Loblaws selling homeopathy is junk science and bad corporate ethics

Homeopathy has the potential to stimulate the body’s own healing powers. Ask us to help you select a remedy.

Photo: Chris MacDonald

This post has been updated with comment from Loblaws.


Imagine you walked into your local bank, and saw a sign that read:

“Lottery tickets have the potential to ensure a comfortable retirement. Ask us to help you select the lottery that’s right for you!”

You would, I am sure, be shocked. Anyone with the slightest bit of financial common sense knows that lotteries are a losing proposition. For every one person who (temporarily, at least) gets rich, there must necessarily be thousands or millions more who lose money. Lottery tickets are a bad bet, and to advise someone to buy lottery tickets as an investment strategy would be fraudulently bad investment advice.

But worse still would be a sign that read:

Ponzi schemes have the potential to ensure a comfortable retirement. Ask us to help you select the Ponzi scheme that’s right for you!”

This, of course, would be even worse advice. After all, lotteries sometimes (if rarely) pay off. Ponzi schemes never do. They always collapse, eventually. They make investors feel good, in the short run, but they are utterly incapable of securing anyone’s long-term future. So advising people to buy into a Ponzi scheme would be the height of professional irresponsibility for a financial institution. Only a company seeking to profit from gullibility—to prey upon the public’s lack of financial sophistication—would even think of such slimy advice.
So what about healthcare? Shouldn’t the same standards apply? Wouldn’t it be shocking if a company promoted a healthcare product that had not just a slim chance of working, but literally no chance at all?

Here’s a sign that greeted me in the back corner of my local Loblaws supermarket:

“Homeopathy has the potential to stimulate the body’s own healing powers. Ask us to help you select a remedy.”

The problem here is of course that homeopathy doesn’t work. It cannot work, as a matter of simple biology, and it’s been thoroughly tested and proven not to work. Scientific consensus is clear and unambiguous on this. For some symptoms, homeopathy can provide a short-lived placebo effect. But that’s very limited, and it’s not the claim being made when homeopathy is sold. A company the size of Loblaw Cos. Ltd. has no excuse for not knowing this.

Of course, some people claim that homeopathy works for them. This can readily be explained by reference to any of a number of perceptual failings and cognitive biases. The short version is that personal perceptions and recollections are not reliable: medicine needs to be rigorously tested using blinded trials. After all, many of us know someone—a former neighbour or second cousin once removed—who scored big on the lottery. That doesn’t mean lotteries are a reliable investment strategy.

Presumably Loblaws thinks they can get away with this because of the weasel words they use: words like “potential” presumably mean they’re dodging making any specific claim about cause and effect. That may keep them on the right side of the law. But it still makes the company’s behaviour deeply unethical. If by “potential” they merely mean “it’s not logically impossible,” then the claim about homeopathy may be true. But if they mean that stimulating the body’s own healing powers realistically could happen, then it’s false.

If Loblaws isn’t selling something that works, are they at least selling hope? Perhaps. And hope is a wonderful thing. But many desperate people also buy lottery tickets as a matter of hope, in a desperate attempt to get themselves out of poverty. In both cases, what is being sold is at best false hope, and there’s no honour in selling that.

Homeopathy is the healthcare equivalent of a Ponzi scheme. Loblaws—and any other retail outlet that sells it—should be ashamed.

 


Update:
The publication of the commentary above (here and on Canadian Business) created a minor firestorm on social media. Within 24 hours this commentary became Canadian Business’s most commented-upon piece for the year. About 24 hours after the commentary appeared, Loblaws responded via twitter, as follows:

loblaws1

loblaws2

Interestingly, the company makes no effort to defend homeopathy itself, or to justify the enthusiastic claim made by the sign shown and quoted above.
-CM

How design can help companies make better ethical choices

What does it take to design an ethical plan of action? What would you do if you were head of compliance at Volkswagen, or SNC Lavalin?

The question arose recently, as I spent a weekend as a speaker and judge at the terrific Ethics in Action case competition, held at Dalhousie University’s Rowe School of Business.

