Tag: economics

Posted in Philosophy

Zero-Sum Game

Posted on by Jinavie

Game theory is the study of using mathematical models to understand how rational decision-makers would strategically act in a given environment. One concept from game theory is that of the zero-sum game, where there is a finite amount of utility shared between players, meaning that if one person gains something, another must lose something to balance it out.

A classic example is a game of competitive sports, where there can be only one winner. For you to win, someone else must lose. A zero-sum game can have as few as two players (such as a singles tennis match) or many players (such as a game of poker, where every dollar you win is a dollar taken away from the other players).

From a young age, we see many examples of zero-sum games. We play sports and board games where there is a clear winner. We are marked on curve and compared to our classmates in exams. We compete for jobs and romantic partners. Competitiveness is driven into us and is sold as a survival skill.

This leads us to be prone to zero-sum thinking which can lead to many biases. Some studies show students acting more competitively and less inclined to help their peers if they were graded on a curve (e.g. percentiles), rather than grade categories (e.g. A, B, C). We think that if someone is a jack of all trades, they are masters of none, because surely no one can “have it all”. Many people oppose immigration because they believe that immigrants will take the finite number of jobs and houses. Some people negotiate aggressively in a deal, thinking that “your loss is my gain”. In severe cases, people may even sabotage others to increase their gains.

However, life is not always a zero-sum game. Game theory also describes non-zero-sum games, where the net balance of utility between all participants can be higher (or lesser) than zero. Simply put, in a non-zero-sum game, there can be more than one winner and sometimes, everyone can be a winner.

The best example of this is the mutual benefit born from cooperation. Zero-sum thinking may dictate that you must conquer your neighbouring tribe because they are your competition, but throughout history, cooperation, peace and harmony have prevailed as the winning strategy, because it results in greater net gain.

Happiness is also a non-zero-sum game, where just because someone else is happy, it does not take away from your happiness. But for some reason, some people cannot stand to watch others happy, or feel they must be happier than those around them. These people constantly try to “one-up” others, not recognising others’ happiness, or even sabotaging others and making them feel bad because they can’t stand to see other people be happier than them. This is an extremely toxic, unnecessary behaviour, that should be unacceptable in any kind of relationship, particularly between friends or family.

The far healthier behaviour is to be happy for others’ happiness, regardless of your life situation. This is why compassion is one of the keys for happiness. Realising that we can all find our own joy and contentness and help each other find happiness is a key step in being sustainably happy.

1 + 1 = 3

Posted in History & Literature

Veblen Good

Posted on by Jinavie

There is a simple rule that every student of Economics 101 knows:

The higher the price of an item, the lower the quantity demanded becomes.

This is because a rational person would feel that the item is not worth it above a given price point.

However, there are many goods that do not follow this law. Veblen goods describe a group of goods where paradoxically, higher prices result in greater demand. Examples of Veblen goods include luxury cars, designer jewellery and trending fashion items such as Air Jordans.

The simple explanation is that these goods are not demanded because of their functionality and usefulness, but because they are status symbols. Possession of a Veblen good suggests that you are financially successful and wealthy enough to disobey the law of demand and get away with it.

For the purchasers of Veblen goods, the fact that they are so expensive and exclusive make them appealing.

Posted in History & Literature

Judging History

Posted on by Jinavie

When we look back on history, there are countless stories where we wonder: “what were people thinking?”. Time after time, people have banded together to inflict unspeakable horrors on other groups of people. Consider the burning of “witches” in Salem, the mass guillotine executions following the French revolution, the transatlantic slave trade, the Rwandan genocide, the infamous Unit 731 of Imperial Japan that performed inhumane experiments on countless innocent people…

Even now, there is no shortage of examples of how a governing entity chosen by its people punishes a subset of its own population. We see homosexual people imprisoned and tortured in Russia. We see refugee children being torn apart from their parents at border control in the USA. We see brutal state policing of ethnic minorities such as Tibetans and Uyghurs in China.

It is very easy for us to examine these stories with a judgemental microscope. How can these governments be so evil? How can the people be so foolish to elect this government? Why are people not rising up against these powers to restore justice? The problem is that it is far easier to judge people for their actions rather than their intentions, or the context and setting that triggered them. Let us take an infamous historical atrocity as an example: the Holocaust.

