Economics – Page 2 – Jeremiah Stanghini

Want an Idea of What Really Happened During the Financial Crisis: Watch “Margin Call”

At the 2011 Sundance Film Festival, an independent film by the name of Margin Call made its debut. It was released in theatres a couple of weeks ago, while simultaneously being released on iTunes and Amazon. Meaning, instead of having to drive out to the theatre, you could watch the movie from the comfort of your comfortable couch. I had seen a few bits about the movie in the news that piqued my curiosity, so I took the time to watch it. I was pleasantly (or maybe unpleasantly?) surprised.

The film covers the actions of an investment bank over a 24-hour period. It focuses on the events leading up the financial crisis of 2007-2008. In essence, the movie is one possibility for some of the events that precipitated the crisis. I want to make it clear that I am not saying that the events from Margin Call are what happened, but I think it presents a perspective that hadn’t been adequately articulated in any of the other articles, books, or movies that I’d seen on the subject.

I’ve written about economics here before (most notably in the American Public Policy series), but after nearing completion of a Managerial Economics course through business school, I have a different perspective on the economy. Maybe more importantly, I have a more nuanced understanding of why things happen the way they do in the economy. Pairing that with some of the things I’ve read/heard outside of business school make for an interesting take on the state of the global economy.

There are a couple of lines from the movie that I think are worth noting. This first bit of lines is between two of the firm’s employees. One of them is relatively low in the firm and one is somewhere near the middle to top. The conversation takes place (towards the end of the film) as the two of them are headed back to the office a couple of hours before they are about to sell as much of the firm’s holdings as they possibly can:

“If you really wanna do this with your life, you have to believe you’re necessary, and you are. People wanna live like this in their cars and their big houses that they can’t even pay for — then you’re necessary. The only reason that they all get to continue living like kings is because we’ve got our fingers on the scales in their favor. I take my hand off, and then the whole world gets really fair really quickly and nobody actually wants that. They say they do but they don’t. They want what we have to give them, but they also wanna, ya know, play innocent and pretend like they have no idea where it came from. Well that’s more hypocrisy than I’m willing to swallow.”

The next scene I wanted to highlight is right near the end of the film. The CEO is having a bite to eat in the restaurant on one of the upper floors of the office building. The Director of Trading walks in and a conversation ensues. In particular, there’s a monologue by the CEO:

“When did you start feeling so sorry for yourself? It’s unbearable. What, so you think we might’ve put a few people out of business today? That it’s all for nought? You’ve been doing this everyday for almost 40 years, Sam. And if this is all for nought, so is everything out there.

It’s just money. It’s made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than it’s ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987, 92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over. We can’t help ourselves. And you and I can’t, control it or, stop it, or even slow it. Or even ever so slightly alter it. We just react.

We make a lot of money if we get it right. We get left by the side of the road if we get it wrong. And there’ve always been and there always will be the same percentage of winners and losers. Happy farts and sad sacks. Fat cats and starving dogs in this world. Yeah. There may be more of us today than there’ve ever been, but the percentages, they stay exactly the same.”

As I said, this is only one perspective on what happened, but I found it quite interesting to see a depiction of what it might have been like to be on the inside of a firm grappling with what to do prior to the financial collapse. I hope you take the time to check out this movie.

What’s On My iPod: Lectures/Podcasts From A Road Trip, Ottawa to DC, Part 4

Part 1: Songs, LA to DC
Part 2: Lectures, LA to DC
Part 3: Podcasts, LA to DC

In the first three parts of this series, I wrote about what was on my iPod for the trip from LA to DC (by car). More recently, I drove from Ottawa to DC, which allowed me to listen to a number of new podcasts and lectures. In this post, I’ll go over the lectures/podcasts and some of the knowledge I gleaned from them.

I had two podcasts. One of them was from the Chicago Booth Podcast Series:

Chicago Booth Podcast: Should Executive Pay Be Regulated? (12/02/2009) – I thought I would start with one of the most interesting tracks I listened to on the trip. Given that I’m about to start an MBA, I thought it would be prudent of me to learn about this topic (executive pay). I will say, I was quite surprised to hear the statistics that the speaker, Randall Kroszner, offered on the topic. While he raised the point about athletes who make (equal or more) money than the CEOs, the surprising fact was that executive pay (now) is actually down in relation to executive pay from the ’80s. And maybe more poignant, executives make less money than athletes and entertainers.

