Behavioural economics

Learning Objectives: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.
Lecture handout: Behavioural economics*

Here is an explanation of the Birthday Paradox. Notice that the probability calculation assumes a uniform distribution (i.e. that there’s a 1/365 chance of being born on any given day). In fact, birthdays in July, August and September are more common than other months.

This applet allows you to play multiple games of the Monty Hall problem. An article in the Smithsonian Magazine asks “When Did Girls Start Wearing Pink?

Case:Sun: A CEO’s Last Stand”, Business Week, July 26th 2004

The purpose of the case is to find examples that allow you to complete:

Here’s a nice poster of cognitive biases:

The UK government are so concerned with “excessive optimism” that they released guidance on how to mitigate it.

One of my favourite uses of behavioural economics is to reflect on the design of a menu when I am eating in a restaurant. This analysis by William Poundstone is truly fascinating.

Although I take behavioural economics seriously, I don’t think it majorly restricts the usefulness Efficient Market Hypothesis:

The reason for this is (partly) explained in Vernon Smith’s Nobel prize address:

  • Smith, V. L. (2003). “Constructivist and Ecological Rationality in Economics†”. American Economic Review93 (3): 465–508

Further videos on the implication for stock picking are: “The psychology behind irrational decisions“, “Understanding Unconscious Bias” (Royal Society) and from Marginal Revolution University: “How expert are expert stock pickers?” (and subsequent videos such as “Can you beat the market?” “Investing: Why You Should Diversify” and “Who Is More Rational? You or the Market?“)


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 11 of ‘Economics: A Complete Guide for Business‘.

Global Prosperity

Learning Objectives: Understand the empirical evidence around economic growth and globalisation. 

Here is my Economics Mission Statement, March 2018.

Lecture handout: Global prosperity*

The incredible data visualisation used at the beginning of my lecture is from Gapminder. I strongly encourage you to visit their website and play around with the tools. In particular, try to create a chart showing GDP per capita against infant mortality and then see how the data has changed over time.

Group activity: Stoves Handout, May 2020

The increases in global income have been incredible. In Factfulness, Hans Rosling tells us that 100,000 years ago everyone was poor and most children didn’t survive long enough to become parents. 200 years ago, 85% of the world were still in extreme poverty. Today, most people live in middle-income countries, with living standards similar to Western Europe and North America in the 1950s. (p.38).

Some more detail can be found in “Rosling’s Charts“.

Higher incomes are important, they lead to:

  • Reduced population growth (poor communities have lots of children because many will die early, and they need a contribution to family income. As they get richer, the need for more extra children declines and parents focus on quality not quantity… based on current growth projections total global population is due to stabilise at ~11 bn people. As Rosling says, “Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religion both the men and the women instead start dreaming of having fewer, well-educated children” (p.91)
  • Greater concern for the environment
  • More resources for humanitarian assistance (e.g. for natural disasters or global pandemics)

In the lecture I argue that infant mortality figures are better proxies for living standards than life expectancy. As Hans Rosling argues, “this measure takes the temperature of the whole society” (p.20). This is because children are fragile, and you therefore require lots of good circumstances in order for children to routinely survive – it tells us about access to basic health care, the literacy of mothers, etc.

The lecture tried to show the link between economic growth and rising living standards for the general public. This is something that Dracula noticed when he encountered a “normal” modern house:

I’ve been a nobleman for 400 years. I’ve lived in castles and palaces among the richest people of any age. Never….never! Have I stood in greater luxury than surrounds me now. This is a chamber of marvels. There isn’t a king, or queen or emperor that I have ever known or eaten who would step into this room and ever agree to leave it again. I knew the future would bring wonders. I did not know it would make them ordinary.

Some great videos to watch that explore the themes from the lecture:

Lecture handout: Stagnation*

I provided some pessimistic views on transformative breakthroughs. But every now and then I notice the power of steady, incremental progress. For example:

Noah Smith has a nice Twitter thread on progress since 1970.

