The Paradox of Choice: Why having many choices isn’t always a good thing

People love to have choices. Walk into a supermarket and you will see dozen of toothpaste brands to choose. Many people, even economists, believe that more choices means more welfare for the consumers. People should feel liberated because they are not trapped in a prison with few choices to make. People should feel satisfied and happy. Well, it turns out that having many choices can actually do more harm than good. That’s called the paradox of choice. American psychologist Barry Schwartz explains the two negative effective of too many choices.

The first negative effect is that too many choices actually make it so difficult for a person that she won’t choose at all. Counterintuitive huh? It’s proved by conducting two experiments. One experiment is to let shoppers sample 24 flavors of jam. The second experiment is to sample just 6 flavors of jam. The result was that more shoppers bought the jam when they were presented with 6 flavors to sample. Schwartz believes that it’s because the shoppers with too many options don’t want to make the wrong decision and they want to postpone their decision making.

The second negative effect is that even if the choice is made, sometimes people are less satisfied with the results of their choices, as they feel the result of the other alternatives might produce a much better outcome. We have learned from our previous post that there is an opportunity cost of the choice that we made. For instance, if I have enough money to buy one of the ten available houses, I would blame myself so bad if the house that I buy does not live up to my expectation or the price of the other house has risen in value dramatically. But if my money is only enough to buy one particular house, well I wouldn’t feel so bad if other people’s house has increased significantly in value, since I don’t have many choice with the amount of money that I have. Well, having too many choices does give you a higher expectation that the choice that you make will be a good one. But you would feel miserable if it doesn’t live up to your expectation.

Moral of the story: The secret to happiness is low expectation.

American Health Care Act: Repealing and Replacing Obamacare

One of the signature legislation under President Obama is the Affordable Health Care Act (ACA) or widely known as Obamacare. If you have not read my article explaining Obamacare yet, I would suggest you follow the link here to get some background information http://odecon-1.blogspot.com/2014/12/the-rise-of-obamacare.html. Just do it, will you?

https://goo.gl/L9s6nm

Let’s be honest, Obamacare is not perfect. No social policy, especially of this magnitude and profound effect to the society, would be perfect in any possible way. However, one of the proud thing that Obamacare has achieved that it helps expand the health insurance coverage to an additional 20 million Americans who were not insured before the bill was passed. That is a lot of people getting insured which means it has helped save many lives and prevented many families from going bankrupt. Let’s face it: healthcare is America is very expensive. Another benefit of Obamacare is that it prevents insurer from rejection health insurance coverage based on pre-existing condition (a medical condition that you have before you get health insurance coverage). Additionally, young adults can stay under their parents’ health insurance until they are 26. ACA also provides subsidy if a person over the age of 26 do not receive health insurance from their employer and cannot afford to buy health insurance.

Obamacare seems like a pretty sweet deal, but it also comes with a cost. You see, one of the problems caused by Obamacare is the rise in insurance premium. As more sick people getting health insurance coverage and the healthy ones are reluctant to buy the health insurance (some would choose to pay penalty), insurance companies have to increase the insurance premium to cover for the medical expense, operation expense and to make profit. Let’s take a look the rise in health insurance premium in some of the states in the U.S. Insurance premium in Arizona has risen by 116 percent in a year. (http://www.washingtontimes.com/news/2016/oct/28/key-facts-about-rising-arizona-health-insurance-pr/). Another problem is that some insurers choose to leave their operation in some counties in some states in the U.S. For example, from Paul Ryan’s presentation, we can that insurance options are disappearing fast because insurers are leaving some counties behind. An increasing number of counties in the U.S. only has one insurer.

The Republicans have been wanting to repeal Obamacare for years now. There has not been a better time to get rid of this controversial bill, since the Republicans are controlling the White House, House of Representatives and Senate. But the problem is what kind of healthcare plan are they going to replace Obamacare with? After months of hearing the talk of repealing and replacing Obamacare, now we can learn about the Republicans’ plan. Paul Ryan proposes a new healthcare bill and it is called American Health Care Act. Here is the summary that I can briefly discuss. I don’t claim to be an expert, as I have to admit: some parts of the new bill is very confusing and need further research to have a better understanding. But I’ll try my best to explain it.

What remains from Obamacare?

Okay, we’ve talked about the problems of Obamacare and here are the solutions that the Republicans believe will fix it. But let’s first start with which main features of Obamacare are still in the AHCA. First, children are allowed stay under their parents’ health insurance until they are 26. Second, insurance companies will not be able to reject coverage for people with pre-existing conditions. Okay, so Republicans do agree with some of the benefits of Obamacare.

