Is this how students feel about assignments?
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What are the Biggest Challenges for 2016
The World Economic Forum recently published an interesting article priming an important discussion we all need to have. Four Nobel economists on the biggest challenges for 2016 compiles the thoughts of Robert Shiller (Noble winner 2013), Edmund Phelps (Noble winner 2006), A. Michael Spence (Noble winner 2001), and Alvin Roth (Noble winner 2012) on the biggest economic challenges facing the world today. It is a nice little read and could help to spark interest for some important problems today.
Shiller, believes that “cyber-physical systems” or the autonomous nature of industry is the biggest issue facing the world today. Most importantly, he believes that hiding within this Fourth Industrial Revolution is the possibility to exacerbate the inequity the world is currently facing.
Phelps, identified the main problem to be the ineffectual mechanics modern economics has in place to correctly predict and help the economy as a whole.
“The difficulty is that standard economics-both Neo-classical, Keynesian and supply-side economics – is unsuited to find the cure. The economy is not a machine that can be cranked up to the best possible performance level: a functioning modern economy is a living organism made up of all the individuals participating in it. Their initiatives are sparked by imagination, encouraged by values and assisted by their personal knowledge.”
Spence, offered an interesting problem. he believes that reversing the deteriorating pattern of global growth is imminently important in 2016. Essentially, we aren’t consuming enough. The lack of consumption has dire effects on the global economic environment. We need to find a way to spark aggregate demand, possibility without the help of monetary policy.
Roth explained that the refugee relocation and matching problem we saw develop in 2015 will persist in 2016. Roth went on to explain that it is important to match the refugees with a place which will allow them to thrive and grow, since they will be an important component to whichever economy they enter.
Personally, I think that the most important economic problem we face in 2016 is the impact global warming is already having across the world. I’m sure I sound like a broken here by stating this opinion, but we are certainly at an important crossroads (some argue we’ve long since passed the point of helping ourselves) which could set the course for years to come.
A word (or two) on Economic Profit and Accounting Profit
Students often find themselves in the first few days of class understanding the idea of opportunity cost. Inevitably, this leads to the discussion of implicit costs observed by a firm and how accountants and economics track these costs.
Most often, students have a hard time grasping the real world implications of accounting for these costs using GAAP and theoretical economic ideas. In 2003, the WSJ published a small article from the eyes of an accountant Robert L Bartley in order to shed some light on how accountants view the differences.
Using GAAP, earnings per share (EPS) are supposed to measure the profit of a company. As Frank Knight (a very famous economist) wrote, it was the income to the proprietor. Granted, there are some more subtle nuances identified by economist throughout history, which we acknowledge and teach today but the the identification of economic and accounting profit needn’t be so muddy says Knight. It is really about perspective. Economists are concerned about the dynamic nature of production while the accountant is interested in proprietorship.
As the article states, “Knight warned that ‘economic profit cannot be carried to theoretical completeness’ because it is difficult to quantify.”
If you’re new to some of this language, here is a nice breakdown of some the terms and how economists have come to understand them.
The Fed raised interest rates; so…what do we do now?
Earlier today the Federal Reserve decided it was time to raise interest rates for the first time since 2006. The thought was that they should start with an increase, over time, of 25 basis points. This may seem like not very much, but really its the start of something more. How much more? Nobody knows for sure (even Janet Yellen).
What does this mean for you, well probably not a lot. In macroeconomics, we would teach students to expect a slight uptick in savings as interest rates become more favorable but in turn would also lead to lower consumption. Really, the adjustment period or the interest rates will roll out over the course of the next year, as to give investors a lot of time to adjust to the changes.
So why did they raise the rates now. Well, many economists believe that this was a good time to raise rates. The zero lower bound was really getting in the way of monetary policy decisions. With the increase in rates, it gives the Fed a little flexibility. Also, inflation rates were not meeting the targets. Raising the rates, hopefully will help in the long term to spur growth and meet that second mandate of the Fed.
Here is a link describing what happened, why, and what to expect now.
Feeling like you’re an expert can make you closed-minded
I just came across this article on Research Digest which explores the relationship between expertise and closed-mindedness. It is definitely worth a read but it got me thinking about decision making.
The article expresses that there could indeed be a strong link between people who feel that they are experts in a field and the dogmatism they provide. A recent study in the Journal of Experimental Social Psychology published the findings.
