QE unwind? Yeah right

August 18, 2017 Leave a comment

Another very informative clip from the FT. Some of the salient points include:

  • Since the global financial crisis the Bank of England, US Fed, Bank of Japan and European Central Bank have bought assets and printed US$12 trillion.
  • Can interest rates return to what has been normal in the past – say 5% instead of close to 0%.
  • US Fed plans to shrink its balance sheet later this year – monthly reduction US$6bn in its assets. But this is a very small amount when you consider that the Fed holds US$4.5 trillion
  • But this is not happening elsewhere. Bank of Japan and European Central Bank are still printing money and buying assets. With Brexit the Bank of England faces huge uncertainties regarding their balance sheets.
  • Interest rates will remain low partly due to: ageing population, low productivity growth and a savings glut. This has reduced the attractiveness of capital spending.

Teaching MC=MR with M&M’s

August 15, 2017 1 comment

Having just completed Perfect and Imperfect Competition with my Year 13 class I used a couple of packets of M&M’s to drum home the concept of marginal analysis MC=MR. It has always been something that students have struggled with but I am hoping this experience of creating graphs with M&M’s might help their understanding and when to use the concept.

Profit is maximised at the rate of output where the positive difference between total revenues and total costs is the greatest. Using marginal analysis, the firm will produce at a rate of output where marginal revenue equals marginal cost. Below are a few of the graphs done using M&M’s.
MM1MM3MM4.jpegMM2

 

Retail stores now target consumer body language.

August 12, 2017 Leave a comment

Keeping on the behavioral economics topic I was interested to read about shoppers emotions being used by retailers to try an increase sales. Companies now pay large sums of money for software that identifies the following:

  • shoppers’ movements
  • facial expression
  • dissatisfaction
  • surprise
  • eye-tracking
  • dilating pupils
  • thermal-imaging

Body language.pngSome research has shown that when a person who is smiling enters a shop they are on average likely to spend 30% more than others who are more neutral position in their emotion. Conventional research states that when people are interviewed or fill in surveys they tend to edit their responses to make them sound like a ‘rational person’. However a lot of purchases are driven by the subconscious emotions. There are various companies out there today that are trying to get in the mind of consumers namely:

We have all heard of retail therapy which involves people going on a spending spree when they tend to be feeling down. The challenge for all the companies out there is to spot when a person is in this state when they enter their shop. The key to it is tracking the unconscious mind in shoppers.

Try this exercise with your class and see how many stages they can get through. If we make persistent errors in things we are very good at like colours how likely is it that we are also subject to persistent, predictable errors in areas of consumer decision-making?

Categories: Behavioural Economics

Deflation – why is it a concern?

August 9, 2017 Leave a comment

Here is a good video from DW on deflation. Deflation is seen as negative for an economy for the following reasons:

1. Money made today will be worth less tomorrow so investment is discouraged
2. Goods cheaper tomorrow reduces consumption and therefore aggregate demand
3. Central banks struggle to set real interest rates which are stimulatory
4. People who borrow money find that what they owe is worth more in real terms
5. Demand runs below the economy’s capacity to supply goods and services leaving an output gap. This can lead to unemployment and wage cuts which worsens the situation

One of the main problems at present is the fact that Central Banks are running out of ammunition – interest rate cuts – as rates are close to 0%. Therefore in order to stimulate demand they now have to use fiscal policy and more government spending would assist especially in areas that are in need – e.g. roads, bridges etc.

 

 

Categories: Deflation

IMF World Evaluation from the FT

August 8, 2017 Leave a comment

Below is a very good video put together by the FT which summarises the recent IMF Report on the World Economy. Includes:

  • Better growth in China and the Euro zone makes up for slow US growth.
  • US infrastructure spending and tax reform still has to be approved by the senate.
  • Europe looking stronger than expected.
  • Emerging economies still face tough conditions.

Categories: Economic Cycle, Growth Tags:

More loss aversion in male tennis players when behind.

August 4, 2017 Leave a comment

A paper entitiled ‘Is Roger Federer more loss averse than Serena Williams?’published by By Nejat Anbarci, K. Peren Arin, Cagla Okten and Christina Zenker on tennis serving and loss aversion caught my attention. The paper found that:

Roger_Federer.jpg
1 a server will put more effort into his/her serve speed when behind in score than when ahead in score,
2 players’ effort levels and thus serve speeds get less sensitive to losses or gains
when score difference gets too large,
3 A female player, on the other hand, does not change her serve speed and thus her effort when behind compared to when the score is tied, while she serves slower when ahead than when the score is tied.
4. Overall servers will be more risk averse in the domain of gains than in the domain of losses.
Researchers used serve speed at different points of matches in the high-stakes, professional Dubai Tennis Tournament to test their theoretical predictions and whether overall players exhibited the fundamental bias of loss aversion.

 

Loss Aversion and the  Endowment Effect

Loss aversion can be explained by prospect theory, which states that an individual’s value function (whether for money or otherwise) is concave for gains but convex for losses. In other words, people are more sensitive to losses compared to gains of similar magnitude. This is illustrated below.

Prospect theory

The reference point in the diagram is the current position of the individual concerned. Gains and losses are evaluated with reference to this neutral reference point. The value function takes an asymmetric S-shape because marginal value (or sensitivity) declines as absolute gains and losses increase in size. A dollar lost more than outweighs a dollar gained. In conventional economics, gains and losses are treated equally – a dollar lost simply cancels out a dollar gained. Golf provides a perfect example of a reference point: par. Every hole on a golf course has a number of strokes associated with it; the par provides the baseline for good – but not outstanding – performance. For a professional golfer, a birdie (one stroke under par) is a gain, and a bogey (one stroke over par) is a loss. Economists have compared two situations a player might face when hear the hole:

  • putt to avoid a bogey
  • putt to achieve a birdie

One group of economists analysed more than 2.5 million putts in exquisite detail to test that prediction and found that whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie. The difference in their rate of success when going for par (to avoid a bogey) or for a birdie was 3.6%.

 

Rethinking Economics – Econocracy

August 2, 2017 Leave a comment

You might have come across the book ‘Econocracy’ written by students from the University of Manchester which makes three big arguments about the relevance of economics courses at Universities.

First, economics is part of all aspects of our public life. Second, the economics profession sees the economy “as a distinct system that follows a particular, often mechanical logic” and believes this “can be managed using a scientific criteria”. It would not be recognised by Keynes or Marx or Adam Smith. Thirdly, the authors criticised what economics students are being assessed on – models or theories which were being memorised for exams.

The interview below on Newsnight (BBC2) has author and student Joe Earle and Professor Diane Coyle (follow her excellent blog The Enlightened Economist) discussing the state of the discipline at University and what they don’t teach to economics students. More information can be found on the website Rethinking Economics.

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