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Tag Archives: Michael Lewis

Decisions Have An Opportunity Cost That Require Tradeoffs

President Obama says he wears only gray or blue suits. As for meals, he prefers having others decide what he will eat. The reason? “Choice fatigue.” Knowing that decision-making requires energy, the President told writer Michael Lewis that he tries not to think about what he will wear and what he will eat. He saves his energy for the important stuff.

Researchers have confirmed that we start to take shortcuts after making up our minds too many times. In one study, voters react to the same proposition differently, depending on its position on the ballot. The higher the proposition, the less likely we will select a “decision short-cut” like maintaining the status quo. For cars, observers noted that when asked to choose among “4 styles of gearshift knobs, 13 kinds of wheel rims, 25 configurations of the engine and gearbox and a palette of 56 colors for the interior,” people got too worn out and turned to the default option.

Prior decisions affect how much energy we have for future decisions.

As a result, if you are president (or just planning your own productive day), you do not want to use up your decision making energy on clothing and food. As an auto dealer, you might want to start with multiple options so that buyers opt for the default (and more pricey) alternative. Perhaps we can even attribute some of the housing debacle to “choice fatigue.” Mortgage agreement were so complex, that buyers just took the easiest route.

Sources and Resources: I especially recommend Michael Lewis’s Vanity Fair article on President Obama and John’s Tierney’s NY Times Magazine article on decision fatigue. For additional academic details about decision fatigue studies, you might further enjoy this paper.

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The US is again hitting its debt ceiling.

With a euro zone update on Greece unfolding (they might lease some islands but we’ll get to that in a moment), here is some Greek math that Michael Lewis presents in Boomerang.

Referring to the deficit, during October 2009, the Greek government thought it was 3.7% of GDP. A closer look from a new finance minister soon resulted in a revision to 14%. How could they have been so wrong (assuming the new figure is valid)? They actually had no independent group gathering statistics. Instead, the political party in charge managed the math.

The 2009 Greek deficit (spending minus revenue for one year) was close to 14% of GDP. The Greek debt (the total amount they owed) might have been 114% of GDP. Why could the Greeks borrow so much?

Comparing Greece’s GDP to its deficit is sort of like comparing your income to your mortgage and then having a wealthy uncle who would guarantee what you borrowed. After the Greeks joined the euro zone, their borrowing costs plunged because lenders assumed the Germans would be there to support the loans. Even though the German economy was much healthier than Greece’s, their governments could borrow at similar rates–and those rates were low. As a result, Greece could go on a borrowing spree and use the money to run unprofitable government businesses like the national railway, to pay generous pensions to retired government employees and to ignore nationwide tax evasion.

Now, Greece knows it has to cut the public payroll. A recent Bloomberg article tells us that they are using incentives to encourage retirement and also placing people on 75% pay if they receive a poor evaluation or disciplinary action. However, as one IMF official told Michael Lewis, “I’m all for reducing the number of public-sector employees. But how do you do that if you don’t know how many there are to start with?” (from Boomerang, p. 79).

And finally–why do the Germans and French care about Greek math? Here we have reality. German and French banks hold Greek debt.

For an excellent video from the St. Louis Fed on “The Greek Tragedy,” I recommend this YouTube video and all others from the series. And this Washington Post book review tells more about Michael Lewis’s financial disaster tourism in Boomerang.

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During his 2012 Princeton Baccalaureate Address, financial writer Michael Lewis describes a college psychology experiment in which students were divided into teams, each composed of 3 people with a randomly assigned a leader. Given a social problem like drinking or cheating, the teams were asked to brainstorm a solution. Then, 30 minutes after beginning, 4 cookies were brought to each group.

3 people, 4 cookies.

Who got the extra cookie?

Lewis tells us that in every group, the leader, the person who was arbitrarily selected, “grabbed” the cookie and ate it with gusto.

As Lewis continues:

“This leader had performed no special task. He had no special virtue. He’d been chosen at random, 30 minutes earlier. His status was nothing but luck. But it still left him with the sense of entitlement that the cookie should be his.”

Connecting his life, his books, CEO pay and Wall Street excess to his cookie story, Lewis focuses on how luck relates more closely to success than people admit. As he points out, for Princeton grads, their parents, their affluent country and their prestigious university all reflected some luck in their lives that then increased, “their chances of becoming even luckier.”

So, he asked, when life presents you with that “fourth cookie,” will you grab it?

Here is the 14 minute video of his excellent address and here is the transcript.

Also, you might find economic Nobel laureate Daniel Kahneman’s favorite equations interesting:

  • success = talent + luck
  • great success = a little more talent + a lot of luck

 

In Thinking Fast and Slow, Dr. Kahneman then uses some surprising golfing statistics, pp. 177-179, to illustrate his point and his discussion of our regression to the mean.

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Maybe sell some islands and an ancient ruin or two?

In Boomerang, Blind Side author Michael Lewis repeats what German politicians were suggesting in 2009 when they heard that the Greek debt was much larger than previous estimates. How much bigger? No one was really sure.

In a wonderful podcast, NPR’s This American Life explains that once Greece joined the European Monetary Union, it enjoyed a new world of credit. With fellow euro zone member Germany perceived as “the rich uncle” to (theoretically) back all loans, Greece’s interest rates plunged. Borrowing more cheaply meant the Greek government could borrow much more. Consumers who never had car loans or home mortgages suddenly found bankers welcoming them with rates that declined from 18% to 4%.

Lewis explains that Greek statisticians had to eliminate the high-priced tomatoes from their CPI to take their inflation rate within euro zone parameters. NPR’s reporters tell how Germany, hoping to expand the market for their goods, initially supported Greece’s euro zone entry. Getting what they wished for, more Greeks were buying Mercedes.

Our bottom line? Incentives. Isn’t everyone responding predictably? You might want to read This Times It’s Different for an academic explanation.

The Economic Lesson

In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

An Econmic Question: How does the United States enjoy the common market benefits  listed by Dr. Taylor?

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When are people more likely to cheat? Behavioral economist Dan Ariely says to look at sweatshirts, the Ten Commandments, dollar bills and cans of Coca-Cola.

In one experiment, Ariely discovered that more students would copy someone’s seemingly dishonest behavior during an exam when that person was wearing their (elite) school’s sweatshirt. Ariely’s conclusion? People are more likely to replicate dishonesty if it comes from a group with which they want to identify.

In this fascinating TED talk, he also connected minimal recall of the Ten Commandments to (less) cheating and explained why we take cans of Coke rather than dollar bills from a communal refrigerator.

Our bottom line? Ariely’s research provides insight about the cheating and corruption that disrupt economic activity.

The Economic Lesson

In the World Bank’s “Doing Business” Index, Greece has a relatively low rank.  I wonder whether it is tougher to do business there because its macro statistics have been “misreported,” taxes are “under-collected” and the underground economy abounds.

An Economic Question: Explain why corruption and cheating affect the ease of starting businesses.

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