economics

Jul 5 2011

Good Defaults

The human mind is lazy. Most times we will simply go with the default option presented to us.

This won’t be true if you’re a geek about that topic (like me and phones, or my dad and cars). But most of the time, we just have too much to think about that we don’t bother doing proper research before buying “the best pen I can get for 2 bucks”. I mean, who DOES that?

We shy away from financial mumbo jumbo

But what happens when it’s a bigger issue? Like what kind of medical insurance to take? Or how to pay off your study loan? People will spend ages deciding which university to study in. And that’s how it should be. But we’ll spend virtually zero time deciding on a good insurance on ourselves and our future health.

I think it’s because most of us don’t understand the language of having good criteria to make a decision. Therefore, most of us make decisions based on how “pretty that laptop is” (most girls I know) or “if that car can be shown off to my friends” (most guys I know).

Buying a car? Or a house? These are decisions that will affect your life for years to come. It will affect your life because most people will

  • spend a huge chunk of their money on it, sacrificing other luxuries.
  • buy them on a bank loan, which will mess with their monthly finances.
  • keep this purchase for a long time. They’re not easy things to change.

Knowing this, the large purchases in life should therefore be based on well-reasoned criteria.

Criteria and how it affects decision-making

It’s a bit obvious that having criteria will affect the decisions you make. But what you need to be sure of before hand is that you have GOOD criteria that is relevant to what you’re spending on. The criteria for buying clothes might be how good it looks, but the criteria for a laptop should be whether it overheats, how long the battery lasts and how light the laptop is.

To know the criteria you need, you just need to spend a little time to think. To know which product has your criteria, you’ll have to spend time and do your research.

And herein lies the problem. We can’t be bothered to spend that much time on each and every decision in our lives. Especially when it’s such an abhorrent (hateful) topic as losing your money. So the best way is to provide “good defaults“.

Good defaults

This term is taken from website design (which I’m sure took it from somewhere else too). In site design, it comes out when people are asked to fill in a form. I’m pretty sure all of us hate filling in forms right? It’s one of those things that we evolved as a species, the gene that hates forms.

To make sure that people weren’t turned off by it and wouldn’t leave their websites, designers had to do something that reduced the pain of typing in each and every one of their forms, clicking over and over again to make a choice. So they used good defaults.

90% of people would choose “the free account” and “that they wouldn’t want promotion emails”. Leaving those options as default means giving the user a “good default”. (*understanding dawns on the readers* Ahhhhh! Now the title makes sense!)

Why government (and anyone in authority) should use good defaults too

You’ll often have to have your people make decisions. How many percent of your wages to put into EPF? How to pay back your student loan? Whether to have car insurance? You’ll want to ensure that your people make the best choice. You also don’t want to be an evil dictator. What to do?

Solution: Give good defaults. 11% of your wages, the maximum, into EPF. Pay back teh student loan RM100 per month starting 1 year after graduation. Take car insurance. BUT! But give them the option to change their minds. Most people can’t be bothered (or are too dumb) to change their minds about every little thing to come along. The ones who do care will take the time to research and change their minds if they don’t like it.

This is why I really believe setting up organ donation as a default would really work. Nowadays the default is that we as citizens DON’T donate our organs. That default could be changed. And if that were the default, 90% of us would leave it as it is. Some of us would change from the default, opt-out and say no (although I have no idea why). That’s fine. That choice would be there.

Pushing people to make the right choices

Let’s be honest. Us humans make the wrong decision all the time. Sometimes, we make those choices despite knowing it’s the wrong one. And most of the time it’s because we’re too lazy to make the right decision. I want to donate my organs but can’t be bothered to find a day to go and test myself and fill the forms up (I hate forms!!!) and wait in line at some unknown location that I haven’t even looked up yet. Don’t bother inviting me either. I would still probably give excuses (I really hate forms).

But making it a default would be good and would push most of us to make the right choice.

