The One Thing that CFPB Must Do

The Consumer Financial Protection Bureau (CFPB) was created in 2011 to, according to the US Treasury Department, "promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services." If you look at the underlying motivation for the CFPB's creation, however, its origin lies in the perceived deception of consumers by financial companies. Finance is really psychology, and the most successful finance companies understand the psychological pitfalls that consumer don't. Consumers make the same mistakes over and over, and the CFPB now exists in the hopes of preventing finance companies from allowing consumers to fall into those traps.

A great example of this is use of credit cards. Because there is no physically representative counter involved, spending money with a credit card tends to be too easy; there is no feedback, such as a diminished weight in your pocket, or thinness of your wallet, that would signal to you that you might be spending too much money. Even relatively sophisticated consumers spend more money when they use a credit card instead of cash. This is exactly the kind of "trick" that consumers fall prey to every day.

So if the CFPB exists to help consumers avoid such tricks, then they really need to go after retail pricing. For decades retailers have discovered that they can sell more products if they mark the price down by a penny or two. Instead of charging two dollars, they charge $1.99, and sales magically rise. Although you might argue that sales rise because the customer is getting a one penny discount, most of the rest of us would think you were pretty stupid to buy that line. No. Instead, when a product is priced at $1.99, a huge majority of consumers think, on some level, that it costs one dollar, not two dollars, even though simple third-grade math tells you that you really ought to round it up to two dollars.

The proof is in the prevalence of the practice. When JCPenney recently decided to price goods "honestly" in whole dollar amounts, investment analysts roundly criticized their new strategy as naive. Perhaps 99% of all retailers use this pricing strategy.

Clearly, using prices based on nines (.99, .98, .97, .95) works, and it is tricky. It is a psychological trick designed to make consumers think that things cost less than they do, and as a result, consumers overspend.

The CFPB is starting in the wrong place. They really need to be out there setting rules for pricing of retail goods. The rule to be imposed is simple:  Goods must be priced so that when rounded to the nearest five percent, there is no change in the price. With this formula in play, items could cost $1.90 or $2.00, but not in between. No consumer is going to lose any sleep over the difference. The retailer, faces a much tougher choice. If they price at $1.90, they keep most of the "trick", but at a loss of 9 cents (4.5%) on every sale. Or they can post the "honest price" of $2.00, and stop tricking the customer into spending money they don't really have.

More on that "Austerity" Thing

Several days before I wrote yesterday's article, I sent Mr. Livingston an email in hopes that I'd have a chance at a dialog on the subject of his article against austerity. When he didn't respond, I decided that the only way to carry the dialog forward was to write and post my article, and also post a comment on the Bloomberg excerpt.

The comments on Bloomberg seem to go heavily against Livingston. I'll cite some of the comments you can find on Livingston's excerpt:

"This is outright wrong...."

"The logic here is horribly flawed...."

"Austerity is bad??? Badly-wrong sentence...."

"...the idea that work is a function of what is wrong with the human condition flies in the face of not only some of the most enlightened thinkers throughout history but also most people's own feelings...."

"The more I read this the less sense it makes..."

Another Bloomberg columnist, Caroline Baum, posted a different viewpoint that also tilts against Livingston's thesis. Her piece, Mall Rats Can’t Bring About the Wealth of Nations, starts out as a comment on Black Friday and retail sales as an indicator of economic health, but necessarily turns deeper and more analytic, concluding with a definition of consumption from Webster:

"the utilization of economic goods in the satisfaction of wants ... resulting chiefly in their destruction, deterioration, or transformation."

Why harp on this? Over-spending is a bad idea, but although some people think it might be bad for the individual, I don't get the sense that they feel that it hurts society. There is the underlying assumption that an over-spender slightly hurts themselves while benefiting the rest of us by making the economy go faster. And this is absolutely incorrect. A unnecessary purchase is the opposite of a vorpal trade. Poor purchase decisions harm the economy for everyone.

I am not against spending or consumption. Several articles in Vorpal Trade have described what a good purchase might look like. This might be a good time to write down some of the characteristics of a purchase that fits the definition of a vorpal trade:

- it costs less than you budgeted

- the purchase comes at exactly the right time for the seller

- it arrives just in the nick of time

- it generates cash shortly thereafter, or significant time or cost savings

- the payback period (moment at which net benefits exceed the price) is very short

- it is elegant, beautiful, or has character in its form or function

- it lasts

- it is a good candidate for using it up, wearing it out, making it do

- it greatly empowers you professionally, artistically, or personally

- it fits in your budget

You know a vorpal trade when you see it. When you think about the all-star products you have owned in the past, or present, it is quite clear that some things were simply vastly better investments than others. Couldn't we all use a few more things like those?