Archive for the ‘Economy’ Category

How long is your attention span?

January 21, 2013 Leave a comment

Human brain has an interesting tendency, it strives to create explanations (or better word would be models) for the environment it observes. Evolutionary speaking, this trait is highly advantageous, it allows humans to adapt and predict their environment, thus increasing chances of survival. But it also creates false positives, builds models and finds order where none exist, as for example in creating constellations out of a random spray of stars in the night sky. While the night sky is an example of how humans find order in dimensional world, we should also note that false positives may exist in the temporal continuum.

Consider, for example, a recent graduate, who becomes a young aspiring commodities trader circa 2000. It would not take long for her to learn that her peers who advise their clients to buy gold are getting substantially bigger paychecks than she does. So she asks her coworkers for their strategies, their models and explanations for how gold behaves. Wether or not those explanations are correct does not actually matter, as long as they predict higher gold price and do not substantially deviate from industry thinking, none of them can be proven wrong. Fast forward to 2012, our graduate is now a 32-year-old successful senior manager, who built her career in gold trading, and received hefty bonuses for the past 10 years. The reason for her success is her unyielding faith in the value of the yellow metal, her peers who doubted that the gold rise in the past are working for her now, since they were not promoted as quickly.

What should interest us in this discussion is the gold pricing model that this manager developed in her head over the years. It can be as simple as a single sentence, or a complex mathematical model, but the key question we must ask is whether or not it is biased. Is it biased? After all this manager was rewarded for a very particular behaviour for the past 10 years, her peers were punished for predicting lower gold prices, her whole career was based on 10 years of rising gold prices, the echelon of her analysts, senior and junior, have similar behaviour cultivated in them since the first day they join the firm. Are they biased? Would they not try to look optimistically on any kind of evidence presented to them, not try to find an explanation for why the gold should rise again after a dip, just as it did before? Furthermore, this slightly skewed view propagates through the ranks with each one adding an additional twist of optimism until reality becomes grossly distorted. How can a person, in a position of power, be objective when all he/she was presented with during her career is a single side of the coin? Can human attention span be long enough to incorporate macroeconomic forces, which take decades to play out, into mental models that humans so eagerly construct?

For most of us gold trading is of little relevance, but principles at play apply to situations that rest much closer to home. Consider for example a banker, who is measured on his yearly performance, while the loans that he makes are for periods longer than 10 years. Would he care if the loan is defaulted on 7 years from now? Probably not, the loan book could have been sold on or he could have changed jobs several times since then. You can realize how this sort of behaviour could quickly become a reckless one. If banking is not personal enough for you, consider a manager who is responsible for plant maintenance. He is presented with a choice, to save some money now or spend it to upgrade plant’s equipment, if he saves it now then he is rewarded, albeit at the risk that the machine will have a higher chance of a breakdown (but when? 1,2 or maybe 3 years from now?). How long is his attention span?

In conclusion I would like to share several quotes that drive home some of the principles discussed.

Abraham Maslow “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

Ralph Linton “The last thing a fish would ever notice would be water.”

Daniel Day-Lewis  “Perhaps I’m particularly serious, because I’m not unaware of the potential absurdity of what I’m doing.”

Several movies: Anatomy of a DisasterHow the banks never lose

And several interesting articles: Morgan Stanley, Warning to Banks



gold price charts provided by

Measuring progress

The business and economic world is obsessed with measuring things. The most widely recognised global measure is GDP, or Gross Domestic Product. The majority of us will not know exactly what this is, but we do know is that a postive GDP is good and a negative is bad. That is what the politicians tell us. That is what the media tells us. And that is what most of us take for granted.

So what is GDP? Essentially, GDP measures a nations growth by calculating its output. It does this through three calculations:

  • measuring production through market value of goods and services over 1 year
  • measuring income across all individuals over 1 year
  • measuring total expenditure by individuals across nation over 1 year

Theoretically, they should all reach the same figure. However, there are many limitations that skew the results, for example, GDP does not typically take technological advances which improve productivity into account. And only recently has the black market been factored into some GDP forecasts. It is clear that when you are measuring an entire nations output, there will be some degree of inaccuracy.

How relevant is GDP today?  A recognised litmus test of a nation’s health is to look at GDP. But does this measure paint a comprehensive picture of how a nation is performing. There are many important factors that GDP does not consider: social factors, such as healthcare, egalitarianism, the distribution of income, environmental damage, food wastage, and even happiness!

Politicians and business people are constantly talking about growth and what we have to do to stimulate an economy. But if a nations obsession with improving GDP leads to increasing the working age, reducing pensions, raising living costs, are we really making progress?

GDP from space - This cartoon is by Kipper Williams from The Guardian

GDP from space – This cartoon is by Kipper Williams from The Guardian

There have been many alternatives to GDP suggested in the past. The Human Development Index is one of the most widely recognised and measures literacy and life expectancy among others. The Index of Sustainable Economic Welfare,  incorporates pollution and income distribution. Or how about the Happy Planet Index, which combines human well-being and environmental impact. This issue is debated by academics, but we have yet to see much take up from business and the political elite.

How long can we rely on growth to measure progress? Surely we cannot grow forever. In fact, does progress even require growth? These are difficult questions indeed.