The man who changed a red clip to catch the paper on a house. The little economic tricks you didn't have
In 2002, the Nobel Prize for Economy was given to Daniel Kahneman from the famous Princeton University, for his work in the development of the behavioral economy. The Economy Prize is not one of the original Nobel prizes; It began to be granted only in 1969, funded by the Swedish Central Bank to honor its 300th anniversary. Non-econonomists still debate if it is a real Nobel prize, but for economists, it is the highest distinction of the profession.
Kahneman is a psychologist, and his work shows a series of systematic deviations from the model that assumes people are rational.
You have 8,000 times more likely to die because of a mosquito bite than because of a shark bite and 4,000 times more chances to die in a car accident than in a plane accident (data comes from the World Health Organization).
But many people are more afraid of sharks and aircraft accidents than mosquitoes and cars. Many people waste money on the tricks and refuse to put money for the pension. We have the impression that restaurants make us spend more or that online sellers are deceiving us to make unnecessary purchases through “lightning bids” over time. On Booking you find out that you have caught the last room at the desired hotel and you are pressed to buy urgently so you don't lose the offer.
Working with Amos Tversky (who would have divided the Nobel prize if he had not died in 1996), Kahneman's contribution was to take the behavioral economy beyond a series of bizarre results and incorporated it into a general theory of decision making. The brain, says Kahneman, uses two “systems”. The first is fast, instinctive and emotional. This system is prone to behavioral prejudices.
The anchorage prejudice means that people are more likely to buy a product if it has been reduced from an initial price. The planning error means that the project of redecoration of the house comes to cost double compared to what you anticipated in the beginning. The first system is used when we make hasty judgments, writes Andrew Leigh in the book “The Shorttest History of Economics”.
System two is more rational, but slower. When we multiply 2 × 2, we use the one system. When we multiply 17 × 24, we use the system two. System two requires more effort and tends to be more rational.
When we decide which type of washing machine to buy, it is worth appealing to the system two to make the best possible decision. The purpose of Kahneman's work is not to ask us to be calculated and rational in each decision, but to recognize when our behavioral prejudices could cause us to make expensive mistakes.
Today, the behavioral economy is taught as part of the “standard” economy, and its implications are particularly important when we study how we take risks.
In 2005, Canadian blogger Kyle Macdonald changed a red clipping paper on a house
The markets do not always fail, however, and it can be useful to recognize the value created by the simple trading act. The morning coffee cup is probably less than the maximum you would be willing to pay: we call the “consumer surplus” difference. (Consumer surplus is defined as the difference between the maximum amount that the consumer would be willing to pay for a unit of a good and the amount he actually pays.)
Similarly, the cafe is probably selling it at a higher price than the minimum that it would be willing to accept: we call this “surplus of the manufacturer”.
In 2005, Canadian blogger Kyle Macdonald lived this principle alive by exchange between a red paper clip and a house. First, he changed the paper clip with a fish -shaped pen. Then he changed the pen with a hand -carved handle.
Then he changed the handle with a camping stove. This continued up to the fourteenth and last exchange: the exchange of a role in a movie with a small house.
At every step, MacDonald appreciated the new object more than the old one – but has changed with someone who appreciated the old object more than the new one. MacDonald did not buy only one house-he did it through fourteen exchanges, each of them bringing a better situation to another person.
MacDonald was not the only eager to get his hands on a house. Until 2005, the US economy had recovered after the short -term technological crisis, and a real estate boom was underway. This was an era when housing prices were raising in the advanced world. On average, a couple with average incomes and two children needed seven years in 1995 to pay an apartment of 60 square meters in the capital of their country. Until 2005, the price of the same apartment had increased to ten years of income.
In the United States, pricing has been particularly steep. In 2007, economist Robert Shiller took his series of prices of US housing from the previous century and represented them on a simulation of Russian Montagne.
The simulator led the spectators up and down, emotionally speaking.
While the prices increased, the lending standards decreased. In Bakersfield, California, a strawberry collector with an income of $ 14,000 and without English knowledge was borrowed the full purchase price of a house worth $ 720,000.
These Ninja (no income no job) loans have been given starting from the assumption that prices will continue to rise, allowing debtors to refinance. As for the lending, the loans were “securitized” – which meant that they were packaged and sold to investors. The theory was that this would allow the market to grow faster.
When the market collapsed, the average values of US homes decreased by about a fifth. Until 2008, one in ten holders of mortgage loans had a negative equity – which means that their mortgage was worth more than their home. Millions of debtors have not paid their loans and lost their homes. However, Goldman Sachs has remained a profitable company.
The financial crisis was compared to the “crime in Orient Express” by Agatha Christie, in which everyone had reason to kill. Bankers, credit rating agencies, credului house owners and negligent decision makers – all have some of the blame. And we should learn something of it.
