Banks and HSN : Slide 3

By now, the reader should grasp the concept of limits. Existing at one or the other limit, clearly, is not as good as existing somewhere in between. In the previous slide, a 30% tax rate is the suggested optimum , and even 10% or 80% tax rates survive in many societies, At the limit of zero and infinity, however, survival becomes disastrous. Measurement of a society, a group, or management portfolio can be ascertained by how well it fits between the suggested model of limits. In the previous case, economics suggest that a good society should have a nominal total 30% tax rate. Other examples are banks. In our narrative story, banks make loans to people. When the risk of loans is zero, the bank, in effect, makes no loans. If the risk of making loans becomes infinity, i.e., loans to everybody, the bank loses money. A good bank "loan portfolio" can be measured by its rate of default. If a bank has a two percent default rate, it is probably near the point for optimum performance across the entire loan portfolio. In other words, a bank can be measured by how successful it is by its rate of failure with its loans. The concept of measuring success by the failure rate using the demographics of a large portfolio is exemplified by home shopping. A typical home shopping television distribution has a 20% buyer's remorse rate. Buyer's remorse means the consumer, after being impulsively driven to purchase an item, decides afterward to return it. A typical media buyer's remorse rate is 20%. Again, this is a risk/reward measurement system. If buyer's remorse rate is literally zero, it probably means that you sold or presented nothing. On the other hand, if the buyer's remorse rate is close to 100%, very clearly you are losing money by selling products and making suggestions not representative of the buyer's desires. There is a default rate that suggests an optimum value of performance. In home shopping, a 20% buyer's remorse rate is considered a good rate. This means that you are pushing hard enough to get the attention of most of the viewers, but not so hard as to lose margin and to have high return costs. We are measuring performance by the rate of failure across the portfolio of action.

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