Did You Know that You Have an Economist in You?

Author’s note: With the hope to dig the natural economist in you, I do wish that you gain some insight from this post!

Aside from wanting to get the most output from the least input, what else could you have in common with an economist?

In the field of Economics, decision-making processes are supported by equations that narrow down options, over-simplifications of reality, assignations of measurable values to factors (even to something as abstract as feelings) and most of the times, through assumptions that limit the number of such factors to consider. Out of the latter, my most favored of all is assuming that everything else is constant aka ceteris paribus.

According to Investopedia, ceteris paribus is a Latin phrase which roughly means “holding other things constant”. It also cites a very good example:

… consider the laws of supply and demand. It could be said that if demand for any given product is outweighed by the product’s supply, ceteris paribus, prices will likely rise. The use of the Latin phrase in this example simply indicates if all additional factors that could affect the outcome, such as the presence of a substitution, remain the same, prices will generally increase.

I say this is my favorite technique because it is non-exclusive to economists. Why, the very moment anybody makes a decision, he is doing so under the supposition that nothing else will change except his own mind/will/action/speech.

For instance, suppose that a homeless person was able to see the weather forecast from a newspaper; he then starts to think about where he would spend the night and decides to sleep on a bench in a park. Our homeless guy of course, based this decision on his most recent memory of the bench a few days ago: He assumed the bench would still be there, empty and ready for him to use, thus prompting him to go and set his sleeping quarters on it. Upon arriving, lo and behold! the bench is no more and instead a picnic table is occupying its space. The protagonist of our make-believe story failed to consider that as he made up his mind and chose a place to sleep in, other forces were also at work, rendering his actions futile.

Having said this, it would seem senseless to fiercely defend the application of the ceteris paribus as it cuts back too much of what reality has in store for us…

So what’s the use of assuming as much (or as little)?

At this point, you may already be criticizing economists for using this technique to do some of the most important tasks entrusted to our profession (most probably you’ve already been cursing some of my colleagues for their false predictions, or for having failed to foresee an economic disaster). However in their (our) defense, I must say that the aims of the ceteris paribus assumption are 
 
1. to simplify the explanation of a causality, and
2. to describe “tendencies” as opposed to “absolute” results.
 
… so with the given outcome, we can take the (hopefully) best decision.

Now, is it safe for me to say that you also wish to simplify the process of making a choice by setting similar objectives?

Let me further explain: when choosing which fruit to buy favoring the cheaper one, immediately those in season come to mind. Certainly, other factors such as imported fruits, a sudden change in weather or transportation strikes are also likely to affect the prices of fruits; but as the probability of them occurring seems remote, the buyer chooses to consider them unchanged. This would be where he wants to simplify the causality between the product and its price.

Similarly, each time one makes a decision, it is not surprising for the person to consider other alternatives or a different course of action, “just in case”. In this scenario, the decision-maker has considered one outcome to have more tendency to materialize, but is aware that there is also a chance it might not.

Basically, I find that the utility of following this assumption (consciously or otherwise) is: it allows the decision-maker to get to a fast and (supposedly) efficient solution to his dilemma.

The economist in you

The application of ceteris paribus does not automatically unleash the economist in you. Biologists, mathematicians and physicists are also known to adopt this method. Your inner economist gets freed when your final aim could be easily summarized to, “the benefits (happiness, financial return, satisfaction, maximum profits, etc…) must outweigh the costs (annoyance, expenses, sacrifices, huge losses, etc…)”. You should be informed though, that you have already taken a very important step towards that direction- that is by trying to optimize the distribution of your available but scarce resources (your time and effort) through simplification of facts.

Life experiences have taught us that assumptions and simplifications only go as far as the complex reality would allow. Because of this, I can only suggest for you to treat the anticipated outcomes as tendencies rather than possible absolute results… taking the economist in you to a whole new level!

The power of this word lies in its practicality, since it conveys a proneness to an end result, not a promise. (I’m thinking that this is the very mentality which allows certain economists to sleep soundly at night). Think about it: it frees us from the expectation of a fixed forecast, and opens our minds to other prospects. Thus our perspective is widened, granting us an improved capacity to make better decisions- even if only because we are seeing more alternatives than before.

Now what you choose to do with the new range of choices spread out before you will most probably depend on the engineer, the cook or the public relations officer in you. Unless of course, you let the economist in you take the reins! (You should tell me how that worked for you.)

-*-
I believe, dear reader that this post has already achieved what it set to carry out. To keep on going would be like overstaying on a house visit. But please tell me, did you like discovering the economist in you?
*This could also be rephrased as “Not even economists take their colleagues’ words too seriously”.

Sources:

  1. Investopedia: http://www.investopedia.com/
  2. Merriam-Webster online Dictionary: https://www.merriam-webster.com
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Adulting and Money Management 1: “I’m poor, I can’t save money”

The contents of this article are derived from the article, “Ahorran los Pobres?” authored by MJ. (For more information about savings, investment and entrepreneurship, please check the website: Dineromio at http://dineromio.com/)

This is the first part of Colorfulifesite Blog’s series of articles about “Adulting and Money Management”

As I finished reading the original article, I immediately imagined a very practical conversation between Colorfulifesite Blog and Dineromio Blog- or at least between me and MJ. It went like this…

Colorfulifesite (C): I can’t save money because I’m poor.