For those not familiar with the concept, a ‘case competition’ is an event in which teams of business students (typically 4 per team) are presented with business scenarios and tasked with giving a presentation, recommending to a panel of judges (playing the role of the ‘board of directors’) how the company should deal with the crisis. Students are judged on the quality of their analysis, the strength of their recommendation, and the poise with which they present it.

At the Dal competition, one of the cases teams had to address involved a company trying to recover from a string of bribery crises. The dilemma effectively was this: what should the company do, going forward, to recover from its problems and to attempt to prevent future trouble?

As we judges recognized, there’s no right answer here — or at least, no clear one. Lots of moves could be and were suggested: enhanced compliance training, careful screening of business partners, establishing a whistleblower hotline, and so on. But none of those moves, either individually or collectively, could come close to guaranteeing that scandal would not strike again at some point in the future. But each of them made a good deal of sense, and all were ingredients of a plausible path forward. Probably.

This implies a useful perspective on ethical problem-solving generally, namely this: every decision made in response to an ethical crisis is a kind of hypothesis. It is a guess — hopefully an educated guess — about what is going to work

This follows more generally from what we might call a “design” perspective on ethical decision-making. Because design (whether of machines or institutions) just is a process of hypothesis formulation and testing. In terrific 1985 book, To Engineer is Human – The Role of Failure in Successful Design, Henry Petroski argues that every structure that engineers build is an hypothesis — an educated guest to the effect that ‘yes, indeed, this bridge IS strong enough to bear the weight of all that traffic on a daily basis.’

What does this perspective imply about good ethical decision-making?

The most insightful work I know of on this topic is to be found in a brilliant 1996 paper by Caroline Whitbeck, called Ethics as Design: Doing Justice to Moral Problems. In her paper, Whitbeck discusses ethical decision-making as a design problem. The parallel between problem solving in engineering and problem solving in ethics, Whitbeck argues, suggests the following advice:

1) Some design problems have have no real “solutions”, where “solution” means “perfect answer. Sometimes we have to cope with a problem, rather than fixing it. Other problems are amenable to several possible design solutions, any of which might be “pretty good.”

2) Some practical problems are liable to suggest answers — design solutions — that are clearly wrong. Even if there’s no clear right solution, there may be plenty of clearly wrong solutions, and weeding those out is pretty useful.

3) Competing “pretty good” solutions may have different advantages & disadvantages. Just as two engineering solutions might have competing strengths (one offers better safety, where the other offers better durability, perhaps), different ethical solutions can have different virtues (as when one produces better outcomes, but the other does more to protect the rights of the vulnerable). Such competing virtues can be incommensurable, and it’s important to admit as much.

4) Finally, solutions to ethical problems, like solutions to engineering problems, typically need to achieve a particular performance or goal (there’s a job to get done), conform to specifications & constraints (you don’t have all the time and money in the world), and be reasonably secure against accidents and changes.

Overall, this design perspective has two major benefits. First, it reminds us that we are human, that our problem-solving is always a matter of looking for better solutions, not perfect ones. But it also reminds us that progress is possible, and that hard work to arrive at better solutions can pay off. There’s always a way to build a better mousetrap.

Do we really want Amazon policing authors?

Should a bookseller help a convicted murderer and rapist earn a living? In brief: yes. It’s not an appealing conclusion, so sold your nose, and listen to the reasons.

Amazon apparently disagrees with me, or is at least willing to bow to public pressure on the matter. The company has apparently removing an ebook apparently written by convicted Canadian killer and rapist Paul Bernardo from its website.

Amazon came under fire last week for selling the ebook. The book, importantly, is not about Bernardo’s own criminal exploits — he’s not profiting off his own crimes. Rather, the book is supposedly a political thriller of some sort. But many people were far from thrilled to see the widely-despised convict publishing at all.

Why should Amazon distribute Bernardo’s book? Some commentators have mentioned the need to protect free speech: Bernardo is a convict, but even convicts retain fundamental rights. But free speech is a red herring in this context. Amazon would be within its rights not to publish Bernardo’s book. No one has a right to be published. That’s not what the right to “free speech” implies. The right to free speech simply means that when you attempt to speak (or write) no one may rightly take action to forcibly stop you from speaking or writing.

