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    How Not To Price a House

    Aug 31 • Behavioral Economics, Demand, Supply, and Markets, Households • 318 Views

    Let’s assume you would like to sell your house. According to Wired journalist Jonah Lehrer, the price you select might not be optimal. Why? Because we like to avoid losing money. (Of course, you might say, that is obvious. But an economist would suggest that a rational person would grasp the reality of the current housing market.)

    People who purchased homes during the housing bubble probably paid much more for them than their current market value. According to Lehrer, these people have a tendency to price their homes much higher than others who made housing purchases after the height of the housing bubble. The reason is “loss aversion”. Only when houses are more realistically priced will the housing market recover.

    The Economic Lesson

    Loss aversion was first identified by economics Nobel Laureate Daniel Kahneman (a psychologist) and Amos Tversky during the 1970s. In one experiment they gave subjects two sets of alternatives. Worded differently, both actually were identical. However, for the first pair, option “A” said out of 600 people, 200 will be saved. With the second pair, the first option said that out of 600 people, 400 will die. Presented the first pair, people chose “A”. However, for the second pair they rejected that first option. According to Kahneman and Tversky, “losses loom larger than gains” and people are not always the rational decision makers that classical economists cite.

    Loss aversion can also explain most investors’ behavior when faced with a losing investment. It also can explain capuchin monkey behavior.


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  • Cost Measured by Work Minutes

    Aug 31 • Households, Macroeconomic Measurement • 341 Views

    Having referred to a $40 1970s airline ticket, I was curious about other prices 35 years ago. Not everything was cheaper.

    (According to the Dallas Fed, in 1974, a 1 ounce bag of chips was approximately 25 cents, and in 1980, a large pepperoni pizza averaged $7.99.)

    But, having pondered prices, the Fed said, instead of comparing prices, look at work minutes.

    Deflation discussio

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    Spend More or Less?

    Aug 29 • Economic Debates, Macroeconomic Measurement, Regulation • 309 Views

    It was perfect. On the left side of the NY Times Op-Ed page, David Brooks defended the austerity approach. On the right was Paul Krugman saying spend more. Those are the alternatives. Maybe now it will be easier to choose one?

    Using Germany as his model, David Brooks presented the facts. He quoted economist Gary Becker saying that, “…the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempy to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.” Now, the American economy remains sluggish while Germany has 9 percent growth and unemployment at “precrisis” levels. Brooks’s conclusion is that the U.S. needs to pay attention to the fundamentals. Fundamentally, we are very good at innovation. Our political institutions, however, are leading us in an unproductive direction.

    Krugman meanwhile says that we have to focus on unemployment. And focusing on unemployment takes us, inescapably, to the fact that we are in the midst of a recession. Why? Stimulus spending has been inadequate.  On the fiscal side, more spending is the answer; on the monetary side, the Fed has to inject more money into the economy.

    A summary? Brooks says less is more. Krugman says more is more.

    The Economic Lesson

    The two economic thinkers we can turn to are F.A. Hayek and John Maynard Keynes. A wonderful rap from econstories.com summarizes each man’s perspectve.




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    Double Dipping

    Aug 28 • Businesses, Economic Debates, Government, Households, Labor, Macroeconomic Measurement • 298 Views

    For a smile, you might want to watch Merle Hazard’s “Double Dippin'” song. As the Guardian points out, also look for the fun trivia such as a small background picture of mathematician Benoit Mandelbrot.

    No one was smiling, though in response to the 1.6% GDP revised growth rate for the second quarter. Thinking of future economic growth, economist Ed Yardeni, suggests three possibilities in a recent newsletter.

    1) The contrarian view says the economy will boom. To generate a 3% growth rate, we would need more housing refinancing that would put money in consumer’s pockets and elevate consumer spending. Also, lower mortgage rates coud lead to more housing sales. Add to this solid corporate profits and higher real pay per worker because of productivity gain and you have a robust recovery. Most say the chances of a robust recovery are slim.

    2) More and more people are concerned about a bust which takes us to the double dip scenario. The second dip would be caused by unimproved unemployment and plummeting consumer spending.

    3) Muddling with ups and downs in different sectors is the third and most likely alternative. Muddling would be characterized by some employment gains, some housng improvement, some consumer spending.

    A (trick) question: If the growth rate has moved from 3.7% down to 1.6% between  the first and second quarter of 2010, then has the economy contracted? The answer: No. The economy continues to grow but at a slower rate.

    The Economic Lesson

    Let’s think of a double dip as a “W”. The U.S. has experienced 2 double dips during the past 80 years. Looking between 1930 and 1940, economic activity contracted 1930-1933, expanded 1934-1937, dipped in 1938, and then steadily grew. A much faster double dip happened between 1980 and 1982. 1980/down; 1981/up; 1982/ down.

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