 

For more on Permissionless Innovation

A good, uplifting account of how creativity can result from not asking permission:

The importance of ideas:


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 12 of ‘Economics: A Complete Guide for Business‘.

 

Macro Policy Workshop

Learning Objectives: Test understanding and utilisation of important macro concepts. 
Group activity:Macro Policy Workshop“, March 2018

fincrisis

“Choose your own financial crisis” a role-playing app

According to Modern Monetary Theory (MMT), it’s fashionable to claim that a country that issues their own currency cannot default on its debt. But as Stephen Kirchner points out, they can and they have.

Instructor Resource: “Macro Policy Workshop: Solutions”, March 2018

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapters 8 & 9 of ‘Economics: A Complete Guide for Business‘.

MPC Sim

Learning Objectives: Apply monetary policy judgment to current macroeconomic data.
Group activity: MPC Simulation, December 2012

You can read more details about the Bank of England’s MPC here. I used to regularly participate in the Shadow MPC. A useful resource may be the Kaleidic Dashboard.

Group activity: ECB Simulation, March 2011

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 8 of ‘Economics: A Complete Guide for Business‘.

International economics

Learning Objectives: Calculate foreign exchange. Understand Balance of Payments. 
Group activity: Josko Joras (A), December 2012

  • Instructions: Complete exercises 1,2, and 3

For an open economy

GDP = C + I + G + (X – M).

However it’s important to realise that imports don’t subtract from GDP.

Read more about the Big Mac index at The Economist. For more on how Argentina games it, see:

Here’s an intro to Balance of Payments:

Instructor Resource: 

  • Josko Joras (A) Solutions, December 2012
  • Josko Joras (B), December 2012
  • Josko Joras (B) Solutions, December 2012

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 10 (Sections 10.2 and 10.3) of ‘Economics: A Complete Guide for Business‘.

International Trade

Learning Objectives: Estimate the welfare effects of trade intervention
Group activity:

The best way to understand economic interdependence is the classic pamphlet I, Pencil.

This guy attempted to make a sandwich from scratch. It cost $1500 and took 3 months. It’s remarkable how cheap and plentiful sandwiches are, due to an extended global supply chain and division of labou.

This video shows the history of globalisation through some important maps:

Here we use basic demand and supply analysis to look at the welfare effects of trade intervention:


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 10 of ‘Economics: A Complete Guide for Business‘.

Fiscal multiplier

Learning Objectives: Perform back of the envelope calculations to estimate the fiscal multiplier for a range of different countries.

 

Group activity:Fiscal Multiplier Worksheet“, March 2018

Instructor Resource: “Fiscal Multiplier Worksheet: Solution”, March 2018

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 9 of ‘Economics: A Complete Guide for Business‘.

Monetary Policy II

Learning Objectives: Apply the One Target One Tool framework to actual policy decisions.
Case: “The Euro in Crisis: Decision Time at the European Central Bank” Harvard Business School case no. 9-711-049

For an account of the financial crisis:

The key goal for monetary authorities is credibility: [Credibility flashcard]

What constitutes an optimal currency areas? [Optimal Currency Areas flashcard]


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 8 of ‘Economics: A Complete Guide for Business‘.

Monetary policy I

Learning Objectives: Understand the root causes of inflation, and contribute to policy discussions. Understand how monetary policy affects business decision-making and thus generates macroeconomic fluctuations
Lecture handout: Monetary policy*

This lecture covers a lot of ground but tries to give you a relatively simple, usable framework to relate monetary economics to monetary policy decisions. One problem when studying macroeconomics is the belief that it equips us with an ability to forecast. See my video on Economic Prediction for why I think we need to be careful.

You may think that I am being harsh on economic forecasters. But I agree with Andy Haldane when he said, “It has been argued that these models were not designed to explain such extreme events. For me, this is not really a defence. Economics is important because of the social costs of extreme events. Economic policy matters precisely because of these events. If our models are silent about these events, this jeopardises the very thing that makes economics interesting and economic policy important.”