So Amazon is within their rights to stop selling the book, but they are still wrong to do so.

Consider the precedent Amazon is setting here. For the sake of consistency, we need to realize that Amazon is now effectively claiming the right — and perhaps the obligation — to vet every author prior to agreeing to sell his or her book. And in doing so, what principles should they apply? Should all murderers be excluded, or only murderer-rapists like Bernardo? Or all criminals? How about war criminals. That’s a category that (ethically if not legally) includes a number of past heads of state. Should Amazon sell CDs by rappers with criminal convictions? And so on.

For what it’s worth, Amazon currently sells books by a number of other serial killers and mass murderers, including the likes of John Wayne Gacy, David “Son of Sam” Berkowitz, and the most infamous mass murderer of all time, Adolf Hitler.

The argument for a nonjudgmental approach by Amazon is strengthened by the fact that it’s Amazon, in particular, that we’re talking about. Amazon’s dominant position in both book publishing and book selling means that it would be incredibly dangerous for the company to start picking and choosing, on moral grounds, which authors it chooses to work with. We, the public, should not want Amazon to help itself to that kind of moral authority.

Amazon should reverse its decision, and go back to selling Bernardo’s book. And we should respect that decision. Not because we think Paul Bernardo is especially worthy (or even, frankly, minimally worthy). The question isn’t who he is, but who we are.

Trust is the most valuable asset any company has

trustValeant Pharmaceuticals has suffered a crisis of trust over the last few weeks. More specifically, the trust that investors had in the company was substantially diminished in the wake of revelations that Valeant had an unclear but apparently too-cozy relationship with specialty pharmacy called Philidor. The loss in trust in this case was quite concrete, measured by a substantial drop in the company’s share price.

The source of this loss of trust was, as is generally the case, a question about the company’s ethics.

Doing business in the long run absolutely requires ethics. At the very least, doing business requires a degree of mutual respect, embodied in our commitment to getting things from others by offering them what we think they want in return. It also requires a commitment to basic honesty, and a commitment to honour our contracts. These ethical basics are essential because they are the foundation of trust. And if you don’t trust someone—at some level—you’re just not going to do business with them.

If trust enables business, then trust has a real value, in real dollars and cents. So what, then, is the dollar value of trust? I estimate the dollar value of trust, within the global economy, at roughly $102 trillion—in other words, the entire nominal Gross World Product for 2014. Without trust, all commerce on the planet would literally grind to a halt.

The fact that trust is crucial in markets is evidenced by the fact that businesses have come up with such a dizzying array of mechanisms designed to generate trust—everything from brands (which carry reputations) through to warranties, return policies, endorsements and third-party guarantors.

But what exactly is trust? What does it mean to trust someone? Functionally, it’s an expectation that someone will behave in certain ways. Trust is also an attitude—part calculation, part emotion—that involves an expectation of goodwill, or at least good behaviour. It is an expectation that the other party to a transaction will not do us harm. As my friend and fellow philosopher Daryl Koehn once put it, trust is a mean between paranoia and foolish faith.

But what happens when trust is broken? How can a company like Valeant (or Volkswagen, for that matter) regain the trust of consumers and the investing public? There are many ways to rebuild trust, and none of them is quick.

A company that has lost the trust of the investing public is likely going to need to show a consistent pattern of trustworthy behaviour over a substantial period of time. And the focus, here, is on the showing. CEO Michael Pearson has said how important ethics is to the company. And—present appearances aside—that may well be true. But in the light of the current wave of mistrust, the company is going to need to do more. It is going to need to engage in substantial disclosures, far beyond detailing the nature of its relationship with Philidor. In the face of a failure of disclosure, the company may well find that that it needs to engage in more disclosure than any company—even one with nothing to hide—would be fully comfortable with.

How bad management leads to bad ethics

What’s the connection between ethics and competence in business? What part was played in Volkswagen’s wrongdoing by the fact that the companies engineers were apparently technically incapable of making good on the promises their marketing department was apparently intent on making?

