Economists Do It With Models

Warning: “graphic” content…

Bookmark and Share
The Claim That There’s A Sucker Born Every Minute Is Apparently An Understatement…

May 13th, 2009 · 14 Comments
Advertising · Uncategorizable

If you’ve been reading this blog for a while (and paying attention), you have probably noticed a few things about me: 1. My TV has a bizarre power over me, and 2. I procrastinate with everything, including going to sleep. These two facts imply that I see a lot of infomercials. Some of them are pretty entertaining- who wouldn’t be intrigued by the possibility of airbrushing on her makeup or making a meatloaf in a blender in 30 seconds?- but there is one in particular that makes me want to punch someone in the face. It’s called “The Art of Making Money” by Russ Dalbey, and apparently good old Russ has a system called “Winning in the Cash Flow Business.”

Like all sketchy infomercials worth their salt, this one is pretty vague about the how part of the making piles and piles of money, but is very careful to point out how easy the system is. (It’s complete with the not-overly-intelligent people bragging about how they made $200,000 with one phone call or whatever.) It even enlists Gary Collins to act as a straight man for Russ’s schpiel, which goes as follows:

“Gary, let me show you how easy winning in the cash flow business really is. Take these two bills for example. (Holds up $50 bill and $100 bill) In my left hand I have a $50 bill, and in my right hand I have a $100 bill. Which would you rather have?”

Gary: “The hundred, of course.”

“Okay, of course. Now, what if I said you could have the $50 bill today, or I’ll give you the $100 bill over the next 5 years. Which would you choose?”

Gary: “I’d take the 50.”

“There you go. Ansolutely, it’s all yours. And that’s how easy the cash flow business is, and that’s how cash flow notes work. Many people who have these notes would love to have cash now, to pay off their bills, to take that dream vacation they’ve been talking about, they don’t wanna wait years for their money. It’s a win-win situation for everybody.”

Hm. So I kind of get how the system works: you call people with some form of structured settlement to be paid out over time (cash flow notes, in Dalbey’s words) and convince them to accept an up front payment in return for the stream of payments. You then sell the stream of payments to an investor for a higher up front sum and pocket the difference.

I’m sorry, all I really heard from that was “you take advantage of people who can’t do math and don’t understand the time value of money”, and apparently Gary Collins doesn’t get it either. Let’s do some math (sorry, it can’t be avoided) to compare the up front $50 to the $100 over time:

What this basically means is that, for the $50 offer and the $100 offer to be equivalent, the interest rate that you get on your savings (or that you pay to borrow) has to be in the neighborhood of 29%. Seems a bit high, last time I checked. If the interest rate is lower than 29%, the $100 over time is the better deal. I’m guessing our buddy Russ is hoping that people don’t realize that.

Let’s put this another way, for sake of comparison. Let’s say you had the $50 up front and you invested it at a reasonable 6% interest rate (though even that could be considered high nowadays). How much would you have after 5 years?

You would have considerably less than $100…and this was even assuming that you didn’t get yearly payouts like in the first example.

Russ brings up the fact that people want to purchase things now, such as vacations, cars, boats, small furry woodland creatures, whatever, so there is a specific benefit to the up front payment. However, given the astronomical foregone return, this would only be a sensible choice for people that can’t get conventional loans, credit cards, etc., since all of these items typically have an interest rate of lower than 29%. Which brings me to an additional point that Russ would like to address:

“If it’s so easy, why isn’t everyone doing it?”

Well, let me see…Russ says that it’s because not everyone knows about it, but I beg to differ:

  • Some people don’t want to target those who either don’t understand math or can’t get credit, since it seems somehow wrong. (Let me address those who accuse me of being anti free market: One of the assumptions required for the conclusion that free markets are the most efficient way of organizing is that all participants have the same information. If one party can’t do math, this assumption doesn’t hold.)
  • The process is a lot harder than Russ makes it seem, if for no other reason than a lot of actual companies are carrying out similar transactions.
  • According to the interwebs, Russ doesn’t actually give you enough information to implement the system successfully, even if it is theoretically possible.
  • In a lot of states you need some sort of broker’s license to legally carry on this type of business.

Need I continue?

I didn’t write this because I really thought that anyone reading this site was going to rush out and purchase this magical moneymaking pot of gold. I wrote this to make the point that it’s important to consider not only your own incentives but the incentives of the other party when engaging in a transaction. Perhaps you should even be thinking to yourself “If this is such a good deal for me, why is this guy so happy to give it to me?” Don’t get me wrong, there are some deals that actually do create value for everyone involved, but a deal that is merely transactional is by definition a zero-sum game. And that means that if you can’t look out and see the sucker, it’s because you’re the sucker.

For the record, I would venture to guess that Russ Dalbey makes more money from selling these packages than he does actually conducting the business that he says is so amazing.

Tags: Advertising · Uncategorizable

14 responses so far ↓

  • 1 Philip // May 13, 2009 at 3:43 pm

    I love the post…but what is even more fun are all the Google ads for the Russ Dalby affiliate programs that popped up in the left margin. Should we click on each of them 10 times so you get your rev share?

  • 2 econgirl // May 13, 2009 at 3:50 pm

    Yes. Why do you think there is an absence of links in the post itself? Duh. =P

  • 3 LL Cool A // May 13, 2009 at 3:53 pm

    you do watch a lot of TV.

