevant to your task, and consider those traits in light of your situation.Your nervous system does this by running all kinds of sensory input through a centralized chain of processing centers known as the dorsal frontoparietal network. One of the links in that network - an area known as the intraparietal sulcus (IPS) - helps your brain decide whether a certain object you’re seeing, hearing or feeling is the one you’re looking for."As you go further up in processing, the neurons are less interested in a specific feature, but they're more interested in whatever is behaviorally relevant to you at the moment," said neuroscientist Miguel Eckstein, who led the UCSB study linked above. In other words, your IPS can “tune in” not only to a specific object, but to combinations of traits and features - like the logo, date and material of each sheet you pull out of a box. It also “re-tunes” itself as new traits and features become more important to you. Not even a supercomputer like IBM’s Watson can do all that as well as you can.In biology, just as in business, sharp intuition beats sheer speed nearly every time. So next time you’re up against some fierce competition, try taking advantage of your brain’s built-in power to rewrite its own rules - you might surprise yourself with an insight."
Here is how I would translate this research to students who want to be told "the answer" to a question: Trust your inner voice. Your brain (the IPS) is hard-wired to make sense of information that it hasn't seen before--and integrate it in a way that can be useful.
In addition, neuroscience holds clues about behavior that can guide marketers in getting customers to recognize and identify brands.
image from bloomberg.com but article content is from the NYT article linked immediately below
NYT: "The Spreading Scourge of Corporate Corruption" by Eduardo Porter. July 11, 2012
"Sixty-two percent of Americans believe corruption is widespread across corporate America," according to the New York Times article by Eduardo Porter linked above (originally from a Gallup Poll). This kind of statistic probably does not surprise any of us. But the Libor scandal--which is truly outrageously corrupt--has produced so little surprise in the financial community and in the press that it highlights how commonplace corruption in business is today.
Let's review the Libor and what Barclays did to mess with it. Check out the graphic from a separate NYT Dealbook article. "The Libor" is a "benchmark interest rate that affects how consumers and customers borrow money across the world." Basically, banks world-wide submit interest information daily to the British Banker's Association, which eliminates the outliers and averages the rates to form the Libor rate. This rate influences derivative pricing, loan rates, mortgages, student loans--any rates that fluctuate based on a standard may be tied to the Libor rate.
Here is what Barclay's bank did to illegally and unethically manipulate that rate (from the Dealbook chart linked above):
The Dealbook graphic quotes from emails among traders to illustrate how these manipulations were promulgated, and shows how the requests influenced rates at the height of the financial crisis.
The reason that people use the Libor is that everyone involved is presumed to be unquestionably trustworthy. Many business relationships are based on trust...just think of how, as individuals, we must trust banks with our most personal financial data in order to get a credit card or a loan. The NYT article quotes Nobel Laureate Kenneth Arrow on this point,"Virtually every commercial transaction has within itself an element of trust."
The real dangers to capitalism occur when a benchmark for "trillions of dollars worth of financial contracts" can no longer be trusted.
Follow up: How and why have the following contributed to spreading corruption? Check out the NYT article and/or other sources.
cartoon by R.J. Matson of the St. Louis Post-Dispatch
The Commodity Futures Trading Commission approved rules this week that would provide some controls over the $700 billion derivatives markets. The valuation issues underlying derivatives was a central cause of the 2008 financial crisis. The story, reported in the New York Times by Ben Protess and online at NYT Dealbook, also noted that one commissioner, Bart Chilton, cast the only vote against the new rules. He feared that there were several last-minute loopholes added that would be exploited by crafty Wall Street firms, saying, "There are lots of lawyers out there itching to find ways for their clients to get around Dodd-Frank."
Dodd-Frank was put in place after the financial debacle involving one form of derivatives--credit-default swaps--that toppled AIG, a huge insurance conglomerate. The intent was to provide for greater oversight, more reporting standards, and "Plan B" safety nets that would be triggered by troubling financial events.The new rules clarify some of these standards.
Corporations have resisted Dodd-Frank at every opportunity. A new industry of "compliance consultants" has grown to find ways for corporations to comply with the letter of the law...but not necessarily the substance. In other words, loophole locators.
The new regulations define the most problematic "swap" transactions, but exclude many other insurance instruments. In addition, several industries previously covered under Dodd-Frank would now be excused from compliance. For example, according the NYT, the new rules state that "if at least one party in the trade is a 'nonfinancial' entity and is using the swap to hedge against its 'commercial risk' it can be excluded. Some experts feel that corporations might manipulate transactions to hide out under this exclusion.
More will be revealed as the law takes effect.
image is from the ad campaign described below, and on Facebook: Gold Peak Tea
"Rebellion Ads" is the topic of this Business Day Live report anchored by Winnie O'Kelley and reported by Tanzina Vega. New York Times Business Day Live: July 9, 2012
highlights ads by several companies with the underlying theme that workers are burnt out, overburdened, and have had enough. The worker angst has been fueled by the slow growth in jobs and a business environment that encourages workers to work through lunch, do extra work, never ask for a raise and not make waves.
The Las Vegas Convention Visitors Authority ad features a woman standing on her desk--think of the image from Norma
Rae--holding a sign that says "Vacation Now."
McDonald's ads on this theme contained the ad lines:
"It's your lunch: Take it.""Sowing the Sesame Seeds of Revolution." Coca Cola's Gold Peak Tea has been holding a contest. The prize: One year off work and $100,000. Images from this campaign feature workers who are totally burned out (see the image above).
All of these ad campaigns appeal to a rebellious urge in workers who feel they are being taken advantage of. Will these be successful? Will we see more of them?