Although Nazi Germany was initially formed from a coup d’état, Adolf Hitler and the Nazi party maintained overwhelming support from the German people throughout its brutal regime. We may wonder how such a large group of well-educated, culturally sophisticated and civilised people could be swayed to support the inhumane actions committed by the Nazi government, but if you look at the historical context, we can find some explanations.

After World War 1, Germany was in economic ruin due to the “total war” nature of WW1 using up resources, followed by the staggering reparations demanded by the Treaty of Versailles, with the final kick of the Great Depression. Inflation and unemployment ran rampant, leaving the populace hopeless and in despair.

But when Hitler rose to power, promising food, land and order, along with hopes of making Germany “great” again, those who had been sick and tired of their depressing situation rallied under the Nazi cause. The Nazi party capitalised on this desperation and vulnerability, using Jewish people and other minority groups as a scapegoat, blaming them as the cause of Germany’s downfall after the Weimar Republic. This allowed them to commit atrocities such as the internment and execution of millions of people, along with unprovoked war against the rest of Europe, by promising the people that it would provide more jobs, more goods and a better world for the Germans.

We can see from this case that a large part of how such a terrible situation arose was due to the desperation that people felt due to the context of global economic depression and the outcome of the Great War. If we simply judged the people for being “sheeple”, blindly following Hitler’s charismatic leadership and propaganda, then we would learn nothing out of this case study.

However, if we examine the underlying reasons for how this situation arose, we can see that the same horrors could happen again in our lifetime under similar contexts. This approach allows us to see current affairs from more objective stances and hopefully explore solutions, rather than just putting the blame on the people affected by their political, economic and historical environment. Furthermore, this frame of thinking helps us be less swayed by forces that are out of our control, as it lets us use our rational and logical thinking to make decisions, rather than our emotional reactions and survival instincts.

Posted in Psychology & Medicine

White Elephant

Posted on by Jinavie

In many Southeast Asian countries such as Thailand and Burma, owning a white elephant has been traditionally considered a show of great opulence. To this day, white elephant are a symbol of peace and prosperity and are kept by royalties of some countries. On occasion, a monarch would bestow a white elephant upon a citizen to reward them for their service to the country. But this was regarded as a blessing and a curse, as elephants are notoriously difficult and costly to maintain.

Today, the term white elephant refers to items that are gifted that serve little practical use and take up space, such as tasteless decorations. In some cultures, “white elephant swaps” are held around Christmas where people will trade gifts, under the philosophy that “one man’s trash is another man’s treasure”.

A related psychological phenomenon is the sunk cost fallacy. This is when a person sees that an action or investment they made has an increasingly bleak outlook, but instead of bailing, they make the irrational choice to continue. For example, you may pay $3000 for a car, which then breaks down. The mechanic bills you $1500 for repairs, which you choose to pay. The car breaks down again and this time it costs $2000 to repair. You think that since you have already invested $4500 in this car, it is worth paying $2000 to repair it. However, you have now spent $6500 on a car that may cost you even more in the future. The more you invest in it, the more you justify keeping it as you feel you are committed to the investment, resulting in a greater loss.

The sunk cost fallacy affects many aspects of our lives. A common example is relationships. Many people will settle down with someone they do not think is the “right one”. But despite many warning signs you are not very compatible with your partner, people think “well, I invested all this time with this person, I might as well see it through”. Eventually, the two end up in a bitter marriage, regretting that they did not break up earlier to find someone that they could be happy with.

The reason we fall into the sunk cost fallacy is that we do not want to “waste” the investment we have put in already. But economically speaking, you will profit far more by walking away from a bad decision as early as possible. It is a “sunk cost” which you will never get back.

Now think about your life. Are you really happy in your job or relationship? Or are you lying to yourself that it will be alright because you don’t want to face the cruel reality that you chose poorly? Knowing about the sunk cost fallacy will help you save time and money, whether it be putting down a bad book before you finish it, or learning when to walk away from the wrong commitment.

(Image source: https://xkcd.com/1768/)

Posted in History & Literature

Free Lunch

Posted on by Jinavie

In the late 19th century, there was a common tradition in American bars where they would offer a “free lunch” to people who purchased a drink. Although it seems like a good deal at face value, the lunches offered were quite salty, meaning that eating it will make you thirstier for another drink. On top of that, the price of the drinks would usually more than compensate for the price of lunch, while making the patron think he or she got a “free lunch”.

