Category Archives: finance

Equal Societies Good for All

The more unequal a soci­ety’s income dis­tri­bu­tion, the more health and social prob­lems ail both the rich and the poor.

With this the­ory brought to his atten­tion through the “quite fas­cin­at­ing book“ The Spir­it Level, Nic­olas Bau­mard dis­plays the evid­ence to sup­port the the­ory that eco­nom­ic inequal­ity is bad for all inhab­it­ants of a coun­try before con­sid­er­ing some pos­sible explan­a­tions, and look­ing at what this means in terms of poverty and cli­mate change.

It is com­mon know­ledge that in rich soci­et­ies the poor have short­er lives and suf­fer more from almost every social prob­lem. In [The Spir­it Level], [the authors] demon­strate that more unequal soci­et­ies are bad for almost every­one – the well-off as well as the poor […]. The remark­able data the book lays out and the meas­ures it uses are like a ‘spir­it level’ which we can hold up to com­pare the con­di­tions of dif­fer­ent soci­et­ies. The dif­fer­ences revealed, even between rich mar­ket demo­cra­cies, are strik­ing. Almost every mod­ern social and envir­on­ment­al prob­lem – ill-health, lack of com­munity life, viol­ence, drugs, obesity, men­tal ill­ness, long work­ing hours, big pris­on pop­u­la­tions – is more likely to occur in a less equal soci­ety.

Base­ball fan? Bau­mard also points out that “the more equal the salar­ies in a base-ball team are, the bet­ter its per­form­ance”.

India and the Definition of Middle Class

A newly pro­posed inter­na­tion­al defin­i­tion of the middle class for devel­op­ing coun­tries, pro­duced by the Cen­ter for Glob­al Devel­op­ment for the World Bank, has some sur­pris­ing con­clu­sions for India.

The report, pro­duced by the pres­id­ent of the Cen­ter for Glob­al Devel­op­ment, Nancy Bird­sall, sug­gests that “middle class” is defined as every­one with an income above $10 a day, exclud­ing those in the top 5% of earners in the coun­try… mean­ing India has no middle class.

This is a com­bin­a­tion both of the depth of Indi­a’s poverty and its inequal­ity. China had no middle class in 1990, but by 2005, had a small urb­an middle class (3% of the pop­u­la­tion). South Africa (7%), Rus­sia (30%) and Brazil (19%) all had siz­able middle classes in 2005. […]

In socio-polit­ic­al terms, the middle class is tra­di­tion­ally that seg­ment of soci­ety with a degree of eco­nom­ic secur­ity that allows it to uphold the rule of law, invest and desire sta­bil­ity. They do not, unlike those defined as rich, depend on inher­it­ances or oth­er non-pro­duct­ive sources of income. […]

OECD coun­tries define their poverty lines as 50% of medi­an income which works out […] to about $30 day. In the US the poverty line for a single indi­vidu­al in 2008 was $29 per day and for each indi­vidu­al in a four-per­son house­hold was about $14 per day.

How­ever, people in devel­op­ing coun­tries liv­ing on even $10 a day still have extremely low social indic­at­ors. Eco­nom­ist Lant Pritch­ett has shown that infant mor­tal­ity of house­holds in the richest quin­tile in Bolivia was 32 and Ghana 58 per 1,000. Few­er than 25% of people in the richest quin­tile in India com­plete 9 grades of school, Pritch­ett showed. “An upper lim­it of the 95th per­cent­ile, while on the high side, is just about suf­fi­cient to exclude the coun­trys richest,” Bird­sall adds.

via The Browser

Abstraction to Increase Effort (and Spending)

When there is a medi­um placed between our effort and a desired out­come, we strive to max­im­ise this medi­um regard­less of wheth­er or not it leads optim­ally to that out­come (think points or vir­tu­al cur­ren­cies as a medi­um when attempt­ing to obtain goods).

That’s my attempt at a con­cise sum­mary of the find­ings from a study coin­ing the phrase ‘medi­um max­im­isa­tion’.

This example taken from the paper (pdf) and presen­ted by The New York Times may help:

Stu­dents were giv­en a choice between two simple tasks. One would take six minutes, and the stu­dents were told that they would get a gal­lon of Haa­gen-Dazs vanilla ice cream as a reward. The oth­er would require sev­en minutes of work, and the pay­ment would be a gal­lon of Haa­gen-Dazs pista­chio.

Not sur­pris­ingly, since the second option involved more work and a less pop­u­lar fla­vor, only about a quarter of the stu­dents chose it.

