I’ve been doing a lot of reading about prospect theory lately. This theory is likely become taught in most microeconomics courses over the next 10 to 20 years (things move slowly in the academy). There are a lot of important details in the theory, but one that sticks out in my mind is the idea of reference points.
The idea is that when considering options (prospects) people compare the possibilities to what they have now. What you have now is a reference point and what you might get is a prospect. It doesn’t take much of a stretch to see that what you expect about something or someone can be a reference point. This is one of the reasons why expectations are so important.
Having established a reference point, the next interesting piece of the theory is that gains are treated very differently from losses. While gains improve your happiness, the effect is moderate. Losses, on the other hand, cause dramatic reductions in happiness. Estimates show a loss as having almost twice the impact of a gain. So gaining $5 bucks, keeping it for a while, and then losing it is worse than never having it at all.
What does this have to do with helicopter parents and happiness? Think about what your average overbearing parent does to a child’s expectations in life. The child has never experienced failure, has been told they are super, special, and just the bestest at everything. These expectations are going to be impossible to meet once you grow up and get out into the world. This means that something that would be a forgone gain (a minor discomfort) for most of us, becomes a crushing loss for the pampered kid. The impact on the happiness of the child will be dramatic. I haven't met a sheltered kid that seemed happy to me, and this might be part of the explanation.
Trying to make your child happy all the time, might just be making them unhappy in the long run.
Sunday, January 30, 2011
Saturday, January 15, 2011
You Can't Say That
I wonder if anybody else is getting tired of censorship. We’ve just seen two major incidences of censorship in the name of correct thinking; the release of Mark Twain’s Huck Finn and the banning from Canadian air waves of Dire Straits’ Money for Nothing.
The edited release of Huck Finn, is being led by an “academic” in Alabama. Twain’s use of the word “nigger” is to be replaced with the word “slave”, the term injun is also to be removed. The thinking is that schools are more likely to use the book if they can avoid the discomfort of loaded words. Never mind that a discussion of the place of offensive language would benefit all students, we wouldn’t anyone to have to deal with something they found unpleasant.
In a related story, the Canadian Broadcast Standards Council has shown it’s willingness to kowtow to people demanding censorship. After an individual in Newfoundland complained, a Dire Straits song, Money For Nothing, has been pulled from Canadian airwaves; for an ironic use of the word “faggot”.
Have we all gotten so weak that we can’t even tolerate words written years or centuries ago from people we’ve never met and never will meet? Have all the years of self-esteem building failed? Has all the affirmative action been in vain? Are we allowing the frailty of a few to govern what is available to all?
From where I sit our society has not progressed, it has actually reverted into something less robust, weaker, and less healthy. If can’t stand the occasional use of unpleasant words, how are we going to cope with the real challenges of the 21st century?
The edited release of Huck Finn, is being led by an “academic” in Alabama. Twain’s use of the word “nigger” is to be replaced with the word “slave”, the term injun is also to be removed. The thinking is that schools are more likely to use the book if they can avoid the discomfort of loaded words. Never mind that a discussion of the place of offensive language would benefit all students, we wouldn’t anyone to have to deal with something they found unpleasant.
In a related story, the Canadian Broadcast Standards Council has shown it’s willingness to kowtow to people demanding censorship. After an individual in Newfoundland complained, a Dire Straits song, Money For Nothing, has been pulled from Canadian airwaves; for an ironic use of the word “faggot”.
Have we all gotten so weak that we can’t even tolerate words written years or centuries ago from people we’ve never met and never will meet? Have all the years of self-esteem building failed? Has all the affirmative action been in vain? Are we allowing the frailty of a few to govern what is available to all?
From where I sit our society has not progressed, it has actually reverted into something less robust, weaker, and less healthy. If can’t stand the occasional use of unpleasant words, how are we going to cope with the real challenges of the 21st century?
Wednesday, January 5, 2011
Monetary Cure?
