Category : Economics

Necessarily Sufficient or Sufficiently Necessary?

The best way to remember things, at least I find, is by association. If something reminds you of something else and you can make the mental chain that links them together when you come across something, you can easily recall what you need to. I’m sure those guys that can memorise decks of cards will tell you the same thing. Something that comes up a lot in economics, maths and anything else that involves some form of logical statement is […]

Attractive Apples

It’s strange how what psychologists and marketing specialists seem to have known for years seems to elude economists. I always feel enlightened and almost embarrassed when I learn some psychological fact that makes a lot of sense to everyone, but that makes economists, conditioned by assumptions of rationality and utility maximisation, seem to look the other way and whistle. The attraction effect is one such phenomenon. Suppose you had to choose between some high quality dark chocolate and some moist […]

Lines of best fit: how to derive the simple OLS estimators

If you ever encounter some data in your life, you’re likely to come across a scatter diagram, which plots two variables against each other. You’re also quite likely to see a ‘line of best fit’ going through those points, which describes the apparent trend or correlation between the two variables, as suggested by the data points you’ve observed. It’s quite possible that in your early school days, you had to draw a line of best fit through some data by […]

What’s going on with consumption?

I was blown away by BBC’s article on the top economic graphs of 2011 for the UK: http://www.bbc.co.uk/news/in-pictures-16090055 Not only do they paint a very interesting picture, I think they do a good job of summarising the headaches (and also some excitement through curiosity) that economists have been experiencing in the last couple of years. There were two graphs that caught my eye in particular. The first one, looks at debt in the UK from private institutions and households, and […]

House price vs wage: which city is the most expensive place to live?

I’d noticed recently that a few people had mentioned the expensive cost of housing in relation to the average salary in their area. So I was interested to find out which places were particularly bad in the grand scheme of things. To do this, I picked some major cities from around the (reasonably developed) world. I used payscale.com to get data for the median salaries for these cities, and predominantly numbeo.com for data on housing. Methodology Initially, I thought I’d […]

Asymmetric information and high school effort grades

In high school, I remember thinking how our grading system was a total farce. We weren’t graded on ‘results’, allegedly. Instead, our teachers gave us a grading based on our ‘effort’. There were 5 grades in total: C – Commendable G – Good S – Satisfactory D – Disappointing U – Unsatisfactory To me this was complete nonsense, because effort is not observable! What the teachers did was to look at the end product, and use that to infer some […]

Interest Rates – or you say “jump”, I say “how high?”

As you can see from the graph above, UK interest rates have flatlined at 0.5% since the recession took full effect in 2009. At the time, economic activity was low, unemployment was rising and banks didn’t want to lend money to anyone. An interest rate cut was needed, and this is exactly what happened (although much later than I anticipated). It is true that the economy is suffering from unemployment and reduced consumer confidence even now, which is why budget […]

VAT’s not looking too good

The BBC reported today that, according to the latest figures from the Office of National Statistics (ONS), the UK economy shrank by 0.5% in the last quarter of 2010. This comes with a particularly large contraction in the construction industry. Of course, a lot of blame has been placed on the bad weather, resulting in worse than expected retail sales over the Christmas period. This may be true, but note from the graph that the UK had made it out […]

Intelligence and wage – a positively skewed hump?

Labour economists devote much of their time to looking at what factors affect wages. The classic regressions they run show that you are likely to have a higher wage if you’ve been to school for more years and if you have more work experience. This seems pretty intuitive and obvious. They’ve also looked at how IQ/intelligence affects wages. The general consensus is the common sense one – you earn more if you’re smarter. Again, this makes sense intuitively. There’s a […]

The Groin Strike Dilemma

Back when the Ultimate Fighting Championship (UFC) was in its infancy, there were very few rules. Ex-presidential candidate John McCain actually described it as the human equivalent of a cock fight, and to be fair to him, the lack of rules made for a rather unsavoury spectacle in some cases. One of the most notable cases in question happened in UFC 4, when strikes to the groin were completely legal. It saw Keith Hackney punch Joe Son (in the photo) […]

Are ‘sunk costs’ really sunk?

What are ‘sunk costs’? ‘Sunk cost’ is a term commonly used in economics. It refers to a cost that you or a firm might incur which is irretrievable – you can’t get it back. Suppose you own a large cheese company which has a cheese factory. You want to build an extension to your factory after a bumper year of exotic cheese sales (sorry, it’s lunchtime). If you bought some steel girders for £100,000 to lay some sort of framework […]

Daniel Kahneman, Loss Aversion and a video

Out of all of the various areas and branches of economics, none has captured my interest more than ‘behavioural economics’. This studies the links between psychology and economics to try to discover more about how the individual thinks when faced with decisions. It brings to light the irrationality of the human being, and the flaws of many classical economic models, which assume rational behaviour at all times. Israeli psychologist Daniel Kahneman was one of the pioneers of this field of […]