I just read a Times article discussing the rational theory in economics.I found it mentioned an interesting point that I want to share in this blog.

“The Myth Of the Rational Market” Time, June 22, 2008, pg.44-46

I, as other Hong Kong high school students who studied economics, was educated to believe that as long as people act rationally, our society will progress, and the accumulated wealth will increase and finally the standard of living will rise as a result. Human beings are assumed to be rational. Irrational people will suffer from losses caused by their irrational decision and will be kicked out of the race (shut down business). This “System of Rationality” is exactly one of the selling points of Market economy. A Free Market is an excellent place to provide  an environment for the “System of Rationality” to work. That’s makes marketplace a pillar of capitalism and centuries of prosperity.

The top scholars and experts like Fisher, Friedman believe in the rational theory. We taught our future elites in colleges and high school the very same theory till today. CEOs and other high executives in companies are suppose to be chosen for being the most rational people in the company. Yet the recent financial disaster disprove the theory. What happened?

The problem is the word ‘rational’. Being rational means that one must analyze an event 100% logically and mathematically, without being influenced by emotions. If all businessmen made their decisions without being affected by their personal grudge, gut feelings or emotions, then they can be considered as rational. But is it possible for a human to be perfectly rational as a robot or computer did? Human are fundamentally made up of emotions and rationality. It was always a balance between the 2 sides. Our strength in rationality confirmed our superiority against the other species. Yet are our rationality strong enough to make sure we won’t be affected by emotions and made bad decisions? We can control the rational part of the nature, but how about the random part, like luck, fate and destiny? Not only it is impossible for us to be totally rational, even we do, we still have to subject ourselves to the judgment of the nature.

Will this major crack in the fundemental pillar of economic rationality forever changed our opinion in value and vaildity of the discipline of Economics?

Two interesting quotes from our dearest Gov. Arnold Schwarzanegger.

“I came in here to fix what is broken in California”

“Even though we fixed a lot of different things, one of the things we couldn’t fix is the broken budget system.”

I put this up on Facebook, but in case you haven’t seen it, here you go.

I’m not making fun of Arnold – OK, maybe I am – but we know California is in a pretty difficult situation, with a $15b deficit on hand and signs of further deterioration. The recent argument is rather ordinary. The government proposes a series of programs and position elimination, including $3 to $5b on education expenditure, $1b on medical care and cutting off at least 500 jobs. That’s why people say if this bill passes, Californian kids are going to be “dumb and sick,” as they will receive a worse education and less comprehensive medical attention. On the other hand, students in college are organizing rallies to Sacramento to fight the budget cut. A quick question to the student: while we fight for our benefits, should we also consider giving a constructive proposal for the government to raise their funds to cover its negative bottom line? If the state is seriously in red, it must seek ways to squeeze some dollars from all areas. I mean, all programs hate cuts, but some cuts are inevitable. Cuts in education definitely will make California lose its comparative advantage to other states, as it is famous for its mature education (UC/CSU) system. Both sides should try to enter the others’ shoes and develop from a common ground, rather than students shouting out of the government agency and the officials inside are doing all the same.

Here is a list of the Golden State proposal on the May 19 ballot.

1. Spending limit and tax hike

2. New education payment plan

3. Borrow from the state lottery (interesting…. maybe that would work)

4. Redirect children’s services funding

5. Redirect mental-health funding

6. Ban pay raises for state officials

Among the six, only item #6 is favored (48% support) by voters, according to a non-partisan survey – and we all know why.

India’s Sensex index surged 17% a couple days ago, to 14284, after the elections that signaled a brighter future for domestic and foreign investment in the country. The performance was also thought to be fueled by the recent interest rate reduction and signals of economy rebounding. India’s “go-slow” development has made it rather insulated  from the credit crisis, and is now seen as one of the possibilities to bring the world out of the economic downturn. With the good news, the Dow followed with a more-than-200-point increase.

It should be noted that the BRICs are doing really well when compared to other major economies. A year to date, India’s Sensex 30 index has gone up by 48.1%; China’s Shanghai composite is experiencing a 45.7% climb; and Brazil’s Boverpsa with a 37% increase. Japan is making a 2%, while France and Germany barely makes a 1%.

The next assignment for myself: research on BRIC’s economy and try to figure out the opportunities ahead.

I have been away for a couple of weeks now. After knowing where I’m going in the next two years, I couldn’t help but got pretty excited about arranging housing, looking for roommates and all sorts of other stuff. (In case you are not aware, I’m transferring from a community college this year!) Finally, I am going to get a taste of the aura in a more-than-100-year-old 4-year university. Every changes always comes with certain degree of anxiety and uncertainty. But I believe, people who manage to survive outside of the comfort zone should be able to be well under harsher circumstances as well.

Though I stopped writing in the last couple of weeks, I did keep up with my RSS reader and news subscription. As I read more, I start to realize how challenging it is for someone like me — at this age and with such little knowledge, experience or what-nots — to write something really worth others’ time reading it. I was too naive to think that I am ready to get started to develop “my theory and opinion” on current social and economic issues. In reality, what I can do know is no more than to summarize ideas from a variety of sources and make some rather undeveloped comments on them.

But I understand if I do not physically go through that difficult process, I will never be able to jump through the fire loop. What I am saying here is that, I should adjust the blog’s orientation and position. Rather than expecting to share something intelligent, I should see blogging as a constant practice for me to develop that intelligence. So for now, what matters is how we can improve our thinking and writing, rather than anticipating a great number of viewers visiting our site.