Dineromio (D): Of course you can!

C: How? Do poor people save money?

D: Yes!

C: Wow! you’re really confident with your answer! What’s your basis for being so sure about this?

D: I had the chance to work as a volunteer in a training workshop involving financial education. It was aimed towards adults who find themselves under the risk of social exclusion. Basically, we’re talking about people who survive with government subsidies worth 400 Euros (Eur) monthly, in a city where the minimum salary is more than 650 Eur, BUT the median salary is 2,200 Eur and the most common amount earned is around 1,100 Eur per month, after taxes.

C: So, if we analyze the income of the group you worked with: the participants of your workshop were earning ONLY 69% of the minimum salary, 36% of the most frequently earned amount and barely 18% of the median salary. Interesting…

D: I know it’s not Baghdad but let’s put ourselves within the context, which would allow us to understand how it is to live with 400 Eur in a city where the standard of living is designed to cost 1,100 Eur.

Our objective is quite ambitious: we wanted the participants to identify opportunities to save money and to manage their squalid earnings to the best that they could.

C: What was the initial reaction of the group?

D: At first, the very mention of the word “savings” produced so much rejection: people squirmed in their seats and there were even some who either laughed ironically or who were annoyed. It seemed to them that the mere idea of making them want to save was insulting.

Resultado de imagen de how to save money if poor

Image courtesy of: Lendbox twitter page

The activity proposed the following dynamics: 1) sharing of ideas and advice from the workshop participants’ own experiences, 2) handing out tips on how to lessen expenses in transport, telephone bills, automatic teller machine commissions, etc and, 3) a practical exercise consisting in drawing up a weekly budget (which is the foundation of any change you might want to start in your life)

Except for a few number of cases (approximately 10% of the participants were in dire conditions and suffered from depression and anxiety), the rest of the group were able to detect small changes which would allow them to save “something” on a monthly basis. And such “small changes” could be anything ranging from purchasing generic-branded medicines to starting a small business.

C: This is INDEED encouraging!

D: I read an article by de Boza Chirino, José y José I. Zabaleta. In it, they pointed out that many people belonging at the “base of the pyramid” (that is, the income pyramid, where people who are at its base could be earning as low as 2 USD per day) build their savings IN KIND: a hen to maintain until the time comes for the family to buy medicines, a cow to take care of until school starts (when tuition fees have to be paid)…

What I’m trying to tell everybody is this:

EVERYBODY CAN SAVE. THE KEY IS TO HAVE SOMETHING THAT MOTIVATES US TO DO SO.

C: I actually remember my grandmother buying jewelries and then saying that it’s an investment, in the sense that she could sell them in case of an emergency.

D: I’m going to share with you a small list where I listed different alternatives to start build microsavings (the type of savings accumulated by the people at the base of the pyramid). These are the most frequently-used ones nowadays. I also included their advantages and disadvantages:

1. Informal savings made through family members, friends, “informal” money collector, hiding money under the mattress and savings in kind.

Normally, the person who wants to save requests a family member or a friend to safeguard his money so he won’t have any “temptation” in his own home. Sometimes, he also makes small investments like buying a hen or a goat, which he could later sell.

The main advantages are: the money’s immediate availability (although this is not always the case), as well as the fact that other people manage the risk of keeping money.

The main disadvantages are the high costs and risks this type of savings entails, such as loss, theft, or systemic risks that affect the whole community caused mostly by natural disasters.

Resultado de imagen de poor people saving money

Image courtesy of: http://www.theguardian.com

2. Rotating Savings and Credit Associations (ROSCAS) are composed of a group of individuals that fill the role of an informal financial institution through repeated contributions and withdrawals to and from a common fund (Investopedia).

Joining this type of association gives high incentives to save, and the members are confident of its strict organization and administration.

The disadvantage is that it can be costly due to its strictness in its rules and regulations; members are also faced with the possibility of the group’s dissolution before having been able to receive the lump sum rightfully theirs. ROSCAS are also susceptible to losses, robbery and systemic risks.

3. Last and not the least, we  always count on banks or Microfinance Institutions where we could open an individual savings account. Banks’ services are highly demanded due to the security it offers, as well as the stability of the organization.

However, the monetary costs (in terms of fees and commissions) are high incentives to NOT save. Also, the geographical location of banks may discourage potential savers because of the need to travel just to be able to deposit a certain amount…

C: Thank you very much for sharing your experience. I’m pretty sure this imaginary conversation of ours has already done its job to inspire our reader to save money. Would you happen to have any tips to make saving less “painful” than how it sounds?

D: Yes, but that would occupy another whole post!

C: I’ll advise my dear reader to keep in tune, then…

Resultado de imagen de saving money is not painful

Image courtesy of: http://www.lifehack.org/