The following are some of the key insights which have shaped the way I look at economics and I hope you will find it useful as well:
1) .....the human brain's specialty seems to be absorbing information in narrative form. (For technical people, this is a simple and yet important point. When conveying your message to layman, don't just present the facts. Give examples or better yet, make it into an engaging story. Technical people should strive to become better story-tellers.)
2) The 'no cash on the table' principle holds that freely available money seldom sits unclaimed for long. In the future, as in the past, the only way to make real money will be through some combination of talent, thrift, hard work and luck. (To put it in another way, you can only "take advantage" of people or situation for a short period of time, e.g. exorbitant price on ignorant customers but if you intend to make real money, it has to be through a combination of talent, thrift, hard work and luck)
3) The 'no cash on the table' principle reminds us to be wary of opportunities that seem too good to be true. (For me, the central message is we cannot get rich in a hurry. HARD WORK is required.)
4) 'Low-hanging fruit' principle - it is always best to exploit one's best opportunities first.
5) Many highly skilled jobs pay relatively little because they are seen as stepping-stones to other desirable jobs. The assistant chef's position falls into this category but the waiter's does not. Highly skilled people are willing to work as assistant chefs at relatively low pay because the position provides essential training and experience for becoming a head chef, a respected and well-paid post. A waiter's position, by contrast, is a limiting profession. Many waiters never go on to higher-paying jobs, and those who do typically do not owe their subsequent success to their background as waiters. (The current difficulties in attracting and retaining talent in the civil engineering consulting business, in my humble opinion, is due to the fact that becoming a top consulting engineer (i.e. head chef in the assistant chef's analogy) is no longer respected and well-paid. This stems from the larger problem of unrealistically low consulting fees due to uncontrolled numbers of consulting engineers. Usually, such problem can be self-corrected through free market mechanism where the weak consulting engineers will eventually be forced out of the business but unfortunately, in the civil engineering business, the government has strong influence through the award of public projects, quality control of civil engineering graduates, etc. Again, this is only one side of the argument. Read the next point for idea on how to separate the good from the average).
6) The potential attraction of a wage schedule that rises faster than productivity is that a dishonest or lazy worker would be unwilling to accept employment under a contract like this. Even though the lifetime value of wages might be high under the contract, wages in the early years are lower than could be obtained elsewhere, and a dishonest worker would have reason to fear being caught and fired before becoming eligible for premium pay. By contrast, honest workers could accept work under the same contract and feel secure that they would maintain their positions long enough to reap the delayed bonuses. Firms, for their part, know that failure to maintain a reputation for honouring the contract would jeopardise their ability to recruit new workers. (Companies who have strong track records of honouring promises will eventually have advantage in getting quality new workers. Similarly, compensation schemes for employees should be tailored towards rewards in the long-term where the total package will definitely be better than short-term benefits. Such compensation scheme will weed out any potential "dishonest" worker)
7) A discount hurdle is effective from the seller's point of view if potential buyers who are highly price sensitive (and probably would not purchase the product without the discount) find the hurdle easy to jump, while others who are not sensitive to price find it hard or simply not worth their while. (For me, the central message of discount hurdle is that we must be price sensitive in order not to be taken advantage by retailers, i.e. we are paying a higher price for the retailer's extra profit. This is why retailers will try to discourage consumers from being price sensitive by protraying price sensitive consumers as cheap, lack of class, etc. so that they can take advantage of us. Think about it! For me, there is no harm to compare prices and to ask for discounts and we can certainly do it in a classy manner without looking cheap)
8) .......as careful investors eventually learn, a buy recommendation conveys little useful information about a stock's future price.
9) Experiments suggest that, in at least some settings, a nurturing managerial style is more likely to elicit good performance from employees than a highly critical style. Such evidence may be more reliable than casual impressions biased by regression to the mean. (Anyway, times have certainly changed. Don't think the critical style of managing works for the current generation of workers will work)
10) According to Kahneman and Tversky, people use heuristics, or crude rule-of-thumb reasoning, to make estimates about events in the world. For example, when people try to estimate the frequency of a given event, they often use the availability heuristic, which holds that an event is more frequent if examples of it are easier to remember. (In simple terms, easy to remember examples is very effective in communicating a point)
11) Why do estate agents often show clients two nearly identical houses, even though one is both cheaper and in better condition that the other? (For this question, I will rewrite the entire text from the book here because I find the lessons learnt is very useful especially for sales people)
A home buyer is having trouble making up his mind between two houses. One is an Edwardian farmhouse in impeccable condition listed at 300,000 pound, the other a recently updated Victorian townhouse listed at 280,000 pound. He is leaning towards the Victorian townhouse. His estate agent then makes an appointment for him to see a second Edwardian farmhouse. This one is in slightly worse condition than the first and is listed at 320,000 pound. As the two are driving back from his visit, the home buyer announces his intention to buy the first Edwardian farmhouse. What led the estate agent to think it would be a good idea to show him the second one?
