If after hearing about the various lunacies of the sub-prime crisis, like NINJA loans ("You have no income, no job, no assets, and you won't tell me your real name... here's $50K. No you don't have to sign anywhere, a handshake is good enough"), your first thought was, "How can I get in on this?", I think you should print out the following quiz:
A child who operates a lemonade stand sees a steep cut in the price of sugar. Should she:
a) stretch her capital to produce more hourly inventory to handle the busy periods (increasing overall revenue but increasing labor inputs)
b) implement variable pricing during slow periods now that her price floor has dropped to draw in new price-sensitive customers
c) explore expanding the business through franchising now that increased margins allow her to tolerate more inefficiency in her core business
d) offer an extra sweetener upcharge, since she can now price it low enough to tempt customers
e) protect the monopoly: cut overall price immediately to avoid competition from start-ups
f) scale back her hours maintaining stable profits on higher margins, so she can spend more time with her parents (they grow up so fast)
g) pocket the extra profit and start a charitable trust to endow her own teddy bear hospital, receive humanitarian awards
h) put out an advertising blitz or loosen up and drink some of her own product now that her budget isn't stretched so thin
i) diversify: get a paper plate with some cookies out there and see how it goes
j) just put more sugar in each cup for no reason
If you took a magic marker in your fist and scrawled about 50 ragged circles around j) while frantically muttering "More, more! More sugar!" you may have a future in the American mortgage backed securities industry, where our motto is when margins go down, it's definitely time to sink in more money, and mass hysteria mows down prudent research like the Sea Dog runs over swimmers in Lake Michigan. If you figured out how my presentation of option j) is actually intellectually dishonest and can point to which option it's the converse of, you are more intellectually honest than I am, and your integrity may win you a cookie.
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