Freedom is not entirely free, at all.

Couple of months ago, I wondered what would happen if we let go of GM. Not necessarily the way we did to Lehman Brothers, but at least we should stop reassuring ourselves that “American Big GM” could remain the top leader in the industry. Hello, we can’t consider all corps TBTF (Too big to fail).

We need to come to realize what has caused the credit crisis. It does not make sense for the federal government to endlessly inject (future generations’) money into companies which have not made endeavors to restructure themselves in the competitive market, while having earned all the big bucks in good times. In a capitalist market, individuals/firms are free to pursue success, but are also responsible for whatever losses they incur.

According to the New York Times, in the near future, GM would shrink down to a size of 38,000 employees, compared to its peak of over 300,000 in the 70’s. However, GM is still facing possible bankruptcy if less than 90% of bondholders agree to accept GM’s $1000-for-225-shares offer.

It would be interesting to watch what’s happening with GM. And how their Good GM/Bad GM plan would turn out.

Around 200 something years ago, an Englishman Adam Smith proposed in his book “The Wealth of Nations” (Original title is too long) that humans’ self-interest (a fancy word for greed) acted as “an invincible hand” to drive the free market, and thus the society to grow and prosper. He was revered as “Father of Economics” for his theory.

The working mechanism of Smith’s theory is simple: Assume that all people are rational and profit-maximizing (another fancy word for greed), they would picked the best decision available, which produce maximum amount of products at the lowest cost.  At the end we will have the maximum amount of aggregated utility available in the society. The famous “invisible hand” was widely accepted by the Western World as the only way to bring a society to prosperity.

To ensure the “invisible hand” work its magic to the extreme, all sorts of regulations regarding the market must be removed (e.g. all sorts of government interventions). This is where the term “deregulation” came into play in early 1970s U.S.. The White House tried to lift all or most market restrictions to as to apply Smith’s theory to the real world.

The Wall street went bananas after the deregulation took place. It gave rise to investment banking, derivatives and crazy lending. People want crazy as if there is no tomorrow. As if the market would never collapse. It did in 2000 in form of “IT Bubble Burst”. But people still haven’t learn their lesson. The market strike us again in 2009. This time it is real big. Big enough to crush a government, and major investment banks, something we thought were invincible for the last century.

What happened? Why Smith’s “invisible hand” didn’t work this time? What did the big shots in huge corporations like AIG do? Shouldn’t they chose the best business decision for their company, which was also best for the society?

What we missed in Smith’s theory is that decision-makers made decisions what they thought was best at that moment. It still sounds alright. Except the fact that what the decision-makers thought was best does not necessary turn out to be what they have expected – decision-makers are not always right about what’s best.  They can be wrong. Very wrong. Smith’s theory to some degree assume decision-makers are wise enough to choose what’s best, which is impossible since humans are not perfect in any point of view.

Some people may argue that there is another mechanism in Adam’s theory to recycle bad decision-makers. Bad decision-makers shut their factory/company down after they made a mistake, so only good decision-makers are left in the market, therefore the market will continue to work at optimism condition. What the mechanism did not mention is the damage bad firms done to the economy when they leave the market. If bad firms are small, of course the good firms can easily help in recovering the loss. How if the bad firms are as big as AIG, GM? Can the good firms cover up for them this time?

Are we relying on greed too much?

MEN ARE JUST HAPPIER PEOPLE

NICKNAMES:

If Laura, Kate and Sarah go out for lunch, they will call each other Laura, Kate and Sarah.
If Mike, Dave and John go out, they will affectionately refer to each other as Fat Boy, Godzilla and Four-eyes..

EATING OUT:
When the bill arrives, Mike, Dave and John will each throw in $20, even though it’s only for $32.50. None of them will have anything smaller and none will actually admit they want change back.
When the girls get their bill, out come the pocket calculators.
MONEY:
A man will pay $2 for a $1 item he needs.
A woman will pay $1 for a $2 item that she doesn’t need but it’s on sale.
BATHROOMS:
A man has six items in his bathroom: toothbrush and toothpaste, shaving cream, razor, a bar of soap, and a towel
The average number of items in the typical woman’s bathroom is 337. A man would not be able to identify more than 20 of these items.
ARGUMENTS:
A woman has the last word in any argument.
Anything a man says after that is the beginning of a new argument.
FUTURE:
A woman worries about the future until she gets a husband.
A man never worries about the future until he gets a wife.
SUCCESS:
A successful man is one who makes more money than his wife can spend.
A successful woman is one who can find such a man.
MARRIAGE:
A woman marries a man expecting he will change, but he doesn’t.
A man marries a woman expecting that she won’t change, but she does.
DRESSING-UP:
A woman will dress up to go shopping, water the plants, empty the trash, answer the phone, read a book, and get the mail.
A man will dress up for weddings and funerals.
NATURAL:
Men wake up as good-looking as they went to bed.
Women somehow deteriorate during the night.
OFFSPRING:
Ah, children. A woman knows all about her children. She knows about dentist appointments and romances, best friends, favorite foods, secret fears and hopes and dreams.
A man is vaguely aware of some short people living in the house.
THOUGHT FOR THE DAY
A married man should forget his mistakes. There’s no use in two people remembering the same thing!