The second podcast was from Knowledge@Wharton Interviews:

Nassim Taleb on Living with Black Swans (04/13/2011) – Nassim Taleb has written a number of articles and books, and is affiliated with some very prestigious institutions. He has so many important things to say, but I think the thing that I found the most transferable was the problem with specialization. He didnt actually put it this way, but this is how Im interpreting it. In particular, he talks about how important it is to in an effort to account for randomness and variability diversify. If youre investing, dont invest in just one company. Dont invest in just one industry. Dont invest in just one kind of investment. Or we could relate it to business, specifically, Im reminded of the book Trade-Off, by Kevin Maney. In Maneys book, among other things, he talks about those times within an industry where companies are blind-sided by some sort of innovation (example: think about cameras 20 years ago and now how cell phones have revolutionized the way we take pictures). Taleb would argue the importance of guarding against a Black Swan, which from our example, would be cell phones with cameras.

The remaining 6 tracks were all lectures I downloaded through iTunes U. If you haven’t checked it out, I highly recommend it! The first lecture I listened to came courtesy of the University of Cambridge called:

What’s the Point of Economics? – The text from the website: “Evan Davis, BBC Today presenter, outlines five things everyone should know about economics, Mike Kitson looks at the relevance of economics to everyday life and Professor Willy Brown describes the growing impact of the minimum wage over its first ten years.”

There were two lectures I listened to that came from a class at Yale on Game Theory. I didn’t have the time to listen to every lecture from the course, so I picked two of the higher rated lectures:

02 – Putting Yourselves Into Other People’s Shoes and 03 – Iterative Deletion and the Median-Voter Theorem – I found these lectures highly informative. The first (or should I say second?) lecture gave a really good example of how important it is to put yourself into other people’s shoes. This example is related to how another person would approach a game (the same one that you’re playing) and exemplifies the importance of knowing your “opponent.” Like in one of the podcast, this lesson is very transferable to other parts of life. In the second (or third) lecture, Professor Polak does a great job of explaining the median-voter theorem, and more importantly, uses the example of political positions to make the theorem more accessible to the students.

The last three lectures I listened to all came from Stanford and its Graduate School of Business:

Hire the Right People, Carlos Brito – This was an interesting talk, especially because it came from someone I usually wouldn’t necessarily voluntarily hear from. Brito is the CEO of Anheuser-Busch and he has some intriguing ideas that he has put into practice in many of his offices. He thinks that separate offices foster LESS work. In fact, he talks about how, in his experience, having no walls has actually made work easier and motivated people to do more work. It’s his opinion that offices are for people who want to hide and do no work. With the open concept office, he explains how meetings are much “shorter;” 2- or 5-minute meetings can happen much quicker without having to “schedule” everything.

Dave Blakely on Fostering Innovation – From the description of this lecture’s YouTube video: “In this talk, Dave Blakely presents a set of principles for successful innovation, regardless of an organization’s size, type or location. The heart of any innovation agenda is a carefully chosen interdisciplinary team, typically including members with backgrounds in technology, business, and other relevant industry-specific knowledge. Creative leaps can be inspired by empathetic human research, and insights are distilled in synthesis sessions. Techniques such as brainstorming can help teams to direct their creativity, and prototypes can be used to improve visualization and mitigate risk.”

Changing Behavior and Changing Policies – BJ Fogg runs the Persuasive Technology Lab at Stanford University. To get a better idea of Fogg’s perspective on behavior, I would say (listen to this talk, as it’s only 20 minutes or so), or check out his site: BJ Fogg’s Behavior Model.

I don’t have any “planned” long trips on the horizon, but I am considering integrating podcasts and iTunes U lectures to daily life. If you have suggestions, I’d love to hear them in the comments, via email, or even on Twitter.