I’ve written before about my hypothesis that cheating is often a way of covering up for your lack of talent. This hypothesis suggests that executives cook the books to hide the failure of their strategies. Companies offer bribes because they know their product or service isn’t good enough to compete otherwise. Salespeople fudge their sales numbers because they’re not as good at their jobs as they need to be.

A year or so ago I heard a presentation by someone who worked in compliance at a global company that had, some years ago, been embroiled in a bribery scandal. One of the most shocking things the speaker said is that, during the years in which the bribery scandal took place, it was not uncommon for a few hundreds of thousands of dollars to go missing from the books — not “missing” in the metaphorical sense (“That money is — wink, wink! — missing“), but missing in the literal “we don’t know where the money went” sense. The very strong suggestion here was that bribery on a large scale went hand-in-hand with very loose and unprofessional accounting standards. The managers at this company simply literally did not have a good sense of where their money was.

Consider also the case of the prosecution of GlaxoSmithKline, a few years ago, for selling adulterated drugs. The problem again was incompetence. Some of the pills manufactured at the company’s Cidra facility, in Puerto Rico, had been mislabeled. Others had been found to contain more (much more!), or less, of their active ingredient, than they were supposed to. Still others contained metal particles, the result apparently of machinery having broken and then repaired in an amateurish way that resulted in metal parts rubbing together. Through and through, the story is one of general incompetence — front-line work being done badly, managers ignoring problems, and senior managers failing to institute remedies once serious deficiencies in manufacturing practices were brought to their attention.

These anecdotes suggest at least several different connections between failures of ethics and plain business incompetence.

One connection involves resorting to unethical behaviour to cover up for mistakes or poor performance. Once you’ve found out that sloppy work has led to a poor product, you can either face up to it (but that’s inconvenient and painful and maybe expensive) or you can unethically (and maybe dangerously) sweep the problem under the carpet.

Another connection is that in some cases poor management makes unethical behaviour easier to get away with. This might involve sloppy accounting, but it could just as easily involve poor training, poor oversight, and unclear lines of accountability.

And then (perhaps more commonly) there are more complex cases, in which lack of business skill (say, at providing high-quality service) results in a desire by some employees to engage in compensatory wrongdoing, and that wrongdoing is made easier by ongoing incompetent accounting.

We all prefer simple stories, ones with clear villains. And, to paraphrase Homer Simpson, just as we like our beer cold, our TV’s loud, and our corporate villains evil. So it’s hard to accept that sometimes the truth is both more complex, and less dramatic. But we’ll do better at understanding, and avoiding, corporate wrongdoing if we come to grips with the messier truth.

If You Think You Can’t be Ethically Compromised at Work, You’re Wrong

It’s a bad week for corporate bosses. Volkswagen CEO, Martin Winterkorn, resigned this week in light of revelations that the car maker had, on his watch, falsified emissions tests on what may turn out to be millions of diesel VW’s. Even more dramatically, former Peanut Corporation of America owner, Stewart Parnell, was sentenced to 28 years in prison for his role in a deadly outbreak of salmonella poisoning.

Just how does this sort of thing happen? Are these corporate leaders bad apples? Do they lack a conscience? Are they devoid of normal human scruples? Are these corporate wrongdoings a whole different species from decent, ethical people like you and me? Not necessarily. Members of Mr Parnell’s family, after all, testified that the man “has a heart always to put others before himself”. Frankly, I don’t doubt it.

The notion that nice, regular folks can, in the right circumstances, do very bad things is not exactly new. Back in the early 60’s, the famous Milgram Experiments provided substantial evidence. In that series of experiments, fully two thirds of experimental subjects — volunteers from various walks of life — demonstrated that they were willing to administer a lethal dose of electricity to a stranger, just because an authority figure in a white lab coat told them to.

And modern psychology and criminology tell us there are lots of factors that can push good people to do bad things.

One factor is the ethical equivalent of inattentional blindness — failure to see something that is in plain sight. Sometimes this happens because we are so focused on the narrow definition of our own job. Sexual harassment? Dealing with that is not my job, so why would I think it’s a problem, or even notice it?