What is new?

Now let’s discuss what is new.

No Individual Mandate

The controversial individual mandate (you need to buy health insurance or pay a penalty) is gone. Many Republicans hate Obamacare because of this individual mandate. They think that it’s the government restricting freedom of choice and telling people what to do. From our article on Obamacare (did you follow the link above?), there is good reason for making people buy health insurance. The health insurance system needs those healthy individuals to also buy health insurance which is a way to pay for the unhealthy individuals. The whole insurance market system will collapse if only unhealthy people buy the health coverage.

Risk Pool

As for those with pre-existing condition, AHCA proposes a model where those with pre-existing conditions will be grouped into one risk pool. The insurance premium (the money you pay to get health insurance coverage) for this pool must be very high, since they have a higher chance of getting sick and requiring medical attention. According to AHCA, this risk pool will receive support from the state budget with the support from the federal government to subsidize this risk pool. AHCA also proposes that states should have a re-insurance program for those with pre-existing conditions. Those who benefit from this proposal is the healthy one, because as unhealthy individuals are removed from the healthy pool, the insurance premium for this low-risk group should stabilize or even decrease.

Medicaid, Tax Credit and Health Saving Account

As for the Medicaid (a social program to support poor people and disabled people), the federal government will send per capita block grant to the states which Paul Ryan believes is a way to give back power to the states. The poor who can’t afford health insurance may see a huge drop in their health subsidy. Instead, there will also be a tax credit for those who do not receive health insurance from their employers. The tax credit ranges from $2,000 to $14,000 based on age. AHCA also expands health saving accounts (HAS) for families as well.

Whether AHCA will help lower insurance premium, provide more options and provide quality health care to its citizen, as promised by Paul Ryan, remains to be seen. Well, the outcome will be in a few more years. But first, the bill will need to be passed by the House of Representatives and Senate first. So far, it’s not very popular among both the Republicans and Democrats. Rand Paul calls it Obamacare Light. Others call it Obamacare 2.0. There are always winners and losers of a social policy. As for now, the losers seem to be the poor people who can’t afford health insurance and those with pre-existing conditions.

What is Money?

When you think of money, I bet your US Dollar note or Cambodian Riel note should come to your mind. Well, it is partly true. Your note is one of the form of money called fiat currency. Money is more than just the paper you put in your wallet. Back in the past, people used to use gold or silver as money. Money can come in any type of form as long as it is generally accepted in the exchange of goods and service. This article from the Guardian paints a much better picture that money can just be anything. Prisoners used to accept cigarette as money within the prison economy (have you watched the classic movie called Shawshank Redemption?) then mackerel can and now ramen. So what are the functions of money?

The first essential function of money is that it is a medium of exchange. Money is used to facilitate the exchange of goods and service. Imagine a world without money. It would be a nightmare to buy or sell stuff in the economy. Say you are corn farmer and want to buy 2 kg of meat from a seller but the seller will only sell the meat if you have 5 kg of apple. In order to buy the meat, you will need to find other sellers who are selling apple and is willing to exchange 5 kg of apple with your 5 kg of corn. You would have to chase other sellers if the apple seller only settles for other goods. This kind of system that the exchange of goods is made with other kinds of goods is called "barter system". Therefore, money which is accepted by all parties will reduce the inefficiency of having to chase apple and other produce to buy 2 kg of meat. Meanwhile, prisoners can also exchange all sort of goods and service in the jail which makes life a lot easier.

Money also function as a unit of account. In a plain word, it means that money indicates to others the measure of value of goods and service. Money makes it easy to under its value. For instance, 1 kg of meat cost 10$, 1 kg of corn cost 1$ and 1 kg of apple cost 5$. Therefore, we can know for sure the value of meat, corn and apple. Wouldn't it be more complicate if we only know that 1 kg of meat equals to 10 kg of corn and 1 kg of apple equals to 5 kg of corn. How about the relative value between meat and corn or beef, veggie and so on? It is a lot easier to have a common unit in terms of money for those produce.