Lisa Kron, playwright and actress, in "The Veri**on Play"photo by Alan Simons
I recently had a customer service experience with an internet, TV, and phone provider in our area. I tried to cancel service at a temporary office. I placed the cancellation order two weeks before my move and three and one half weeks before my next bill would be due. My guess is my frustrating experience was similar to that of many others. The unanticipated consequences of my cancellation order included:
I guess I was in good company. Others seemed to have some of the same troubles I had with cancelling a service bundle: LINK TO FAQ THREAD.
It is baffling that Zappos and Amazon can instantaneously bill my accounts for purchases, and credit my account when there are returns, but this close-to-monopoly entity cannot process an electronic transaction with precision or timeliness.
A more creative individual than I am, Lisa Kron, wrote a play about her similar experiences. Lewis Lazare reviewed the play at the ReelChicago website (March 13, 2012). From his review:
"If nothing else, the finished play by Kron and the production on view at the Actor's Theatre through April 1, should be a VERY forceful reminder that any major brand of whatever stripe must never, ever forget that superior customer service is of paramount importance."
I checked out the professional organization Customer Service Institute of America and other customer service guidelines. It seems that stellar standards exist. I wonder what is keeping corporations from following them.
What is the name of Lisa Kron's play? What does she call the company in the play? Can you find any references of other creative works that highlighted poor customer service? Hint: Google "Lily Tomlin Ernestine" if you can't find any others.
What are the qualities that make for good customer service by phone? What are the guiding principles of good customer service? Do customers take advantage of companies that provide good service? What are the pros and cons of providing good service?
Are customer service standards different for retail sales (online) vs credit cards vs cable/internet providers? Why might differences exist?
Describe your best and worst customer service experiences.
[View::550:0]If video does not open, click on "More Video"--and if video still doesn't open, use this LINKVideo produced by Ben Solomon, July 5, 2012
Microfinance is once again in the news--this time in Malawi. The savings-and-loan set-up here is under the auspice of CARE, according to narrator Nicholas Kristof of the New York Times. It works in a similar way to the micro-financing set up by Nobel-Peace-Prize winning financier Muhammad Yunus. Entrepreneurs meet weekly, paying small dues into a community lockbox, "saving for a better future." Funds can be borrowed for business purposes.
Kristof's story focuses on Biti Rose, who makes doughnuts as part of a business funded by a $2 loan from the grass-roots "savings and loan" in her village. Like other borrower/investors, she takes part in annual celebrations, distributing profits to villagers. These savings and the increased wealth would have been unimaginable without the community savings and loans. These S&Ls are spreading, and as they expand to new locations, wealth and hope also increase.
Read about Muhammad Yunus. Where did he begin his micro-lending activities? What are some of the tenets of practice that he has found leads to successful micro-lending operations?
According to the video, how many of the world's poor have no access to banks, and therefore, no way to save for a better future?
Where is Malawi?
What kind of organization is CARE?
image from pensionriskmatters.com
What a classic example of "massaging the data"! This past week, Congress wanted to find the money so that it didn't have to raise the rates on student loans, as well as continuing the much needed economy-boosting infrastructure improvements on American roads. It was afraid to raise tax rates, so it looked to actuarial assumptions surrounding pension benefits to back into the possibility of increased revenues there.
Here is how the logic goes: When interest rates are high, it takes less of an investment, at compounded rates, to produce more money later. For example, if you take $1000 today and invest it at 8%, compounded annually, you would have1000 x 1.08 = $1080 after one year1080 x 1.08 = $1066.40 after two years; and1066.40 x 1.08 = $1259.712 after three years. If interest rates were 4%, in order to get $1250 after 3 years, you would have to invest more: $1111.25--1111.25 x 1.04 = $1155.701155.70 x 1.04 = $1201.9281201.928 x 1.04 = $1250.005
What this shows is: if you change your assumption about the interest rate, then you can change the assumption about how much you need to invest to reach your goals.
Actuaries use more complicated math, with more variables, to determine the amounts that need to be invested in pension funds to meet federal requirements for proper funding. But federally-mandated interest rate assumptions are a major factor in the calculations. The rules set in 2006 are conservative--based on recent, low interest rates. These more conservative rates have had these effects:
The change proposed last week tweaked the interest rate. Instead of using prevailing interest averaged over the prior 2 years, actuaries could use the interest averaged over the last 25 years. Twenty five years! That takes us back to the high interest rates in the 1980s, and moves the allowed interest rate used on computing current investments to 7%.
Who among us is getting 7% interest now? Hmm. Anyway, this means corporations will be paying less into pensions, and taking lower income tax deductions, leading to more tax revenue--estimated at $9.4 billion over ten years according to the Joint Committee on Taxation.
The unintended consequence, of course, is that the pensions themselves might end up being underfunded. Here are comments from two actuaries, both from the NYT article linked below:
“'It’s really a stealth measure,' said Jeremy Gold, an actuary and
economist who has called attention to the gaps between the numbers that
actuaries work with and the true economic cost of pension benefits. He
said the bill could eliminate special safety features introduced in 2006
to keep the weakest pension funds from running through their money too
"Donald E. Fuerst, a pension expert at the American Academy of Actuaries, sent an unusual letter
to the lawmakers in May, advising against it. Pension values based on a
25-year average rate 'are insufficient,' he wrote, 'and do not provide
meaningful information about the current funded status of the plan.'"
Nevertheless, the House of Representatives went forward with this legislation.
Source: NYT, "Looking for Cash, Congress finds some in Corporate Pension Rule Tweak" Mary Williams Walsh, June 28, 2012.