The key finding of monetary economics is that the root cause of inflation is excessive money creation. We looked at some specific examples of hyperinflation, and to learn more you can watch “Zimbabwe and Hyperinflation: Who Wants to Be a Trillionaire?” (Marginal Revolution University). The BBC has an article to show how you can calculate your own personal inflation rate (provided it’s 2015 and you live in the UK!).

Conventional monetary policy is a simple link between a target (usually inflation) and a tool (interest rates). During the lecture I implied that central bankers change interest rates relative to the current rate. In some cases, however, they may be trying to move the policy rate closer to some sort of benchmark. A common benchmark can be calculate using a Taylor Rule. For examples, see Kaleidic Economics.

The key goal for monetary authorities is credibility: [Credibility flashcard]

To get a feel for how central bankers should respond to changing conditions, try these simulators:

A corridor system is when the central bank targets three policy rates. We looked at how those rates changed from 2003-2015 in the Eurozone. The ECB website has more recent data.

The Dynamic AD-AS model is a really good way to think through macro events. If it is unclear after the Monetary and Fiscal policy lectures, there are plenty more resources on this page of my website.

The lecture also introduces the concept of the signal extraction problem. This isn’t the most intuitive concept to grasp, but it explains how nominal shocks can have real effects. In other words how changes in the money supply can affect inflation and real growth. A good article on this is Steve Horwitz’s ‘The Parable of the Broken Traffic Lights“.

What constitutes an optimal currency areas? [Optimal Currency Areas flashcard]

I also like the “Econ Talk” podcast, and the episodes with Milton Friedman on Money (August 28th 2006), Allan Meltzer on Inflation (Feb 23rd 2009), and Charles Calomiris on the Financial Crisis (Oct 26, 2009), are particularly relevant.

What is a yield curve:


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 7 (Sections 7.3, 7.5 and 7.6) and Chapter 8  (Section 8.1 and 8.2) of ‘Economics: A Complete Guide for Business‘.

Fiscal Policy

Learning Objectives: Assess the efficacy of fiscal stimulus and aggregate demand management.
Lecture handout: Fiscal policy*

Keynesian approaches to aggregate demand management became popular because they were seen to have explained the problem of the Great Depression. My video on the Great Depression explores some of the history, and also have a video looking at The Financial Crisis of 2008-09. The big debate between Keynesian and Hayekian economics was popularised by Russ Roberts and John Papola in the rap battles Fear the Boom and Bust and Fight of the Century.

This article from the New York Times has a great visualisation of how unemployment is measured.
For some documentaries on the Obama stimulus, see:

Here’s the official website of the Williamson Tunnels and for more on Chinese “ghost towns” you can watch China’s Empty City, or read this short World Bank blog post on the Rise of the Chinese Ghost Town. The photo of manual labourers in North Korea scrubbing the road comes from this article, and my grad school buddy Curtis Melvin created North Korea Economy Watch. Despite what I say in the lecture… not all dog rescues are disasters….

Some podcast episodes that I particularly recommend:

The content on policymakers feeling pressurized to “do something” is an element of crisis management more generally. An interesting example of the types of trade off that policymakers face is BBC Radio 4’s ‘Discussion Time: Coronovirus‘. Even though it relates to an epidemiology situation, it is relevent for any PR situation. Policymakers face a balance between maintaining public confidence, being seen to be providing a quick and clear response, without inciting a general panic. This relies on having good frameworks and tools that relate to the specific situation (the Radio 4 panel explain how important expert forecasts of the spread of foot and mouth disease were, in a recession economic impact studies play a critical role); but also an ability to manage public expectations. The goal of successful crisis management is to balance these things without introducing new uncertainties.

Finally, my video on Macro Policy summarises policy makers options. [Macro Policy flashcard]


These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 9 (Section 9.2, 9.3 and 9.4) of ‘Economics: A Complete Guide for Business‘.