Another important function of money is that it has to store value. If we hold 100$ note today, we are almost certain that 30 days later the value of the dollar note is still 100$ and people will accept our 100$ note (let's get inflation out of the equation for simple explanation). The fiat money works well as money in the economy because it is light, durable (unlike gold or silver which is super heavy) and will hold its value in the future. This reasons also explain why prisoners choose cigarette and now ramen as a form of money. Ramen can last a very long time. It is not very heavy to carry around or store it. Other stuff might not be a great form of money. For example, milk is a terrible choice for money. It can get spoiled easily. One needs to always store it in a fridge. The value of milk today should worth nothing in a month time because the milk is spoiled and no one is going to accept it in the exchange of goods and service.

One thing to take away from this article is that when you think of money, it can be more than just a piece of paper. Well, it can be the noodle that you eat when you run out of cash at the end of the month.

Is the Goal of Higher Education to make its Graduates and the Country Rich?

I recently had a conversation with my friend who is a software developer. He said his current job would only need a person with 6 months of rigorous computer programming training. The current programming language that he is using was not even taught during his 4-year college education. Come to think of it and being inspired by a book written by Ha-Joon Chang, a South Korean economist, is the goal of tertiary/higher education to make its graduates rich and thus the country rich?

College education is in high demand at the moment both in the developed and developing countries. In a country like Cambodia where almost 70% of the population is under the age of 35, the number of young people going to college is increasing dramatically. One of the major reason that fuels the demand for college education is the parent’s and young people’s hope of high salary (for most people) and employers demanding college graduates for a vacant position. Basically, there is a trend for employers to search for candidates with a college degree, which significantly increases the demand for college education among young people. Those who do not have a college degree are facing the risk of being put at a disadvantage. It is understandable why employers place a lot of emphasis on college degree. The reason is employers are looking for employees who are competent, knowledgeable, hardworking and reliable. One of the best proxies (a representation of something) to determine such qualities is a college degree. A college-educated person is more likely to be a smart, competent and hardworking person. One, colleges teach a number of subjects that should help graduates to function in their new roles. Two, one must have put a significant amount of effort to endure the gruesome 4 years in college. Third, college graduates should be accustomed (to a certain extent) to an environment which demands great teamwork and leadership, as can be learned during group assignment, clubs or other leadership roles within the school.

While 4 years of college education teaches you a lot, I think it is safe to say one does not use everything that they learn at school and applies them in the daily tasks of one's work. My friend who is a software development does not use Photoshop, Statistics, History or Geography for his daily work. He learned a new programming language through on-the-job training. My point is that a bachelor degree is definitely important, but the society should not put too much hope on bachelor degree alone to solve the society’s problems and to make the country rich. For a few positions like a cook, a technician, a website designer or programmer, a 1 or 2 year vocational training should be enough to perform the roles required for this position. An employer should not disqualify the applicants who is not a college graduate.

It is important to understand that, as put by Ha-Joon Chang, not everything that is taught at the formal education is meant to make the students richer or to promote the prosperity of a nation. A typical businessman or an investment banker does not use chemistry, biology, history or geography lesson that is taught in high school or sociology, environmental studies, philosophy and music taught in the foundation year of college. These subjects are taught to help people to live a more meaningful life and to become a good citizen within the society.

The downside of putting too much emphasis on tertiary education is that it puts the country at a dangerous trajectory where not having a college degree means you are not smart enough and you are not favorable to your potential employers. One of my Chinese friends said many Chinese want to get a Master or even PhD degree to stand a better chance of being recruited, since the job competition in China is very fierce. The time and money that one spends is an opportunity cost. Not everyone can afford higher education and a number of jobs does not require 11 years of higher education. From a pure economic point of view, the resource (time and money) should be spent elsewhere that generates a better return on investment. Some subjects taught at the university are not relevant to one’s workplace. Many important skills and qualities can be learned through on-the-job training including technical knowledge, leadership, teamwork, and self-discipline.

I am not trying to claim that there is no value in higher education. I, myself, have benefited a lot from higher education. I have a broader perspective of the world and live an independent life thanks to higher education. But the society should not believe that only college graduates are competent and rule out applicants without a college degree. In addition, to better prepares college students for their professional work, companies and universities should closely collaborate to design a curriculum that. We should conclude this article to remember that the goal of education is not to make a country financially rich. The reason to invest in education is to help citizen think critically, live a meaningful life and become a good citizen within the society. 

Economics and Woman Empowerment

One says if you teach a parrot to repeat the words - supply and demand- there you go, you can produce an economist. I find it very witty and funny but economics is more than that. One funny analogy is to say that pop music is all about Justin Bieber. Ok here's a better analogy. To say economics is about supply demand is equivalent to say Cambodia is all about Angkor Wat and temples. Yes, Angkor Wat is an indispensable wonder which puts Cambodia on the world map, but Cambodia has more things to offer besides the beautiful Angkor Wat. Similarly, we can use the basic concept of supply and demand as a framework for our analysis on many social phenomenon. 