This comes out of a question I asked when the Parliamentary Budget Office was giving a seminar here. In one set of forecasts, the PBO is projecting that interest rates will remain low for the next several years. Given the lack of inflationary pressures we’re seeing and speed of the recovery south of the border, this makes a lot of sense to me. In a different forecast, they were predicting that Canadian labour productivity wouldn’t be rising very quickly in the foreseeable future. Again, I can believe this.
The problem arises when you put the two together and this was basically the question I asked. What I was initially intrigued by was the apparent contradictory nature of these two predictions. Of course it was the last question and I didn’t get to ask a follow up, so you get to suffer.
Start with the idea behind a monetary stimulus. The whole point of reducing interest rates is to encourage consumers to buy (on finance) durables and firms to engage in more investment spending. This is a pretty textbook story so far. Reduce interest rates, increase consumption and investment, and presto the economy recovers.
Investment in economics isn’t quite the same as what most people think of as investment. When we talk about investment, we’re talking about the purchase of new physical capital not financial capital. We’re talking about the stuff that tends to make people more productive like machinery, computers, and so on. So a monetary stimulus should be followed by a period of increased productivity as new capital comes “online” and increases labour productivity.
The problem with the story so far is that it ignores the excess capacity many measures show in the Canadian economy. If there is a lot of excess capacity in the economy, we aren’t likely to see a lot of investment in new capital. Why buy more capital when you aren’t using what you’ve already got? So, for the monetary stimulus to have any impact on the Canadian economy, all the heavy lifting has to be done by consumers. This is actually what’s happening. Consumer debt is on the rise in Canada and is now reported to be higher than (relative to income)in the U.S. It is possible we’re setting ourselves up for a debt driven bubble in consumer spending.
There’s another catch. Consumer spending generally doesn’t go to stuff made in Canada. Look at almost all your consumer goods, electronics, appliances, etc. Not very much of it is made in Canada. A lot of it is made in places like China or Korea. So a spike in consumer spending doesn’t do a whole lot for the Canadian economy.
So the follow up question remains. Is the monetary stimulus of low interest rates likely to do us any good or is the cure likely to be worse than the disease?
The problem arises when you put the two together and this was basically the question I asked. What I was initially intrigued by was the apparent contradictory nature of these two predictions. Of course it was the last question and I didn’t get to ask a follow up, so you get to suffer.
Start with the idea behind a monetary stimulus. The whole point of reducing interest rates is to encourage consumers to buy (on finance) durables and firms to engage in more investment spending. This is a pretty textbook story so far. Reduce interest rates, increase consumption and investment, and presto the economy recovers.
Investment in economics isn’t quite the same as what most people think of as investment. When we talk about investment, we’re talking about the purchase of new physical capital not financial capital. We’re talking about the stuff that tends to make people more productive like machinery, computers, and so on. So a monetary stimulus should be followed by a period of increased productivity as new capital comes “online” and increases labour productivity.
The problem with the story so far is that it ignores the excess capacity many measures show in the Canadian economy. If there is a lot of excess capacity in the economy, we aren’t likely to see a lot of investment in new capital. Why buy more capital when you aren’t using what you’ve already got? So, for the monetary stimulus to have any impact on the Canadian economy, all the heavy lifting has to be done by consumers. This is actually what’s happening. Consumer debt is on the rise in Canada and is now reported to be higher than (relative to income)in the U.S. It is possible we’re setting ourselves up for a debt driven bubble in consumer spending.
There’s another catch. Consumer spending generally doesn’t go to stuff made in Canada. Look at almost all your consumer goods, electronics, appliances, etc. Not very much of it is made in Canada. A lot of it is made in places like China or Korea. So a spike in consumer spending doesn’t do a whole lot for the Canadian economy.
So the follow up question remains. Is the monetary stimulus of low interest rates likely to do us any good or is the cure likely to be worse than the disease?
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