October 15, 2023

by Stephen Stofka

This week’s letter is about how we process information. I’ll cover everything from investing and FTX to Sesame Street so buckle in. This week’s topic was prompted with my exchange with two people at an online help desk. People who handle a lot of email probably skim the emails they receive without paying too much attention to the details. As a result they become less responsive to customer inquiries and problems. Tuck that word responsive into your pocket. It is a key feature of interpersonal relationships and how web pages are supposed to respond to our mouse clicks and keyboard strokes.

In a complex society, there are many principal-agent relationships. We rely on other people to intermediate a problem we are having. We do not have the knowledge or the capability to reach a solution by ourselves. Often these roles are formalized and licensed. The agent must have some training and testing. Examples include a doctor, electrician, an insurance agent, a real estate or securities broker. However, we often engage with people for which there is no standard of training or testing. People on a help desk – customer service reps – are examples of this type of agent. They may have received training by the company they work for but there is no formal standard. It is up to each company to decide how to spend its resources.

Two weeks ago I had a legal matter with a large bank and wanted to know if I needed a type of notarized affidavit or was there a simpler solution. The person I reached at customer service did not know the answer but repeated the gist of the problem back to me, indicating that they understood the nature of my problem. After thirty seconds of waiting she came back with an answer that was appropriate to the problem I stated, confirming that the person had listened and understood my problem. Within minutes the problem was resolved and I could see confirmation of the solution. This past week I had a technical problem with a computer program. The online customer service rep could neither help me resolve the problem nor respond appropriately to the problem I presented. A second service rep was also unresponsive. This company touts itself as a leader in responsive technology and design. A search within a customer forum suggested a solution which worked.

I have been a customer service rep and trained reps in the days before the widespread use of computers. We wrote out general classes of problems that customers had and the questions that needed to be asked to determine a path toward resolution. A rep might fail to recognize that a specific problem belonged to a general set of similar problems. They did not know enough about the company’s business to comprehend a suitable classification so that they could reference the correct question and present a way forward to the customer. Companies now have powerful search engines that can empower customer service reps. Are they deploying those tools and training reps properly? I fear not. We can do better.

Being able to classify events and data is a skill that we begin learning early. Those who watched Sesame Street may remember “One of these things is not like the other” drills. Presented with a picture of a dog, a horse, a cow and a bird, which one is not like the others? We learn to compare and contrast, to extract qualities from individual objects that are similar and different. Is the bird different because it has two feet, because it has a beak or because it is small compared to the others? Was the horse different because it had hooves and the others didn’t? Why is that not the best choice? We learn to reason.

As adults we learn to classify cancerous tumors from x-rays, to identify money-making schemes that are too good to be true, to assess the risk of recessions or asset bubbles. Despite extensive training and experience, these are all difficult to classify. A second radiographer reviews a mammogram to reduce diagnostic errors. Every day people fall for a swindle because they cannot see the similarity with other swindles. This week’s trial of FTX founder Sam Bankman-Fried is an example of our vulnerability in this area. Economists and financial advisors are often surprised by recessions and asset bubbles. The financial crisis in 2008 caught many economists off guard. Irving Fisher, a leading economist during the early part of the 20^th century, expressed his confidence in the stock market and was fully invested when the stock market crashed in 1929. He lost all his savings and spent the rest of his life in poverty, beholden to some charitable benefactors for a place to live and a respite from debtor’s prison.

As individuals we are not good at processing the amount of information we encounter. In a complex society, the information can be disorienting so we rely on others to help us digest it. Our society and culture provides props that we use as shortcuts, or heuristics, to navigate the load of information. A foundational assumption of economics is that we want to maximize our sense of satisfaction. To do that, we must choose among the resources available to us. We may not know how to achieve the satisfaction we desire but we care about achieving it. Schemers and promoters take advantage of us because we care about our satisfaction. 

Because we rely on others to help us navigate toward greater satisfaction, we are vulnerable to get-rich schemes. We want to be more financially secure so we invest in FTX tokens or pay a monthly fee to get hot stock tips that will turn our meager savings into a comfortable cushion of cash. In our search to satisfy our wants, we don’t think to ask if this solution is easily accessible, why isn’t everyone financially secure? We are told that we are getting in early on an idea and when the idea becomes popular, we will reap the rewards of recognizing a golden opportunity. We may be reminded of Amazon or Microsoft and the astronomical gains of those who invested early and held on.

We must put up with customer service reps that don’t respond appropriately to our questions or problem. We must be on guard against those who promise solutions before we have even presented our problem. Our greatest challenge is that we are both agent and principal in many of our financial affairs. We may not become better informed agents and protect our savings and assets until have we have been hooked like a fish by some promoter.

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Photo by Jon Tyson on Unsplash

Keywords: utility, satisfaction, classification, diagnosis, swindle, security