The mind-boggling thing about economics is that you can see economics everywhere you go. (Credit to our friend at Economind for the inspiration.) Should you use your last $10 on drinking with your friends or $10 phone card to call your bae? That is an economic question related with cost and benefit and which alternatives produce the higher level of satisfaction and happiness or what economists like to call “utility”. (The term utility is a bit vague and I’m pretty confident that it is very very similar to satisfaction and happiness. I hope our friend at Economind would share the same understanding) Should you send a girl to school or force her to help family at home? Yes, it’s more about gender equality and education but I can assure you that it has everything to do with economics. You see, an educated woman can participate in the labor force and labor is a scarce resource to the economy. We don’t have an infinite amount labor to produce goods and service, so we have to be clever in allocating the labor in a way that produce the most output “as many and fast as possible”. Economists also have a term for that. It’s called “efficiency”. Making a woman stay at home may not be the most efficient way to utilize her labor. She may be able to be involved in other activities that generate more social or personal benefit, be it a manager, a teacher, a salesperson, a factory worker and so on. An educated woman produces more than just income for household. A study found that a child born to an educated mother is “50%” more likely to survive past the age of 5. An economist can even monetize the social return/benefit of child mortality reduction and of educating a woman all thanks to our brilliant mind.

Our friend at Economind made a very interesting point and I'll add his whole quote. "Economics is indeed everywhere. A failure to recognize this is a failure to see solution to many problems. Gender empowerment is in every bit and piece economics as it is about gender equality. On top of what you just said, allowing women in labour force will also raise tax revenue and increase marginal productivity of capital, meaning capital investment will yield more return due to larger base of labour force. This boosts economic growth significantly."

Now you understand the massive scope of econ. Well, similar to M&M chocolate candy which comes with many colors, economists can be separated into many kinds as well such as trade economist, financial economist, health economist, agricultural economist, other development economist and so forth. The point is when it comes to allocating scarce resource to its most efficient use, superman has nothing on economists and they are just one call away to save the day. (Congrats to you if you get the Charlie Puth’s reference. Give yourself some kind of reward because you have a good taste, my friends.)

Find our friend Economind athttps://www.facebook.com/economind/?fref=ts

Brands and The Economics of Information

We would like to touch on a subject that is ubiquitous to everyone - brand - which comes to my mind today when we talked about which cinema we should go to watch Finding Dory from my favorite animation studio: Pixar. Some of my favorite Pixar films are “Up, Toy Story 3, Wall-E, Ratatouille and many more. Enough of my praise for Pixar and I will focus instead on coffee, since it’s something that many people know and relish.

The common misconception for many people is that they consider “brand” as something that is of high value and high value and it is a label on a product. While it’s true to a certain extent, it doesn’t completely cover what brand really is. When you think that your co-worker is very genuine and helpful, that’s a brand you attach to your co-worker. Perhaps you think that your co-worker is a hypocrite and manipulative, that’s also brand with which you associate your co-worker. You see, brand goes beyond the label on the product. Brand can extend toward a person, service, a religion and a country. Brand is more than the label per se. Brand basically is the “perception” or “image” you have representing a certain product/service and everything. Even my country Cambodia is putting a lot effort in “rebranding” our country’s image.

Source: https://d.ibtimes.co.uk/en/full/1455968/finding-dory-movie.jpg?w=400 http://funnyand.com/wp-content/uploads/2014/12/Starbucks-Coffee.jpg

There is a reason why a market researcher asks a respondent to tell the researcher the words that come to the mind of the respondent immediately after hearing the name of a product. It goes something like this “What three words come to your mind when you think of Starbucks?” Take 30 seconds to answer this very question yourself. Well, some internet users would comment “Overpriced, Overrated, Overhyped”. Some might say “Quality, Hip/Cool, Cozy/Relax”.