This is the free lunch referred to in the saying: “There ain’t no such thing as a free lunch”. Nothing in life is free. If someone tries to tempt you with a free product, there will no doubt be a string attached in one way or another, such as a hidden cost. To have something, you must trade in an equal amount of something, such as time, money or work, or take it from someone else. Because you cannot make something from nothing. Such is the way of the universe.

Every resource is finite, meaning that you must make choices on how to use these resources. Every decision comes with an opportunity cost – the cost of not being able to use your resources for a different outcome. If you have $2, you can buy a bag of chips or buy a drink, but you cannot have both.

The most useful application of this principle is time. When you procrastinate or leave your work to tomorrow, you are not having a “free lunch” in the sense of having free time to yourself. You are borrowing that time from the future, as you will no doubt pay the cost of having to work harder or end up with a less comfortable life.

If that is the case, then how are we supposed to have the time to keep ourselves happy, when we have so much work and so little time? Economically speaking, the only way you can have anything close to a free lunch is by improving your efficiency. By being efficient, you reduce the time you spend doing work and you can gain more happiness while investing less time. For example, instead of procrastinating watching television, if you engage in your favourite hobby and enter a flow state, you will achieve far greater happiness for the same amount of time.

Posted in History & Literature

Ponzi Scheme

Posted on by Jinavie

Money is a human invention that acts as a medium of exchange and a store of value. It lets us easily carry around our assets in the form of paper, or nowadays, on a card. But because of its characteristics, money allows for some very intricate, complicated con schemes. One famous example is the Ponzi scheme – a type of investment scam.

In 1920, Charles Ponzi had a great idea. Back then, people would send an international reply coupon along with international mail so the receiver could send a reply using the coupon. Ponzi noted that since the value of these coupons were constant across nations, buying it cheap in one country then selling them in the United States would lead to profit. To kickstart his business idea, he began gathering investors, to whom he promised large returns that the investors could not refuse. However, when Ponzi began trading the coupons, he quickly found that it was not effective and he did not make the profit he expected. But instead of telling the investors that his plan failed and that they would not get the returns he promised, he decided to try something different.

Having not heard of Ponzi’s failure, new excited investors asked Ponzi to invest their savings too. Ponzi used the invested funds to pay off the original investors by redistributing the money. Happy that they got their promised returns, the original investors told their friends and family about the incredible opportunity. This brought more new investors to Ponzi, whose money he used to pay off the previous investors. Because Ponzi took a commission from each investment, he quickly raked in a massive amount of money – just by redistributing money around and not actually investing a single cent.

But Ponzi schemes do not last. Eventually, the amount of new investments were not enough to pay off the previous investors and people began investigating, only to discover that Ponzi was scamming them all along. 

The Ponzi scheme relies on three things: enticing investors with the promise of high returns, intricate redistribution of money to feed the previous group of investors and the good reputation built through word of mouth. Because the scheme relies on paying old investors with money taken from new investors, a larger number of new investors is needed compared to the old investors. This leads to the formation of a pyramid. When the number of new investors is not enough, for example during a recession, the pyramid’s base becomes weak and the whole scheme collapses, with everyone losing money except for the schemer and the few original investors.

(Click Read More for diagram explaining a Ponzi scheme)

(Image source: http://browse.deviantart.com/art/Support-83476199)

Posted in History & Literature

Demand And Supply

Posted on by Jinavie

How does the economy function? On the surface, economics seems extremely complex and intricate, changing dynamically due to what appear to be insignificant factors. For example, one can predict a recession from the increasing attractiveness of waitresses. But economics relies largely on two simple laws: the law of demand and the law of supply.

The law of demand states that as the price of a good goes up, people demand less quantities of that good. This makes logical sense as (rational) consumers want to spend the least amount of money possible for something. When plotted on a graph with price (P) as the y-axis and quantity (Q) as the x-asis, we can show that demand (D) is a downward-sloping curve.

The law of supply states that as the price of a good goes up, people supply more quantities of that good. This makes logical sense as (rational) producers want to sell something for as much money as they can. When plotted on a graph with price (P) as the y-axis and quantity (Q) as the x-asis, we can show that demand (S) is a upward-sloping curve.

