Sunday, May 11, 2008

A couple of Sunday thoughts

- The post office is raising rates again tomorrow, monopoly-granted first-class mail will inch up a penny to 42 cents, as well as a host of other modifications. Available for purchase is a "forever stamp," which can be purchased at the current price of a first-class stamp but is always good for the value of a first class stamp. So, you can put one of these forever stamps that you bought last week on a letter ten years from now and you won't have to pay anything extra.

Why aren't these priced at a level above that of a first-class stamp? Am I missing something? People would pay a premium above this, especially since the Post Office announced they'll be increasing rates generally every year. Perhaps they overestimate the willingness to pay of the public...but then they'll just buy more of the fixed-value stamps, which generate the same revenue, and with the added future income of buying smaller stamp amounts so they can use them up after the rates increase again. Is there a downside anywhere to charging more? Perhaps stamps are like cigarettes and people irrationally buy them in smaller amounts.

It's effectively a financial instrument, isn't it? Does the SEC regulate this? If you bought a roll of these tomorrow at 42 cents, and the Postal Service kicked up the rates to 44 cents in a year, that's a tidy 4.7% return on your stamp investment. And short of the Postal Service lowering rates (monopoly on first-class letters-- probably not likely), you can't lose anything.


- This last week and the next is College Championship week on Jeopardy!, I have to root for the Claremont Colleges and pull for the fellow from Harvey Mudd. I wrote a little while back about betting strategies, and I must say, I think I saw perhaps the single-worst bet in my Jeopardy! watching experience.

Tournaments are a little different than regular play. They last for two weeks, and the first week is the first round. The five individual winners advance along with the four highest dollar totals amongst the non-winners. One girl, I believe she was on Thursday night's show, had about $22,000 heading into Final Jeopardy. This was the high score for the individual game. Because she played on Thursday, she (presumably) has the knowledge advantage of what 6 of the 10 non-winners have earned. I'm 95% certain that she had out-earned the previous 6 non-winners. This means that she can bet nothing and advance to the next round. This can't be overstated. In the 5% chance that she hadn't out earned everyone, $22,000 does everything but guarantee you a shot in the next round. Instead of taking the certain spot in next week's semifinals, she sees the category...and bets every dollar she has. I was amazed at this. I'm still amazed at this. There's a reason that episode of Cheers is very well known. She ended up getting it right for the win, but...really? Betting all of your money there? In a tournament? In the first round?! The only time I could think of this being even remotely acceptable would be in the first half of the championship of a tournament.

Now, if you get to keep the money that you earn in every part of the tourney, then this might explain the strategy a bit (though still doesn't justify it, in my eyes). I'm also fairly certain that seeding plays little to no role-- you might get the chance to select the first question of your respective semifinal match if you were one of the best players of the previous week, but I'm not positive of that and even then that is of minuscule importance.

I think about Jeopardy a lot.


KipEsquire said...

"It's effectively a financial instrument, isn't it? Does the SEC regulate this?"

The SEC doesn't regulate "financial instruments." The SEC regulates securities (and securities exchanges). You'd be hard-pressed to demonstrate that a stamp is a "security" any more than a check is a "security." (See, e.g., SEC v. Howey.)

"Why aren't these priced at a level above that of a first-class stamp? Am I missing something?

How about the price and cross elasticities of demand?

The Chosen Rob said...

RE: paying a premium for the Forever stamp.

You're ignoring the time value of money. If you pay 44 cents today for a Forever stamp, you will still be at a loss when postal rates increase to 44 cents. Simply put in the old cliche, a dollar today is worth more than a dollar tomorrow.

The incentive to purchase the Forever stamp is the time value of money. Your "discount" is paying today's postal rates, and there is no penalty for using it today. If you take away that discount by charging a premium, then what's the incentive for buying the Forever stamps? You are at a financial loss if you use that stamp before postal rates rise up to the future value of today's postal rates assuming interest cost as the risk-free rate.

Depending on how large the premium paid is above the current postal rates, you may have to wait many years before you receive fair value on your Forever stamp purchase.

(note: I've spent the past 15 minutes trying to plug a numerical example into my BAII-Plus, but the CFA prep has left my brain fried)

I think I can break it down this way. Even purchasing the Forever stamp today at 42 cents, assuming 5% as the risk-free rate of return, it will be 16 years and 7 months before you can break even on using the stamp at a value of 45 cents. Now, I believe the postal rate increases are going to be tied to inflation. Unless you think annual inflation is going to be less than 0.5% per year for the next 16 years, than the Forever stamp is not a good buy.

Matt E. Ryan said...

Rob does make an interesting point; inflation is definitely a factor in the decision. To which I offer the following: How does the price the Post Office chooses reflect their anticipated price increases in light of inflation? Presumably, it's on pace with inflation-- if they planned on increasing rates faster than expected inflation, (i.e. real prices will be rising), and made this known, then the Future stamps should trade at a premium above the current price of a first-class stamp, right?

Interestingly, the cost of a stamp has to be rounded to the nearest penny, so we get some small number issues with percentages and how they can relate to inflation. Though rolls of 100 stamps could help get around this.