But what brand has anything to do with economics? Well, as I told you in the previous post, you can feel the force of economics almost everywhere you go. Brand has many things to do with the economics of information. Let’s say you drive to a faraway place and you are in need of some caffeine and your favorite drink is hot latte. You have two choices: you can buy your latte at a local coffee shop or at your well-known Starbucks. More often than not, you would get your latte at Starbucks. But why is that? It doesn’t necessarily mean that Starbucks latte is always highly superior to the local shop’s, but you know what to expect of Starbucks latte and service. The local shop’s coffee might be a lot better than the population cafe chain like Starbucks, but we do not have the luxury of having this piece of information. Brand can exerts confidence and quality to the mind of a consumer. This is why a company can spend considerable amount of money on marketing campaign to convince consumers that their products are different than the competitors’ in terms of quality, experience, satisfaction and so on. By planting a particular brand image and perception inside the mind of the consumers, the company of such branded product can design a monopoly (a monopoly is a market situation where there is a single producer of a product and the producer can set a price- price setter) for its own niche market and set the price accordingly.

Normally, a branded product costs more than a generic product. But is it worth it to pay extra for a branded product? Well, if you ask me, I would give a classic reply “it depends”. (Economind, great mind thinks alike) Different people have different perception on a branded product. If you think highly of Starbucks and you derive high utility from consuming Starbucks and you consider the benefits are higher than the cost of Starbuck’s latte, you should go for it. If you are a person who rate Starbucks very low and your utility derived from drinking either Starbucks’ or the local coffee shop’s is the same, then perhaps you would go for the local coffee shop.

Now you know the framework for analysis inside the mind of economists. Just in case you are curious which cinema we are going to watch Dory, it’s Legend. Why? Because our utility derived from either Legend or Major isn't very different and we also gather enough information to make this decision.

Why can't a country print more money to be rich (Part 2): Worst Hyperinflation in History

We touched on the basic economic principle, that is, excessive money printing leads to dramatic rise in price level - inflation. Don’t get me wrong here. Inflation may also be caused by other factors, but we will only stick to money printing as one of the sole factors.  In addition to inflation, the idea of printing more money to be rich is a complete fallacy. We also envisioned a country with extreme money printing and what easy money can do on the price of our beloved sedan Mercedes, clothes, phones, food and other available goods on the market that you can name it. The envisioning is not real and there are a few times when an economic theory and model sounds perfect on the paper but it just does not work in real life due to unrealistic assumptions and other reasons. So as promised we are back again to find examples in real life whether printing more money does indeed bring turmoil to the economy. Before we get into some of the worst inflation, I have to make it clear that the economic notion of money growth and inflation is so complex that economists exchange argument back and forth and I am nowhere near the economists’ status. With that being said, it is possible to learn it the intuitive way by studying previous hyperinflations in the past.

Probably the most well-known hyperinflation in history, at least to me, Weimar Germany’s hyperinflation was a disaster to the economy pioneered by wild money printing. You must have heard of World War I and it is  one of the deadliest war of the modern era due to the modernization of weapon and the massive scale of the war. It is dubbed by historians “The War to End all Wars”, but this world war was followed by another world war began in 1941. Following the end of WWI, Germany was obliged to pay war reparation to other countries. Weimar Germany’s government resorted to money printing to exchange with foreign currency and as a result Germany’s Papiermark’s value fell significantly. A down-to-earth economic concept can be used to explain the devaluation of Papiermark. According to the Working Paper of Steve Hanke and Nicholas Krus, the daily inflation rate was approximately 21% and it took only 3 days and 17 hours for price to double. To put this data into context, price of goods on the market must be changed every hour or even every 10 or 15 minute. The German Mark depreciated to a point when people would use the notes for toilet paper, since it was cheaper to directly use the notes than to purchase the toilet paper.

German’s hyperinflation might be the most well-known but it didn’t earn the title of the worst hyperinflation in history. One of the worst hyperinflation in recent memory was Zimbabwe in 2008 when the inflation rate was 79.6 billion percent following the infamous land reform designed by non other than the chief architect President Robert Mugabe. The land redistribution from the rich white farmers to the local people, many economists believe, led to a dramatic fall in agricultural and manufactured outputs due to the lack of experience and training.  I remember quite vividly when my Corporate Finance Professor showed the class the trillion dollar Zimbabwe dollar note. There were so many zeros that I lost count. Price of goods doubled every 24 hours which must be a headache for those who hold the money. Moneyholders would buy needed items immediately in lunchtime before the price doubled during dinner. So what is the solution to combat this hyperinflation? Well, Zimbabwe ditched their “beloved” Zimbabwe Dollar for other foreign currency such as the US Dollar to restore people's confidence.

The title of the worst hyperinflation in history goes to Hungary after the WWII. Hungary was obliged to pay war reparation to the Soviet Union. At its peak, the monthly inflation rate in Hungary was 13.6 quadrillion percent which means price doubled every 15 hours.