Nurit Rothmann on Shrinkonomics: How Reduction Can Enlarge Our Success

08/07/2015 09:50

When Transparency is Blinding – Reducing Information

"The sun is the best disinfectant," wrote Louis Brandeis, who later became a United States Supreme Court judge. By saying that, he outlined the principle of transparency in public systems as a remedy for corruption.

But the sun can also cause burns and permanent damage. When transparency of information is implemented incorrectly, it may harm the interests which it is suppose to serve.

Professor George Akerlof, best known for his Nobel Prize winning article, "The Market for ‘Lemons’ - Quality Uncertainty and the Market Mechanism", identified severe problems that afflict economic markets characterized by asymmetric information. (Asymmetric information is one of transparency's arch enemies.) It was Akerlof’s argument that this type of information can lead to negative choices caused by market failure.

For example, suppose a wine connoisseur looking for a deal bargains with Joe, who is just an ordinary person lucky enough to have inherited a fortune from a rich uncle. Joe and the connoisseur are debating about the price of a barrel of wine Joe is interested in selling: vintage Chateau Petrus '98.

If what they both know is that the wine is red, they can close the deal efficiently, since they are equally uninformed. But, if the details of the vintage, the vineyard and the type of wine are only known to the connoisseur, Joe might be fearful to sell it as he knows the information he holds is unequal to the information the connoisseur holds.

Diamond mines and sources are more sophisticated than the manufacturers and sightholders – they are much stronger since they represent a large percentage of the market. This demonstrates an unhealthy problem, since the knowledge on the two sides of the deal is asymmetrical. Unless both parties in any transaction have symmetrical information, liquidity will decrease.

More information does not actually help unless both sides have equal amounts and types of information. Symmetrical information is the key to rational purchasing decisions and ultimately, a healthy transaction and marketplace.

Many sightholders and manufacturers are showing concern over the lack of information. The feeling is that the mist they have to operate within is making it difficult to make efficient decisions. Of course, everybody wants to know for how much his colleague/competitor sold the box, but is this serving your benefit rather than creating a false impression of lively trade?!

Isn’t it our curiosity itself that is backfiring on us? This “need to know” and “need to publicize” is providing suppliers with information that does not behoove us. Once the supplier has this information, he has more than you do (an asymmetrical business transaction) because the supplier is then aware of all profits along the chain.

The Paradox of Choice – Reducing Inventory

First, it’s important to recognize that the market is currently flooded. When rough pours out into the market in large quantities, neither the manufacturer nor the polished diamond seller can cope with such a large supply. This causes low traffic and flooding of the market. This problem can only be solved by reducing inventory drastically and immediately.

Second, the issue of choice has pushed itself to the forefront. American psychologist Barry Schwartz argues in his book, "Why More is Less - The Paradox of Choice" that eliminating consumer choices can greatly reduce anxiety for shoppers.

For example, a company makes jams with a wide variety of flavors and would like to introduce its products to the market. If the company displays various flavors (at supermarket selling points) assuming that this way, everyone can find his own favorite flavor, the likely result is that sales volume will be smaller than if they only displayed three flavors. This is because studies show that our decision-making capacity is undermined as the number of options increases. Then, one of two things happens: our decision dissatisfies us, or we decide not to decide.

Now let’s compare this example to the diamond world. When a young couple comes to buy an engagement ring, if you expose them to a wide selection, the chance that they will buy is small. The bride will feel trapped - that any choice she makes could have been a better one. Overwhelmingly, however, when the couple is exposed to no more than two or three options, the decision will be fast and will even come with a big smile of satisfaction.

Stubborn Like a Donkey – Reducing Prices

"The bitter taste of poor quality remains long after the sweet taste of low price expires,” wisely said Benjamin Franklin.

“The decrease in rough prices is not significant if the assortments are also at a lower level or come in lower average sizes,” argue my interviewees. “Only a gradual, consistent decrease in prices of fixed sortings will return the sightholders’ and manufacturers’ confidence and stability to the market."

Let’s conclude with an amusing story I heard a while ago:

A farmer came into town looking for a donkey. He carefully studied the selection available and found a young and healthy donkey. After tiresome negotiations, he agreed to pay $1000 upon purchase, while the donkey was to be delivered at dawn the next day.

The next day, he came to take the donkey and found him dead, while the previous owner claimed that he already spent the money.

"Never mind," said the farmer, "give me the dead donkey." The seller was surprised at his request but was happily willing to get rid of the corpse.

The next day, the farmer posted around town that he was selling raffle tickets for the price of $10. The winner prize would receive a healthy young donkey. The farmer managed to sell 500 tickets and made a net profit of $4000 (after deducting the $1000 he lost.)

And what happened, you ask, with the winner who won a dead donkey? Well, he received his $10 back…

Are you ready to value the goods for yourself and offer a counterproposal that you are actually willing to pay, rather than buying a white elephant at a fixed price? Know what you’re purchasing. Pursue the freedom of seeing and evaluating the product. Give a counterproposal - make clear what you’re willing to pay.

Take control!


Nurit Rothmann is a 20 year veteran of the diamond industry. A trailblazer and innovator, Nurit is dedicated to lending enlightenment to the often shrouded world of rough diamonds. Founder of N. ROTHMANN Rough Diamond House, Nurit specializes in brokering major rough diamond deals, managing diamond tenders and publishing well researched analytical reports on the market. She is the co-founder of the Women Diamantaires Forum in Israel.