But the research­ers also repeated the exper­i­ment with a couple of tweaks. In the new ver­sion, the six-minute task led to a pay­off of 60 points, and the sev­en-minute task brought 100 points.

The research­ers then told the stu­dents that any­one who fin­ished with between 50 and 99 points would be giv­en a gal­lon of vanilla ice cream. Any­one with 100 points would get pista­chio.

Prac­tic­ally, there was no dif­fer­ence between the two exper­i­ments. But the out­comes ended up being very dif­fer­ent.

In the com­ments of a pre­vi­ous post of mine look­ing at the denom­in­a­tion effect, the idea that “the great­er the level of abstrac­tion, the more ready we are to spend” was mooted. So it seems to be the case here.

via @BFchirpy

Bonus Cultures and Ideal Banks, Schools, Hospitals

In light of the ongo­ing debate with regards to the fin­an­cial sec­tor’s so-called ‘bonus cul­ture’, eco­nom­ist John Kay looks briefly at the his­tory of the bonus and why the idea of a ‘bonus cul­ture’ is a “poor joke” (using the example of teach­er and doc­tor bonuses).

At one time, the offer and receipt of a gra­tu­ity was a state­ment of social and eco­nom­ic superi­or­ity on the part of the giver, its accept­ance a state­ment of social and eco­nom­ic inferi­or­ity on the part of the recip­i­ent. To be salar­ied – to be trus­ted to do the job for which you had been con­trac­ted and paid – was a mark of status. Con­trac­tu­ally agreed per­form­ance-related pay – com­mis­sions and piece work – was wide­spread in shops and factor­ies, but has now largely been aban­doned.

The com­mon out­come was that employ­ees came to care more about the quant­ity of the product than its qual­ity. The sys­tem polar­ised the con­flict between the interests of the organ­isa­tion and of those who worked in it. […]

Teach­ers and doc­tors strongly res­ist the intro­duc­tion of a bonus cul­ture: not just because they resent meas­ure­ment of per­form­ance and account­ab­il­ity for their activ­it­ies […] but because they oppose import­ing the cul­ture of assembly lines. They fear an envir­on­ment in which they would be encour­aged to focus on nar­rowly quan­ti­fi­able object­ives at the expense of the under­ly­ing needs of cli­ents.

Even if many teach­ers and doc­tors are incom­pet­ent and lazy, many oth­ers are ser­i­ously com­mit­ted to the organ­isa­tions for which they work, the sub­jects and spe­cial­isa­tions to which they are devoted, and to a broad­er sense of pro­fes­sion­al eth­ics: and it is only people like these who estab­lish the kinds of schools and hos­pit­als we want as par­ents or patients.

The Economically-(Im)Perfect World of Online Games

Kris­ti­an Segerstrale–owner of online games com­pany Play­fish (acquired by Elec­tron­ic Arts for $400m in Novem­ber 2009)–discusses why online game envir­on­ments are excit­ing places for eco­nom­ics research (and spe­cific­ally: “how social factors influ­ence eco­nom­ic decision mak­ing”):

When eco­nom­ists try to mod­el beha­vi­or in the real world, they’re always deal­ing with imper­fect inform­a­tion. “The data is always lim­ited, and once you get hold of it there are tons of reas­ons to mis­trust it,” Seger­strale says. In vir­tu­al worlds, on the oth­er hand, “the data set is per­fect. You know every data point with abso­lute cer­tainty. In social net­works you even know who the people are. You can slice and dice by gender, by age, by any­thing.”

Instead of deal­ing only with his­tor­ic­al data, in vir­tu­al worlds “you have the power to exper­i­ment in real time,” Seger­strale says. What hap­pens to demand if you add a 5 per­cent tax to a product? What if you apply a 5 per­cent tax to one half of a group and a 7 per­cent tax to the oth­er half? “You can con­duct any exper­i­ment you want,” he says. “You might dis­cov­er that women over 35 have a high­er tol­er­ance to a tax than males aged 15 to 20—stuff that’s just not pos­sible to dis­cov­er in the real world.”

Of course, there’s a fairly obvi­ous caveat:

One pos­sible flaw in this eco­nom­ic mod­el is that the kind of people who spend hours online tak­ing care of ima­gin­ary pets may not be rep­res­ent­at­ive of the rest of the pop­u­la­tion. The data might be “per­fect” and “com­plete,” but the world from which it’s gathered is any­thing but that.