When we superimpose these two laws on the same graph, we get a nice X-shape as the two lines cross over. The point where they cross is called the market equilibrium and this is where the consumers demand exactly the right amount of goods that the producers are willing to supply at a given price. If a good is being sold at a price higher than the equilibrium price, consumers demand less of the good and producers are left with an excess. If the price is lower, then there is a shortage as demand exceeds supply. Over time, the price is pushed towards the market equilibrium. Thus, thanks to the laws of supply and demand, the market automatically adjusts to the price to accurately reflect the value of the good.

Adam Smith, the father of economics, called this the invisible hand – a force driven by the individual ambitions of consumers and producers to balance the market. This force is not found in centrally planned economies of communist states, as the price and quantity supplied is fixed by the government. A pure free market is only driven by the invisible hand. Most modern countries’ economies are mixed economies, usually in the form of free markets with some government intervention.

Although economics appears complicated, it essentially boils down to the laws of supply and demand. By understanding the principles of demand and supply, one can begin to understand more complicated economic theories such as aggregate demand and supply, elasticity, foreign currency exchange and trade. Real economic situations such as oil cartels, trade embargos and taxation can be broken down and modelled using PQ-diagrams (depicting the demand and supply curves).

The laws of supply and demand are two crucial laws of economics that everyone should have some understanding of, as it can be extremely useful in everyday life. Not only do they apply in obvious situations such as running a store or a business, or understanding how the economy works, but it can be applied to negotiating too. One of the fundamental principles of negotiating is finding the balance between what one person wants (demand) and what the other person is willing to do (supply). It is amazing how useful knowing that simply being slightly flexible is in negotiations.

Posted in Philosophy

Achilles And The Tortoise

Posted on by Jinavie

In 450 BC, a Greek philosopher named Zeno thought of the following paradox. Let us imagine that Achilles and a tortoise were to have a footrace. Achilles, obvious being faster than the tortoise, allows the tortoise to have a head start of 100 metres. Once the race starts, Achilles will quickly catch up to the tortoise. However, within the time he took to cover the distance, the tortoise would have travelled some distance as well (say 10 metres). When Achilles runs the 10m to catch up again, the tortoise has once again toddled on another metre. Thus, whenever Achilles reaches somewhere the tortoise has been, he still has farther to go. Because there are an infinite number of points Achilles must reach where the tortoise has already been, theoretically the tortoise will be ahead of Achilles for eternity.

According to this thought experiment, motion is paradoxical and theoretically impossible. However, we know for a fact that motion happens. So how can we break Zeno’s paradox?

The main flaw of Zeno’s paradox is that he uses the concept of “eternity”. If we record the story mathematically, the time taken for Achilles to run the footrace is (if it took him 10 seconds to run 100m): 10 + 1 + 0.1 + 0.01 + 0.001… = 11.111… Ergo, the tortoise is only ahead of Achilles for less than 11.2 seconds (rounded). After 11.2 seconds pass, the time passed exceeds the sum of the infinite series and the paradox no longer applies.

Although it is a flawed paradox, the story of Achilles and the tortoise teaches the concept of geometric series – that something finite can be divided an infinite amount of times. For example, 1 = ½ + ¼ + 1/8 + 1/16… ad infinitum. This principle is a crucial part of mathematics and has significant implications in the field of economics. For example, it can be used to calculate the value of money in the future, which is necessary for working out mortgage payments and investment returns. Perhaps it is because of this mathematical principle that it seemingly takes an infinite amount of time to pay off a mortgage.

Zeno’s paradox teaches us that one should not take the concept of infinity for granted.

Posted in Psychology & Medicine

Tit For Tat

Posted on by Jinavie

In human society, there are many ways for a person to interact with others when in a group setting. Some may choose to be selfish and only be out for their best interests, while others may choose altruism and cooperate with each other. The mathematical model that tries to predict human behaviour and outcome in these settings is the Prisoner’s Dilemma – the core of game theory. Tit for tat is one strategy that can be employed in such a setting.

The basis of tit for tat is equivalent exchange. A tit for tat player always chooses to cooperate unless provoked. As seen in the Prisoner’s Dilemma, if both players cooperate, both benefit (let us say 3 points each); if one player defects, that person gains more than from cooperation (5 points) while the tit for tat player gains 0 points.
If a tit for tat player is provoked, that player will retaliate. However, the player is also quick to forgive. Ergo, if the other player chose to cooperate, the tit for tat player (following the principle of equivalent exchange), will also cooperate. If the other player defected, the tit for tat player loses the first round and then chooses to defect from then on.
Note that tit for tat strategy only works when there is more than one game so that the player has a chance to retaliate.