Another important factor is the slow, steady erosion of our moral sensibilities that goes with incrementally-worsening ethical behaviour. Tell a harmless little lie…then tell a bigger lie…then tell a huge lie. Eventually serious wrongdoing creeps up on you, maybe without even realizing when it was that you crossed that line.

Finally, there’s rationalization, the self-serving process of redescribing our behaviour so that we can accept that we did it without accepting that the thing we did was bad. “I didn’t steal the money, I just took what I deserved.” Or, “Sure, we fudged the numbers, but no one got hurt!” Or, “Yeah, we bent the rules, but everyone does it.” Rationalizations amount to a crummy exercise of critical thinking skills, but they can be pretty psychologically persuasive.

The net result of these various psychological factors is that you too could screw up the way Martin Winterkorn and Stewart Parnell did. If you think you couldn’t — that you’re simply above such behaviour — you’re deluding yourself.

Admitting that this is the case is a good start.

So, what to do? First, beware. You’re human, and so you’re subject to the usual human failures. Second, don’t tolerate rationalizations in others, and don’t ask them to tolerate them in you. Finally, think twice before bending the rules and thinking that you’ll do it “just this one time.” Because down that path lies ruin.

How companies can stop making their best employees miserable

The New York Times recently carried a provocative thought piece by Arthur C. Brooks called Rising to Your Level of Misery at Work. Brooks describes the phenomenon this way:

Ambitious, hard-working, well-trained professionals are lifted by superiors to levels of increasing prestige and responsibility. This is fun and exciting — until it isn’t.

I’ve certainly witnessed this phenomenon at the university. Smart, ambitious researchers get tapped for administrative jobs — being a department chair or even dean — only to find out that their aptitude for scholarship doesn’t imply an aptitude for administrivia, nor a stomach for administrative politics. It happens at universities, but it happens at organizations of all kinds when employees leave positions where they excelled and got noticed, to move “up” to managerial roles.

The result is bad for morale, perhaps bad for productivity, and, as Brooks points out, probably results in a bunch of extra alcohol consumption.

Brooks presents this as a challenge faced by individuals, a crisis point in the career of the smart, ambitious worker. And he’s right about that. But it’s also an organizational challenge, and a leadership challenge. Here are a few thoughts on what leaders are ethically obligated to do to rise to that challenge.

1. Select based on what matters. Leaders (whether CEOs or senior leaders at universities) understandably tend to choose for promotion bright people people who excel at what they do. But wise leaders need to look beyond performance, to look at the match (or mismatch) between the qualities that allowed the individual to excel and the qualities that would allow them to excel in a new managerial role. They need to ask not just, “would this person be good at the job?” but also “would this person thrive at this job? The person who could “do the job” might be good enough at it for now, but the longer-term organizational and personal costs of burning out need to be counted too.

2. Support your people. Leaders have an obligation to make sure that people promoted to what risks being their “level of misery” are provided appropriate training and support. The fact that you were a star accountant doesn’t mean you have the people skills to be good at managing accountants. The fact that you were a terrific account manager doesn’t mean you’ll have the administrative skills to run a team of account managers. Inevitably you’ll need additional training, you’ll need the support of talented admin staff, and you’ll need mentoring. That last one is tough: mentoring tends to require an investment of a senior leader’s own time — a precious resource — but it’s an essential investment to make.

3. Fine-Tune the Culture. Leaders need to foster the right kind of culture within their organizations. That’s a truism, but worth considering none the less. In particular, leaders need to foster a culture (and a reward system) that gives talented people more than one way to “advance” within in organization. It’s a bad thing if the talented salesperson can only advance (and see herself as advancing, and be seen by others as advancing) by taking on a supervisory position for which she isn’t suited. And it’s a bad thing if going “back” to front-line sales, after a few years’ hard service in a supervisory role, is seen as a sign of failure. If getting promoted to, and keeping, such a position is the only way she can demonstrate her worth, she may well do it — to the detriment of both her own health and that of the organization.