  • 4 Joel // May 13, 2009 at 4:23 pm

    I like the rounders movie reference! Economics is always interesting, especially when you add Finance to the equation. This system sounds like selling mortgage debt to outside investors…… I wonder where that happens? Well if this Russ guy can sell his idea to people then he is apparently living the American Dream!
    – JP
    P.S. I think that most infomercials are targeted toward the….. lower class per say.

  • 5 Scott // May 13, 2009 at 5:12 pm

    Philip: one of my ads says, “Russ Dalbey Secrets? Don’t Learn Them. Copy Them.”

    What does that even mean?

  • 6 econgirl // May 13, 2009 at 5:27 pm

    Maybe you should click and find out. 🙂 (Behold the power of being vague…)

  • 7 Rich // May 13, 2009 at 8:37 pm

    I have to pick a nit with one statement: that the efficiency of free markets requires equal knowledge.

    I readily admit that *perfect* efficiency in a free market would require not only equal knowledge but *perfect* knowledge of all participants.

    By the same token, *perfect* efficiency in central planning would require *perfect* knowledge by those few who were permitted to make decisions for everyone else.

    But it seems you’re trying to compare a perfect government (which is where?) to a real world market. There is no reason to believe that an imperfect government will outperform an imperfect market. Quite the contrary, the millions who died of central planning — usually starvation or being murdered by their own government — over the last century would probably claim, in retrospect, that they would have preferred to live in a free country with an imperfect market than to die in a slave country with central planning.

  • 8 Scott // May 14, 2009 at 1:25 pm

    I didn’t know there were others who watch those infomercials late night also. My wife makes fun of me all the time because I find them so fascinating. Not necessarily the product/s being offered, but the sales techniques being used, the quick handed demonstrations, and the people in the audience who are all so amazed. By the way, you really should sell bumper stickers with the title of your blog “Economists Do it With Models” for us financial nerds. I love it!

  • 9 Bart // May 14, 2009 at 2:36 pm

    “that means that if you can’t look out and see the sucker, it’s because you’re the sucker.”

    That certainly has to be the comment of the day.

  • 10 Rich // May 14, 2009 at 11:08 pm

    >> I’m sorry, all I really heard from that was
    >> “you take advantage of people who can’t
    >> do math and don’t understand the time
    >> value of money”, and apparently Gary
    >> Collins doesn’t get it either. Let’s do some
    >> math (sorry, it can’t be avoided) to
    >> compare the up front $50 to the $100
    >> over time:

    There are a couple problems with this:

    1) It assumes that every person will pay the same amount of interest on a loan. Now, personally, I would not lend money to an Keynesian at the same rate of interest I would offer to an Austrian, ’cause Keynesian economists believe in accumulating debt instead of assets. That implies to me that they’re headed for bankruptcy.

    2) If I take a 30,000 lump sum instead of 50,000 over time, and I invest that 30,000 to build a prototype of the new anti-gravity boots I invented, but that I cannot sell based on a drawing, and as a result of that I am able to make 1,000,000 over the course of 1 year, it does not imply that I can’t do math. It implies that I had a higher time preference than the person who bought my future money with present value.

    All value is subjective and context dependaet.

    Time preferences are subjective and context dependent.

    That is why trade happens: different people put different values on the same items.

  • 11 John S // May 15, 2009 at 1:50 pm

    Those are some good points. But I am sure that you are aware that when explaining economics, there are a lot of assumptions made that make it easier for people to understand.

    The first assumption would be that the interest rate for everyone would be the same. Although it will not be so in reality, it helps to make the point easier to understand.

    The second assumption is that if you are ordering something from an infomercial on how to get rich quick, you probably know little to nothing about investing. Even more so, you probably don’t have a workable idea for a patent.

    I definately agree with your arguments, but we have to make these assumptions to make explaining economic theories a little easier, even if they don’t make sense.

  • 12 Bob Nease // May 15, 2009 at 2:51 pm

    Great (as usual) post! Temporal discounting is a big deal, and as you know hyperbolic discounting can cause all sorts of interesting behavior (including – ahem – procrastination). We’ve used insights from this principle to drive whopping behavior change in the pharmacy benefit… without fiddling with financial incentives one iota. Pretty cool stuff.

  • 13 Alice Yates // Jun 11, 2012 at 7:24 am

    Hello Econogirl – just wanted to say I enjoyed your blog. I’m one of those Dalbey “suckers” – and yes – I feel rather silly about the whole thing. I found your blog while trying to find out the current status of the Colo vs. Dalbey lawsuit and was intrigued.
    Do you really make money doing this blog? Can you tell me how that works? I’m an archtitect that’s been out of work for 2+ years now – so I’m really searching for something that will bring in some cash.
    Thanks! Alice Yates

  • 14 Musan // Mar 8, 2015 at 6:30 pm

    Learning from anyone about economic from anyone is great as this can be the easiest way to success. I am trading with OctaFX broker and they help me in a massive way with their free analysis and news section. I can follow it for all my trades as they provide it on daily basis so I can keep my trades completely on the basis of input and the results has been fantastic so far in past 1 year without any major losses while profits has flown in.

Leave a Comment