Information Failure: Solariums

I dont usually listen to Women’s Hour, but during a lazy morning just before the start of our summer term, I latched onto a really interesting discussion about the dangers inherent in using sun beds and other solarium machines - not least from younger people whose skin is not yet mature enough to cope with intensive sun-showering. I was alerted to this issue last week with this article on the BBC news website about a 13-year-old boy who suffered severe burn blisters to his face after visiting a tanning salon three times in just one day. We can expect teenagers not to understand fully the dangers of AV tanning treatments but the problem is more widespread than that. Indeed, earlier on this month, Cancer Research released a report warning of the risks - this BBC news video might be a good resource to use if you are teaching the topic of information failure in a market. Should the industry be left to regulate itself or is there a case for government intervention e.g. enforcing a minimum age of 18 or 21 for using sun bed machines? The discussion might be broadened into looking at why people are willing to pay for such services and the availability of substitutes.

Depreciating lemons and peaches

The prices of used cars are falling faster than ever before.

The most powerful law in the world?

We are studying information failure this week and at one point during the lesson today I was tempted to spurt out that the biggest information failure of all was the failure of people to understand the law of compound interest. That was going to be in the context of discussing why people often leave it so late to start saving money when a small pot earning interest on a compound basis over a large time period can grow very quickly if it invested for long enough. Just small changes in the annual return - say from 2.5% pa to 3.0% pa can have an enormous effect on the final value of a pension fund. MindYourFinances has a good example to use by way of illustration.

I will leave that discussion until the next lesson ... but tonight I picked up a piece by John Kay which will appear in the FT tomorrow on the wealth of Warren Buffett newly crowned as the world’s richest man. Kay reinforces the power of compound interest in shaping the value of the Buffett Foundation. 

“Albert Einstein supposedly observed that the most powerful force in the universe is compound interest, and Mr Buffett’s frugality has enabled compound interest to work its magic. During Mr Buffett’s tenure at Berkshire Hathaway, the S&P 500 index has produced an average total return of 10 per cent. That return reinvested over 42 years will multiply your stake 67 times. But if your investments yield twice as much as that – as Mr Buffett’s have done – your wealth increases not by twice 67, but 67 squared, a factor of 4,500. That arithmetic makes Mr Buffett the richest man in the world.”

Read the rest of John’s piece here