Altruism, To Give or To Take: Economics & American Public Policy, Part 1

A couple of weeks ago, I mentioned that I wanted to do a series of posts on American Public Policy. This first post will be about America’s economic policy. As a disclaimer, I should say, economics can be a very academic field, in that there are hundreds of programs around the world that offer doctoral study in economics, so anything that I can say about economics in 1000 words or less is going to pale in comparison. However, I do think I’ve stumbled upon a possible explanation as to the economic “mess” that American economics finds itself in…

I was watching some of the older videos posted by the RSA, (I’ve mentioned them before), and I came across one by a couple of author’s whose blog is rated quite highly. I’ve read Freakonomics, but I haven’t read Superfreakonomics, so if the connection I’m going to make is made in the book (but not in this 10-minute video), you’ll have to forgive me. Anyways, in the video, they are talking about altruism as it relates to economics, but not necessarily to economic policy. Take a look:

The most interesting parts are the last 2 and a half minutes. The speaker is explaining studies done by John List where he has participants, in this case, called dictators, who have the ability to give up to $10 to an unwitting stranger (who won’t know the person who is giving them the money and therefore, is unable to thank them afterwards). On average, people gave around $3. List then altered the experiment to allow ‘dictators’ to also be allowed to take up to $1 from the stranger (again, the stranger would not know the person who is taking the money from them). So, on a range, the dictators could give the stranger anywhere from $10 to ($1) [brackets implying that the stranger is losing a dollar]. List found that the most common choice was $0 (but the average giving was around $1.50). One more alteration… dictators could now give up to $10 or take up to $10 from the stranger. On average, under these conditions, people steal about $1.30, as opposed to giving.

When I first watched this video, I couldn’t help but make the leap to ‘real-world’ examples of these findings at play. I think about what happened leading up to the events of 2008 and I see parallels. I think back to the movie Inside Job and the ‘simple’ way that is explained as to what happened (of course, this is just one perspective as to what happened leading up to the collapse). People of the financial services industry, in my opinion, are not inherently bad. In fact, just the opposite. As I argued that politicians are inherently good, I think the same case could be made for those who were, in part, responsible for the collapse of the financial system.

To make it explicit: people who work in the financial services industry, like the “dictators” in the studies done above, were, in a sense, given the opportunity to take money from strangers without having to face these strangers. On a range of giving money from $10 to taking $10, the people who work in this industry, in my opinion, were able to freely take money from people without having to face any repercussions. It’s not that they were malicious and they wanted to hurt people. I think it’s more that they were given the opportunity (and as the study above shows), given the opportunity, people usually take it. [As an aside: in the video, they talk specifically about students of economics as it relates to the ultimatum game and how they would take 2 cents because 2 cents is better than none. I think this economics-mentality of some money is better than no money is what sways the amount of money that the financial industry took from citizens who were otherwise clueless as to what was happening.]

Moreover, in the dictator game described above, the range was from giving $10 to taking $10. In this real-world example, I think we could “hold” the giving $10 side of the scale, but the taking side of the scale could be moved to “infinity.” Meaning, sure, there is a set number of dollars that they are able to give to citizens, but they are unlimited in what they can take from citizens. As this scale is tipped into the ‘taking side,’ I think we would find that people, on average, are more likely to take a greater number of dollars. I haven’t read any of List’s studies, but it’d be interesting to see if he has done any work where the scale is tipped in the other direction (give up to $1 and take up to $10) to see if that average of taking $1.30 from a stranger changes. My guess is that it would.

I think there are a couple of great documentaries (and hoards of books) that I’ve found rather enlightening on the topic with regard to economic policy. I mentioned Inside Job above and would recommend it to get a different perspective on what happened in the late-2000’s. I also think that Capitalism: A Love Story was educational. I understand that Michael Moore is very liberal and as such, his movies come across that way, but I still think it’s important to take in viewpoints that are different from one’s own. Additionally, and maybe my favo[u]rite on this topic, is The Corporation. It was a Canadian documentary done almost 10 years ago now about the pathological disorders of “corporations” as they are, legally, persons.

Overall, given the information in these documentaries and various books, and the results of the studies done by List, I think that this speaks to a broader issue with regard to economic policy. We can’t necessarily fault those who, when given the chance to take money, do so. Instead, I think we need to put regulations (read: public policy) in place. These regulations would limit the scope of people’s ability to take money. To put it in terms of the dictator game, instead of having people able to give or take up to $10 from a stranger, I’d like to see the limit be that they can’t take anything from the stranger. Let’s limit their ability to be able to give up to $10 and take nothing. As List found, on average, given these conditions, people are more likely to give around $3 — to complete strangers.