In times of economic uncertainty, why do wages and prices often remain ‘rigid,’ even as demand drastically falls or spikes? This phenomenon, known as ‘stickiness,’ is a central concept in Keynesian economics. The father of this section of economics, John Maynard Keynes, argued that without government intervention, mainly fiscal or monetary policies, the rigidity of prices can ’trap’ economies in high unemployment and slow growth … Continue reading Sticky Wages and Prices
Human behaviour, especially when it deviates from rational decision-making, has become increasingly significant in the realm of modern investment strategy; traditional economic models’ expectations of rationality no longer paint the whole picture. By applying psychological principles to economic analysis, behavioural economics adds nuance to the investment decision-making framework of individual investors. This interdisciplinary approach creates awareness that investors are subject to cognitive biases, emotions, and … Continue reading The Behavioural Economics of Investment
In economics today, it is often assumed that human behaviour follows the model of ‘Homo Economicus’ or ‘the economic man’. This refers to a form of behaviour where an individual acts rationally to optimise their own utility, or the total satisfaction gained from the consumption of a good or service. While this approach has stood the test of time, cognitive psychologists have since shown that … Continue reading Quantum Economics
Economics is often criticised for being a reactionary science that predicts nothing and only explains its mistakes (Rodrik, 2015). It is rarely credited with discoveries that help society; and in a random survey, most participants did not trust economists (Economics Network, 2017). Instead, economists are criticised for their resistance to change and for limiting the exploration of real-world practical policy solutions. Moreover, it is true … Continue reading Has Economics Run Out Of New Big Ideas?
It is only recently that the concept of human nature has been applied to economics, yet its impact can be seen everywhere. Contradicting traditional economic theory, it is believed now that human nature is intrinsic in every action we take from the small scale to the large. The recent GameStop trend was fuelled by individual investors taking an opportunity to turn a profit and retaliate … Continue reading The Psychology of Investing
Last year, in the last week of school, I was trapped in a painful dilemma: should I continue revising for that onerous Economics exam or should I flip open the laptop and switch on England’s (not so) dramatic Euro’s Group D decider? Adam Smith back in 1759 would’ve explained my situation as a battle between my passions and my impartial spectator. That is, I found … Continue reading Time Preference and Economics of Self-Control
Behavioural economics has taken the world by storm, aided by catchy and digestible books and superstar researchers. One of the most prominent contemporary figures in the field is Daniel Ariely, the current James B. Duke Professor of psychology and behavioural economics at Duke University. He has authored multiple best-selling books on his research, most famously his ‘irrational trilogy’ of Predictably Irrational, The Upside of Irrationality, and The Honest … Continue reading Dan Ariely – Modern Behavioural Economics
Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett Buffett uses this mantra every day, along with his two other ground rules for running his investment firm Berkshire Hathaway: So why does the 90-year-old legendary investor hold these core mantras? One possible answer can be found by considering the history of investment bubbles. One of the first recognised “bubbles” … Continue reading Forever blowing bubbles
Cees Armstrong and I had the pleasure of interviewing Professor Sunstein, the Robert Walmsley Professor at Harvard Law School. Professor Sunstein is the best-selling author of many books, including the critically acclaimed Nudge, as well as the most cited law scholar of all time. He now works with the US government. Continue reading An interview with Professor Cass Sunstein: Nudges, economic systems, and freedom
Reinhard Selten, 1994 Nobel prize and founding father of experimental economics, predicted that individuals wouldn’t play the conventional Nash Equilibrium in the Ultimatum Game, better known as a take-it-or-leave-it offer. This was proven to be accurate when his student Werner Güth showed this supposedly irrational behaviour in his 1982 experiments. In game theory a Nash Equilibrium is a scenario where neither player would benefit from … Continue reading The Rationality of Irrationality
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