This episode evokes the story of a man who asks the waitress in a cafe what kinds of sandwiches are on the menu. 'We have chicken salad and roast beef', replies the waitress, whereupon the diner orders roast beef. The waitress then adds, 'I forgot, we also have tuna,' to which the diner responds, 'In that case, I'll have chicken salad.'
By switching his order, the diner has violated a fundamental axiom of rational choice theory, which is that adding an inferior element to a list of options should not alter the option chosen. The diner's initial choice implied a preference for roast beef over chicken salad, a preference that should not have been altered by the addition ot tuna to the list of options.
As Itamar Simonson and Amos Tversky have shown, however, such preference reversals are actually common. What seems to be going on is that people often have trouble choosing between two options that are difficult to compare. Each has attractive attributes, and people are reluctant to choose one for fear that they may later regret not taking the other. In such situations, Simonson and Tversky argue, the introduction of a seemingly irrelevant new option can have a profound effect.
The estate agent's client could not choose between the first Edwardian farmhouse and the Victorian townhouse. But he experienced no such anxiety when comparing the first farmhouse with the second, because the second was inferior in both quality and price. The first farmhouse's easy victory in this comparison creates a halo effect that carries over to the comparison with the Victorian townhouse.
(Get the central message? It is always useful to guide potential client in making their decisions ;) I am sure we can relate to all of this. I would think that this also applies to SALE strategy used by a lot of retailers. When they show the consumer how much they save during a SALE, the consumer can make easier decision, i.e. to buy it during the SALE event eventhough they may realise later, that they don't need that item).
12) By planting the thought that others are spending millions, Victoria's Secret makes the idea of spending several hunderd dollars seem less preposterous. It is easy to imagine that an eager husband, having just seen the 6.5million Fantasy Bra, might hand over 298 dollar for the company's Chantal Thomas Pinstripe Merrywidow and think what a sensible shopper he'd been. (Same with previous point's concept. This is how marketing has manage to push the limits for what can be defined as sensible. For instance, it would be extravagant to consider travelling overseas yearly or twice yearly a few years back but with the introduction of low-cost airlines, it appears sensible now to do so eventhough at the end of the day, you still need to spend considerable sum for travelling, lodgings, food, etc. The same goes with owning the latest smart phone. A few years back, it would seem crazy to spend such a large amount of money on a handphone but now, it is a norm. The point is, can we wise up to the marketing tactics used by retailers and we wonder why the gap between the rich and poor is getting wider)
13) ...... employees performing a given task earn higher salaries when they work for more prosperous employers. (This is obvious isn't it? For example, a struggling firm paying minimum wage for a security guard can be accepted by the public but if for example, Petronas paying minimum wage to the poor security guard, it may be seen as exploiting by the public since the public have the perception that they have already made so much money and can certainly afford to pay a little bit more to the poor security guard who has a tough time making ends meet. Another obvious reason is of course, prosperous employers have the mean to do so - duh!)
14) ...... the best gifts are often things we're reluctant to buy for ourselves. (Companies planning for rewards scheme would do no harm by remembering this point. Remember, we humans are not rational).
15) ...... the more unpleasant and risky a job is, the more it pays. (This holds true from a strict economic perspective but am afraid I don't agree entirely with this statement. Sometimes, people may get exploited and ends up getting less than what he deserves. Again, this is a fine balance, one cannot be too calculative and expect instant reward but at the same time, should be smart enough to realise he is cheated and move on. Anyway, in my opinion, the risk of going wrong is smaller if you work hard rather than hoping for quick gain).
This book is certainly recommended especially for technical people to be more attuned to the real world. We must remember that the world certainly do not work based on strict protocols or standards which technical people are accustomed to in their world. Happy reading and have a nice weekend.
p.s. World financial markets appear poised for another turbulent period. At this moment of uncertainties, it is important that we stick to our principles (I mean good principles) and eventually, such event are for the better as it will weed out the good from the bad. Companies caught in recession would do well to strengthen their core competencies to take advantage of the eventual recovery.
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