Let us use an example to illustrate why tit for tat strategy works. In this scenario, two tit for tat players and two defectors all play six games each, using the above point system (if both defect, they each receive 1 point). The results are as follows:
  • Tit for tat vs defector: Tit for tat loses first round, both defect for next 5 rounds (5 vs 10)
  • Tit for tat vs tit for tat: Both cooperate on every round (18 vs 18)
  • Defector vs defector: Both defect on every round (6 vs 6)

When the points are added up, a tit for tat player gains 28 points (5 + 5 + 18) while a defector only gains 26 points (6 + 10 + 10). This is a surprising turn of events, as the defectors never lost a round and tit for tat players never “won” a round. This goes to show how cooperation leads to better long-term results while selfishness prevails.

There are shortcomings of this strategy. If there is a failure in communication and one tit for tat player mistakes the other’s actions as an “attack”, they will retaliate. The other player then retaliates to this and a vicious cycle is formed. This is the basis of many conflicts ranging from schoolyard fights to wars (although interestingly, tit for tat strategy is also found during wars in the form of “live and let live”). One way to prevent this is tit for tat with forgiveness, where one player randomly cooperates to try break the cycle (a defector would respond negatively while a tit for tat player will accept the cooperation), or the tit for two tats, where the tit for tat player waits a turn before retaliating, giving the opponent a chance to “make up for their mistake”.

Computer simulations have all proven that tit for tat strategy (especially the other two types mentioned just before) are extremely effective in games. In fact, it is considered one of the most optimal strategies in overcoming the Prisoner’s Dilemma.

In human societies, there is usually a mix of “nice people” and “selfish people”. By cooperating and trusting each other, we can produce a much greater gain over time compared to being selfish. And since society still unfortunately has “defectors”, you can retaliate to those who refuse to cooperate by defecting on them also. Ergo, a good approach to life is to initially reach out your hand to whoever you meet and treat them from there on according to how they respond. If they take your hand and want to cooperate, treat them with altruism and help them out. If they swat your hand away and try to use you for their selfish gain, it is fine to shun them and not help them out.

Through cooperation, understanding and connection, we can build a far more productive and efficient society, just like the ants.

Posted in History & Literature

Communism

Posted on by Jinavie

A professor was lecturing about communism. The students insisted that communism worked since no one would be poor and no one would be rich – a great equalizer. To show the students whether communism worked or not, the professor designed a social experiment. The professor announced to the class that all grades will be averaged and everyone will receive the same grade.

After the first test, the grades were averaged and everyone got a B. The students who had studied hard were upset while the students who had studied very little were happy.
But when the second test came, the students who had studied little studied even less and the ones who had studied hard before decided that since they could not make an A (even if they got 100%, the bottom half of the class would pull the average down), they also studied less. The second test average was a D.
No one was happy. By the third test, the class average had fallen to an F. Now no one was rich, but everyone was equally “poor”.

Communism ultimately fails because it removes one of the major driving forces of economies – incentive. Money is a key (but not the only) incentive that motivates people to work harder as they are rewarded with a better quality of life. But when private wealth is abolished and wealthy is “equally” (note that it is not “equitably”) split among the population, there is no longer motivation to try harder. Because no one wants to work for the benefit of strangers (due to psychological phenomena such as responsibility splitting and the monkeysphere), the economy does not grow and everyone becomes poor.

Communism essentially relies on the goodwill of the people while disregarding all realistic factors of economic growth. It is an extreme ideal that has failed in every instance in history. The only times communism works is in a small society setting such as a small village or tribe where there are less than 150 people (within the monkeysphere, thus people actually care about all of the others). The idea behind it is admirable – that all human beings have equal rights to a certain quality of life. However, it disregards the most important factor of economics; that resources are scarce and we cannot fulfil the infinite needs of everyone. Monetary incentives at least allow us to seek out these resources ourselves, with market economies rewarding such behaviour with money.

Thus, we should not focus on “equality”, which means that everyone should receive the “same”, but “equity”, which means that everyone should receive a “fair share” according to how much they have worked and contributed to the society.