So my first thought was does this occur in economics or finance? We assume that agents are experts in things like ranking their own choices for utility. Do these dogmatic feelings carry over to here? I’m sure they do to some degree. And if this is the case, how does an economist model this behavior?
We use habit persistent utility functions, but what about misidentified preferences? Generally, our assumptions on preferences require them to be complete, reflexive, and transitive. This last assumption should hold for “rational” individuals. It would be interesting to include the dogmatic behavior of agents to see if any tractable results rise to the surface.
A more macro view of this behavior would be to see how individuals in the finance sector absorb information. Does expertise breed closed-mindedness in this arena? My intuition says yes. I believe that there is some persistence to beliefs rooted in some dogma surrounding each institution. Again, It would be interesting to see how, if at all, this could be measured through econometrics.
Cognitive Biases
This infographic has been floating around for the past few months. It explains common cognitive biases that push decision makers away from rationality.
In my MBA classes, we often debate the idea of rationality when agents make decisions. Students still believe that ideas such as the efficient market hypothesis still exist, even though there is clear evidence contradicting the idea that rationality is an empirically sound assumption.
What I like about this chart is that students should be able to clearly see where their own biases reside. I find myself struggling to always overcome these biases even though I should know better when making decisions, and I assume students are share that sentiment.
What I wish this chart did was include some of the recent econometric advancements which contribute to irrationality so that students can see how to model deviations from rationality.
The Debt Ceiling Agreement
It was just announced that The House has passed a bipartisan debt limit agreement to keep the government from defaulting.
So, what does this mean?
A great video from youtube user CGP Grey explains the process. The video is just shy of 4 minutes and is well worth your time.
Uber and its surge in market share
In my MBA class we discussed at length the advantages and disadvantages for Uber being a First Mover (or Second Mover to taxis) in the ride share market.
The economics section of fivethirtyeight recently posted an article detailing Uber’s fight for market share in Manhattan.
Some of the takeaways from the article are that:
- The net change in NYC pickups has remained relatively unchanged over the past year, indicating that Uber is eroding the market share of yellow cabs in NYC
- What is striking is that Uber is aggressively picking up market share in Manhattan, essentially replacing the loss in yellow cab pickups to the tune of 4 million rides
- Uber is adding rides to just about every borough of NYC they have increased the number of rides from 2 million 2014 (from April to June) to 8 million in 2015 (from April to June)
To say this is impressive is an understatement.
My students correctly predicted many of the pitfalls faced by the first mover (second to taxis) in the ride sharing market, but their optimism wasn’t as robust.
The Job Outlook is Grim. Everywhere.
In a recent article from BloombergBusiness, we get a very sobering view on what the job outlook is like for young people around the globe.
Here are some draw dropping facts:
- People aged 15-29 are twice as likely to be unemployed as adults, ACROSS REGIONS OR CONTINENTS
- The world will need to create 600 million (yes, million) new jobs just so the situation doesn’t get worse
- The youth unemployment rate is projected to be 13.1% in 2015 compared to just 4.5% for adults
So why are we seeing such staggering numbers of unemployed youths? Employers are citing that the necessary skills to engage in everyday business are not being developed. Again this is GLOBAL problem.
There are many reasons why this is a very real concern for all governments and this article summarizes the most dire,
“Social costs are ever mounting as well,” the report said, citing youth-led uprisings in many Arab countries and the rise of economic insurgency and youth extremism. “What we see is a generation in economic crisis.”
Along with climate change and water rights issues, the global youth unemployment crisis should be a priority for policy makers.
It’s all about who you know
The Washington Post recently posted an article describing what your neighbor knows rather than what you know.
A quick puzzle to tell whether you know what people are thinking
Their example requires you to observe a fictional town and the connections between the population. What becomes apparent is that popular opinion may be biased in some way. The network in this example shows that the majority believe their the minority. This is a very real perception that many people in our society posit.
I think that the article said it best when they state that: “our sliver of local knowledge, can lead us to the false conclusion.”
This article speaks to how agents make decisions in the economy and this is very far from the idea of rational expectations. Behavioral economics is beginning to explore these deviations from traditional methodology and with articles such as this, I believe that even macroeconomics will benefit from the change.