Daily Archives: September 16, 2008

Predictably Irrational: The Hidden Forces That Shape Our Decisions

This is a book by Dan Ariely that I have started to read. Dan Ariely is a behavioral economist. If you don’t know what a behavioral economist is, maybe it’s about time you found out.

Follow this link to read my musings about the book. That is the page that I will update as I read more.

The type of research that Ariely does may not be well known to people who learned their economics a long time ago and have not maintained contact with the current state of economic theory.  I certainly include myself in the list of old geezers who have fallen behind.  I would also include John McCain and perhaps Phil Gramm in that list.

With Barack Obama’s university contacts and his willingness to learn new things, I would be willing to bet that his policies will take account of this new information.  My thinking on economics will certainly be influenced by this book.

What Is Truly Frightening About American Voters

Follow this link to a commentary published on Haaretz.com with perhaps a key insight into the American electorate. The author tells us what need Sarah Palin fulfills without it qualifying her to be Vice President.

Some times it takes readings from other countries to truly see what we are.

Very special thanks to LeonidG for the link to this article. He is passing on the knowledge he gains from reading what to us is the foreign press.

McCain Just Doesn’t Understand Economics 1

I heard John McCain blame the CEOs of the failing companies for the current financial mess. He claimed that it had nothing to do with deregulation. Does John McCain blame the millions of people who took on mortgages they would eventually not be able to afford? Was it just a problem of a few bad CEOs and millions of ordinary folk?

This is further proof that John McCain just does not understand how capitalism works or needs to be regulated. Capitalism rewards taking risk as long as it pays off handsomely.  If you are a CEO who does not take excessive risk and your decisions do  pay off but not as well as those CEOs who are taking imprudent risks, then you are soon out of a job. So the wise CEOs either learn to adapt to the excessive risk taking strategy or they are weeded out of the CEO market.

How do you protect a CEO who knows a bad risk when she or he sees it?  One way is to put in regulations that do not allow for the excessive risk taking that achieves short term payoffs and long term disaster. Not only does this protect the wiser CEOs, but it also prevents the bubbles from getting to such dimensions that they end up in such big disasters.

I saw a similar thing happen to mutual fund managers during the .com bubble. The managers who knew how to manage risk prudently and stayed away from the .com companies soon got fired for not having the stellar results of the fools who were jumping on the bubble.  Those of us who stayed with the few remaining managers of value oriented mutual funds felt like fools for getting measily 12% a year returns when others were getting 90%.

In the end we didn’t feel like such fools after all. We got to keep our gains (or most of them) while many .com followers lost it all.  It’s not so much how high your net worth ever got, but how much of it you got to keep in the long run.

When the economy was booming and the Republicans called for more deregulation and more tax cuts to stimulate the economy even more, we engineering oriented people realized what a horrible mistake this was going to be.  We engineers know about the value of what we call negative feedback. In economic terms this means that the government is supposed to be the counter-weight to excesses in the economy.  This is just like electronic negative feedback is the control on excessive amplifier gain.  Without the negative feedback or worse in the presence of positive feedback, high-gain amplifiers tend to go into wild oscillations. In the economy we are seeing wild oscillation because of the application of positive feedback instead of negative feedback.

We engineers know that you have to start with a high gain amplifier before you can start applying judicious amounts of negative feedback.  Similarly we appreciate the economic engine that is the U.S. economy.  It is just this appreciation that makes us understand that regulation also has its limits.

It doesn’t matter what discipline you study that gets you to this insight. I believe Barack Obama and his advisers have it.  The people who never come to this insight, like John McCain and his adviser Phil Gramm, should never be put in charge.

I only wish voters who never get this insight would understand what they are missing.  Of course, it they did understand, then they would have, by definition, had the insight.

Even Donald Rumsfeld knew that there were known unknowns and unknown unknowns.  His aphorism may have sounded funny, but I wish the electorate had the humility that this should have given to Donald Rumsfeld. If only he had really taken this to heart.

McCain’s Radical Health Insurance Agenda 3

Follow this link to a column by Bob Herbert about McCain’s health insurance plan.

I must admit that I don’t pay much attentioin to what McCain has to say, but if this is truly his plan, your going to end up paying more for health insurance if McCain gets his way.  If this is true, his plan will discourage your employer from providing health insurance.  Instead you will get a $5,000 tax credit to pay for a family’s health insurance.  If that insurance in the private market costs you $10,000 or $12,000 per year, you take a hit in the wallet of over $5,000.  The only ones who come out ahead are the employers and the insurance companies.

If this is the kind of “help” you want, then go ahead and vote for McCain.

By the way, I wouldn’t keep linking to items in the New York Times if RichardH didn’t keep sending them to me. When he sends me something worth mentioning, I can’t pass it up.

The West Begins to Doubt Georgian Leader

Follow this link to an article in Spiegel Online about plans to investigate what really happened in the brief war between Russia and Georgia. Many people are beginning to think that Saakashvili lied about the sequence of events.  The story also shows that Georgia might not be quite the democracy that our side paints it to be.

Perhaps it will become clearer that early reports one gets from the U.S. media are heavily tainted by influence form our government in Washington.

It is also clear that to get contrary information one must read news sources from outside this country. I have not yet seen this story reported by U.S. media.