The Ashley Madison Hack: A Sleazy Attack on a Sleazy Business

Several weeks ago, hacker group The Impact Team threatened that they would release the identities and credit card numbers of clients of infidelity promoting social network Ashley Madison. This week, they made good on their threat, releasing details of a reported 36 million user accounts.

For the moment, the data is apparently out there — some news outlets clearly have access already — but it’s hard to find. But informed commentators suggest it may soon be available and searchable online.

Some will call this a victimless crime: a scuzzy company’s lying-and-cheating customers are getting exposed for what they are. But it’s worth noting that there may be some innocent victims in all this: some Ashley Madison accounts may be spoofed by people using stolen credit cards. Others accounts may belong to people who are not in fact married, but who nonetheless don’t need their online dating habits shared with the world. And even the company’s ‘core’ customers, the ones who truly are acting dishonourably, don’t necessarily deserved to be punished in vigilante style. Or perhaps more to the point, it’s not that they don’t deserve it, but rather that The Impact Team doesn’t have the right to decide.

What about Ashley Madison itself? It’s in a sleazy business to say the least. Of course, employees at Ashley Madison aren’t themselves committing adultery (well, unless they happen to be, incidentally). So some people might wonder whether the company itself is doing anything wrong in the course of business? I think pretty clearly, yes. When you actively and knowingly contribute to someone’s wrongdoing, you share the blame. And there are a range of familiar examples in which helping someone to do wrong is considered blameworthy. Think of lawyers suborning perjury. Think of business agents facilitating bribery.

Naturally, many are calling this a “wake-up call,” for web-based companies and for the corporate world more generally. Reports suggest that insiders at the company knew that privacy was a big risk, and worried about “a lack of security awareness across the organisation.” One sign of a lax attitude toward privacy: according to a report in The Guardian, while customer passwords were stored in hashed (scrambled) format, “information such as addresses, credit card details and sexual preferences is all stored in plain-text in the database.” So anyone with access to the database has access to a treasure trove of private info.

Perhaps the moral of the story is that, human nature being what it is, it’s easier to make money by pandering to people’s baser instincts, than it is to protect the private information gathered along the way.

Cecil the Lion shows how reputational risk has gone global

Artwork by Susan MacDonald

Drawing by Susan MacDonald

As of this week, Walter J. Palmer of Minnesota, is pretty much obviously the worlds least-popular dentist. Palmer recently shot — as part of what he says he thought was a legal big-game hunt — a lion whose home was a protected national park in Zimbabwe.

There are some lessons for business in this tale. Even though Palmer wasn’t in Zimbabwe to “do business,” as a tourist he was none the less engaging in a commercial transaction.

The first and most obvious lesson involves the risks of doing business overseas, where it is all too tempting to rely on the guidance of locals to tell you what’s legal and what’s not. Palmer says he “relied on the expertise of my local professional guides to ensure a legal hunt.” The temptation to rely on quick advice from locals is obvious, but it’s a foolish mistake, particularly when those locals have a financial interest in painting a particular picture for you. The risk here is clear. But how far do you need to go in making enquiries? Anyone doing business overseas has to figure out just how far to go in ensuring the legality (broadly speaking) of various aspects of their business. Is this product legal here? Have you got the right permits? Is paying that fee really on the up-and-up?

The second lesson has to do with the difference between what’s legal and what’s ethical. Palmer believed he was conducting a legal hunt. But what’s legal isn’t always ethical, especially in countries with underdeveloped regulatory systems. The fact that a practice is legal doesn’t imply that you’re doing the right thing, that you should be proud of yourself, or that you’re not going to be subject to well-founded criticism.

Next, there’s a lesson here about ethical disagreement. There is deep and genuine disagreement over the morality of certain practices. Hunting lions is one of those practices, but there are others. Birth control is another. So is refusal to bake a cake for a gay couple. So the fact that you are personally absolutely certain that a business practice is ethical doesn’t mean that others are going to agree.

