One of the claims he makes is that people don't really act like classical economics says we should act. Everyone in the world acts like humans. But in textbooks we all act like "Econs" people that seek to act rationally and optimize utility at every step of their decision making process. In later blogs I'll take issue at some of the tests he does while I read one of his books. So look forward to more posts!
Tuesday, August 25, 2015
Are we Econs?
Anyone with an interest in economics should get to know the name Richard Thaler. He is after all considered the founder of behavioral economics.
Thursday, August 6, 2015
Animals spirits
I just finished reading Robert Shiller and George Akerlof's book "Animal Spirits" and I think there were some good theories for you to digest.
The first one is what they call "Money Illusion". It was actually developed by Keynes back in the 30's, and as he explained it, economic agents never look at their income as compared to the basket of goods they purchase, instead they just look at the nominal value as if prices never change. The idea can sometimes be seen quite often in the real world. I've seen more often than not that someone who just received a raise of 3% is overly excited for the anticipated increase in income. With inflation at 2% their real raise was only 1%! If there was no inflation and the raise given was 1% they certainly wouldn't be that as happy as the 3% even though they are actually the same.
The best example they gave was during the great depression when prices fell 28% and the economy needed a wage cut the labor unions enthusiastically rejected any claim that the wage cut would be "fair". As one politician put it, "if prices fell by 28% wouldn't a 25% wage cut be better than no wage at all"? But they declined because they had money illusion.
They also define animal spirits as the reason to why there's a boom and bust cycle in a natural economy. When the economy is expanding it's because the Bulls are out. Producers are spending more on capital goods because they believe someone will buy them, consumers are buying goods because they believe they'll get a raise, banks are lending more and requiring less collateral because they believe asset prices will rise, and investors are investing more because the economy is booming an no one can fail.
Then reality snaps back in and the bears start coming out. Producers hold growth, consumers spend less, banks lend less and investors invest less because there's no way anyone will be able to pay them back.
Animal spirits can be seen almost anytime when you look at a financial news network. One of my favorite examples is Jim Cramer. I guarantee if you watch him any day you'll think hes been possessed by one of those animal spirits.
The first one is what they call "Money Illusion". It was actually developed by Keynes back in the 30's, and as he explained it, economic agents never look at their income as compared to the basket of goods they purchase, instead they just look at the nominal value as if prices never change. The idea can sometimes be seen quite often in the real world. I've seen more often than not that someone who just received a raise of 3% is overly excited for the anticipated increase in income. With inflation at 2% their real raise was only 1%! If there was no inflation and the raise given was 1% they certainly wouldn't be that as happy as the 3% even though they are actually the same.
The best example they gave was during the great depression when prices fell 28% and the economy needed a wage cut the labor unions enthusiastically rejected any claim that the wage cut would be "fair". As one politician put it, "if prices fell by 28% wouldn't a 25% wage cut be better than no wage at all"? But they declined because they had money illusion.
They also define animal spirits as the reason to why there's a boom and bust cycle in a natural economy. When the economy is expanding it's because the Bulls are out. Producers are spending more on capital goods because they believe someone will buy them, consumers are buying goods because they believe they'll get a raise, banks are lending more and requiring less collateral because they believe asset prices will rise, and investors are investing more because the economy is booming an no one can fail.
Then reality snaps back in and the bears start coming out. Producers hold growth, consumers spend less, banks lend less and investors invest less because there's no way anyone will be able to pay them back.
Animal spirits can be seen almost anytime when you look at a financial news network. One of my favorite examples is Jim Cramer. I guarantee if you watch him any day you'll think hes been possessed by one of those animal spirits.
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