• Cocktail and Dinner Party Economics
  • cocktail_carosel
  • Dinner Party Economics

Reading Fast and Slow

For behavioral economists, however, freedom has a cost, which is born by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes.  For adherents of this school, freedom is free of charge.  Thinking Fast and Slow page 412 by Daniel Kahneman. I like this book.  In fact, I think it would make a great supplementary text for an experimental economics course.  Kahneman explains carefully and exhaustively why human beings should think carefully about the process of making decisions. He argues that human beings can be quite irrational  and this material is good to know especially if you want to make good decisions. However, I do have a couple of quibbles: 1) The book is very long and I got really tired of reading over and over again why people make the wrong decision between two choices.  The examples made me feel like I was at the optometrist.  “Is this clearer or is this clearer?”  After a while you just don’t care anymore. 2) He goes on a bit of a rant against economists (note that economists are quite willing to give a psychologist a Nobel Prize in economics it they think the work is worthy) and the assumption of rational agents.  We understand the problem of this assumption BUT  and this is a big but,  rational agent models are still the best way to make initial predictions about market behaviour.  What doesn’t work at the individual level seems to sort itself out at the market level. 3)  Much of his policy implications just reinforce the economic idea that incentives matter.  For example, an opt out system for savings will generate more savings in total because people will just have the money taken from their pay cheque without any effort.  To the economist, the act of opting in is a transaction cost and the results make perfect sense.  If  it takes effort to start a savings program then less savings will occur. This doesn’t imply that the person is irrational. Quibbles aside, this is a good read.  

Continue Reading No Comments

The Work of Jobs

I figured that it was always my job to make sure that the team was excellent, and if I didn’t do it, nobody was going to do it.   Steve Jobs by Walter Isaacson pg 570 If this biography is to be believed then it is clear that the love of Steve Jobs’ life was not his family, his friends, his Zen-god, his wealth or even himself.  The love of his life  was his creations, the work of his mind.  He was passionate about Macs, NeXT,  Pixar, iPods, iPhones, iTunes, iPads and all of those  iNventions.  He paid whatever price it  took for his creations  to be excellent–even his health. I will let you decide for yourself  what you think of the man as portrayed by Walter Isaacson.  Here I will give a few comments from the armchair of an economist. 1) Apple demonstrated in a few short years the Schumpeterian concept of creative destruction. Schumpeter said that innovation often created temporary monopolies but eventually they would be destroyed by competitors to create new wealth.  Not only did Apple monopolisticly compete with other high-tech firms, it also cannibalized its own products in favour of new and better ones. 2)  Profits matter even  if people say that they are creating something for the love of it , In order for Apple to do everything that it did, Apple  mastered the art of making big profits. For example, in 2010  Apple captured 35% of the profits with only 7% if the revenue in the market.  This also demonstrates the difference between sales and profits—-Sales only matter as they relate to profits. 3) Options are only worth something if the market price of the share is higher than the strike price on the option.  Unfortunately for Jobs, his options were priced just before a stock market crash rendering them useless because he would have to buy shares at prices far above what the market was charging.  Thus, you can’t always believe the salaries quoted in the news if options are part of the package. 4) Productivity matters and CEO’s have to figure out how to increase it.  Steve Jobs seems over-the-top tough but somehow the employees who survived thrived in this environment.  Team A types like to work with other A types and find B types annoying.  Jobs kept Apple filled with A type people who accomplished more than they thought possible.  Their efforts never seemed to surprise Steve however. 5) Sometimes supply creates its own demand.  When asked if Apple had done any market studies for its products, Jobs said that if Ford had done a market survey customers would have just asked for a faster horse. Customers don’t always know that they will love a new product.  It seems that many times the initial assessment of a new Apple product was lukewarm by the pundits until it hit record sales in the marketplace.

Continue Reading No Comments