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History of the Current Crisis

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Decision-making and Economics - The Paradox of Choice. The European: How did you get into researching choice and decision making?

Decision-making and Economics - The Paradox of Choice

Schwartz: For many years, I have been interested in the hold that the ideology of free market, economics has on people throughout the developed Western world. Why is it that everyone thinks that it’s a miracle of human intervention? I concluded that one of its principle attractions is that it seems to cater to the desire for freedom. That’s the most important thing about it: nobody tells you what to do, nobody tells you what to buy. There’s no other way to arrange things where that kind of freedom is nearly as substantial. The European: Yet modern times and Western prosperity has enabled us to do just about anything we want.

Nudge thyself. Economists have more to learn from the natural sciences if they are to claim a realistic model of human behaviour You’ve come to a canteen for lunch: at one end of the counter, you see juicy fat burgers sizzling on a grill and, at the other end, healthy-looking salads.

Nudge thyself

After a little hesitation, you choose the burger. “Cheese and bacon with that?” Well, why not? How We Were All Misled by John Lanchester. Boomerang: Travels in the New Third World by Michael Lewis Norton, 213 pp., $25.95.

How We Were All Misled by John Lanchester

A wise man knows one thing – the limits of his knowledge. John Maynard Keynes, who never tried to conceal that he knew more than most people, also knew the limits to his knowledge.

A wise man knows one thing – the limits of his knowledge

He wrote “about these matters – the prospect of a European war, the price of copper 20 years hence – there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” And Keynes was right. He published these observations in 1921, and 20 years later Britain was engaged in a desperate, and unpredictable, struggle with Germany. But lesser men find prognostication easier. The models share a common approach. But little of this knowledge exists. This may lead to extravagant flights of fantasy. The Book of Jobs. What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed.

The Book of Jobs

Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The cities weren’t spared—far from it. The value of assets (such as homes) often declines when incomes do. John Lanchester · The Art of Financial Disaster · LRB 15 December 2011. No essay in English has a better title than De Quincey’s ‘On Murder Considered as One of the Fine Arts’.

John Lanchester · The Art of Financial Disaster · LRB 15 December 2011

I wonder whether, if he were alive today, he might be tempted to go back to the well and write a follow-up, ‘On Financial Disaster Considered as One of the Fine Arts’? The basic material might be less immediately captivating, but there’s a lot to choose from. As Warren Buffett has pointed out more than once, ‘It’s only when the tide goes out that you learn who’s been swimming naked.’

Financial and economic downturns always cause a rash of scandals and exposure. The tide has gone out – it’s still going out – and, frankly, it’s hard to know where to look. In the UK, our most recent outrage has featured Northern Rock, the bank whose collapse in the autumn of 2007 was the first harbinger of the credit crunch and subsequent Great Recession. I think De Quincey, from the aesthetic point of view, would have preferred the MF Global scandal in the US. Many have tried to rival Goldman. The future: Expect the unexpected. Top economists reveal their graphs of 2011. Book Review: Why Nations Fail. Updated March 24, 2012 12:01 a.m.

Book Review: Why Nations Fail

ET Far too much intellectual firepower regarding the global poor these days focuses on the (small) things Westerners can do to help—obsessing about, say, how much money to spend on mosquito-blocking bed nets to fight malaria. The bigger questions—about why some societies prosper and others don't, about how to improve the lot of an entire impoverished class—are left by default largely to uncritical admirers of China's growth. The arrival of "Why Nations Fail" is thus a hugely welcome event, since economists Daron Acemoglu and James A. Robinson take on the big questions and in doing so present a substantial alternative to the dominant thinking about global poverty. For Messrs. It is common among those who work in development to wish for a technocratic rule of experts unencumbered by politics.

Inclusive political institutions mean both a broad distribution of political power and limits to that power, such as democratic elections and written constitutions. The mathematical equation that caused the banks to crash. It was the holy grail of investors.

The mathematical equation that caused the banks to crash

The Black-Scholes equation, brainchild of economists Fischer Black and Myron Scholes, provided a rational way to price a financial contract when it still had time to run. It was like buying or selling a bet on a horse, halfway through the race. It opened up a new world of ever more complex investments, blossoming into a gigantic global industry.