Finally, there’s a lesson about the vulnerability of businesses to critique in an age of social media and online business ratings. The source of criticism lies in the 2 points just above, namely ethical critique and moral disagreement. But the effect of such critique and disagreement is amplified in a world in which your customers as well as the general public can post online messages about you, more or less with impunity. The Yelp page for Palmer’s dental practice has apparently been flooded with angry messages. Twitter has been awash with criticism, and the story has (partly as a result) received widespread media coverage. The doors to his practice are closed, and it’s not clear whether he’ll ever practice dentistry (in the US) again. He will forever be “that dentist who killed the poor lion.”

Maybe Palmer will need to flee to a developing nation. It would indeed be a kind of irony if the only place Walter Palmer can practice dentistry, in the coming years, is a place like Zimbabwe — a place where social media plays a smaller role, where dentists are needed but seldom get wealthy, and where hunting big game is a significant and tempting form of economic activity.

Ethics of Extended Warranties

Shopping this weekend, I was twice offered the “opportunity” to buy an extended warranty on a consumer good. Both times I declined. In one case, I bit my tongue because the warranty was such a bad deal that I was tempted to chastise the salesman. But in neither case do I think it wrong for the sellers to try to sell the warranty to me.

Let me explain.

“Extended” warranty offers are of course common these days. Such warranties may cover a longer period of time, or cover a greater range of problems than does the basic warranty that comes with the product. Whether you’re buying small electronics or a laptop or major appliances, the salesperson will likely offer you the chance to pay extra to get a warranty that goes above and beyond.

But let’s focus here on the small stuff — not major appliances, but smaller items. And let’s start with the two warranties I turned down this weekend.

First, I bought a new pair of prescription reading glasses, for $500. The extra warranty I was offered was priced at $25.

Next, I bought a small, waterproof digital camera to take on a beach vacation. Cost: $189. The young salesman (he could have been one of my students) confidently explained that I “really should” buy the extended warranty, for “just $49.”

Now, whether you should buy a warranty depends on two things. First, it depends on the probability that something bad will happen to the product you’ve bought, multiplied by the cost of repair. That gives you the “expected value” of not having the warranty, which is what you must compare to the expected value — the price— of buying the warranty. In most cases, the expected value of the warranty will be lower than the value of going with out it. Not a good deal.

But one more factor must be counted, namely whether you can afford to cover the cost of loss or damage yourself. If my house burned down, I wouldn’t be able to afford to buy another one, which is why I have house insurance. But in the case of the $189 camera, I know that if it breaks I can afford simply to pull out my credit card and buy another, and so the ridiculously expensive warranty doesn’t make sense for me. But the warranty could conceivably make sense for someone who has the extra $49 to spend on the warranty, but who absolutely would not be able to afford another $189 for a new camera eighteen months from now. People in that category are presumably relatively few, but probably not zero.

What direction did my rough math point in, for the two warranties I was offered this weekend? I figured the warranty on the glasses might, barely, be worth it, but I decided to take a risk and opted not to buy. (Besides, I’m in my 40’s and my prescription might well change in the next 2 years, which would mean buying new glasses anyway.) The warranty on the camera, on the other hand, was laughable; I would have been a fool to buy it. (You can find lots of blog entries out there about why extended warranties on small electronics are generally a bad deal.)

So what about the ethics of offering such crummy warranty deals to customers?

In generally, I think it’s ethically fine to offer such warranties, even though they’re generally a bad deal.

First, the dollar value on these things is relatively low. So, although I think the $49 warranty is (for most buyers) a rip off, it’s a small rip off. No one is going to miss a mortgage payment over it.

Second, the ability to figure out whether a warranty is worth it is well within what we should expect in terms of basic financial literacy for grown-ups. That’s not to say that everyone has that bit of financial literacy. But warranties on small electronics are very simple insurance policies. Compare the question of selling indexed annuities or derivatives or other complex investments. In those cases, investment professionals are selling highly sophisticated financial instruments, and we should expect them only to sell them to sophisticated investors.

So buyer beware. There are bad warranties out there. And they’re generally not unethical products, so even an honest salesperson earnestly advise you to buy a warranty that you don’t really need.

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