Tadaa! And that’s what is meant by “good defaults”.

By Lutfi Torla • Understanding Behaviour • 0 • Tags: , , , , ,

Jul 15 2010

School’s not enough

I guess it started when I read that novel online. The one about the kid with dyslexia working his way through life. And he said, “There’s so much that school doesn’t teach us!”

It’s true you know. School is supposed to teach us to learn. Unfortunately, it doesn’t even do that very well. But there’s more to learn in life.

There’s academic literacy, which school can teach. But then there’s spiritual literacy that you often have to find at home. There’s communications ability that you need to have as well. But then, there’s one that most people don’t ever even try to look for which is financial literacy.

How surprised was I to hear that, “You can be broke and still be rich. Broke is temporary. Poor is eternal.”

It doesn’t completely make sense because the person here uses the words rich and poor with a slightly different meaning than what we’re used to. But it basically means that to be truly rich, you need to have the skill and motivation to change your financial ability to become better.

Schools need to start teaching financial literacy.

By Lutfi Torla • Daily Life • 0 • Tags: , , , ,

May 9 2010

Capitalism

I was watching Prof David Harvey on hardtalk today. He was talking about how capitalism is not ideal for the masses. It was very interesting. He spoke a little about how wealth should not be hoarded by the rich but should be redistributed to the masses. But one point that he really emphasized is that 3% compound growth is impossible to sustain.

Putting money into “growth”

When America grew economically in the early 1900s, they grew in production. People invested in factories and companies that made things. After a while, the market couldn’t grow that fast anymore and couldn’t sustain that 3% compound growth. So they put money into assets like property (that didn’t produce anything or contribute anything to development!). When that couldn’t grow as fast as they wanted, they then put money into things like hedge funds and derivatives. Things that don’t even exist in the real world.

Instead of putting money into production, they then put money into “growth”. They made money from money. It’s simply nonsense.

But it got me to thinking and I had an epiphany. Where we are economically with capitalism is the same place we were legally in the wild west. Without laws. It’s every man for himself, with the strong free to trod on you.

The wild wild west of economics

It’s preposterous. It’s ridiculous. And it’s happening right now.

We wouldn’t stand for a country where everyone had to fight for himself and people with guns could do what they liked with you. And if you didn’t have a gun? Well, too bad. You’re weak and you deserve to die.

Why then do we stand for it when it happens in our economy? The rich are free to manipulate the market however they like to make themselves richer. And if you’re poor (weak)? Then too bad. You’re weak and poor and you deserve to die and rot away in poverty.

We’ve evolved our government to counteract this. From barbarians to monarchy to democracy. Why? So that the few who are strong wouldn’t oppress the weak. So that people couldn’t kill and rape and steal with impunity. So that the weak are protected even when they cannot protect themselves. ESPECIALLY when they cannot protect themselves.

Evolving our financial systems?

Why then don’t we evolve our financial systems in the same way? From bartering to trade to free market capitalism to something better?

The professor said something else interesting. He said that he’d been reading a lot of Marx. And that Marx has a lot of insights into understanding economics. That perhaps something along those lines might be better.

And that’s what Europe tried. They called it a welfare democracy and what it meant was that capitalism would run normally and taxes would be charged. Those taxes would also then be used to help the poor, sick, old and others who needed help. It was simply enough, redistribution of wealth. But even in this form it failed as we can see happening in Greece and Europe today.

We’ve seen the failure of capitalism in the free market form in America with their mortgage crisis.

So we know its an inherent problem with capitalism itself if two (TWO!!!) of its very different forms can both fail (within a few years of each other) and will “stagger along from one crisis to another”, as Prof Harvey says.

Maybe we need a financial system that allows:
1. For people to own things.(not communism)
2. No monopoly (because its evil)
3. No hoarding of wealth (keeping billions in the bank without investing in something productive)
4. Redistribution of wealth.(because the weak should be protected when they cannot protect themselves)
5. A currency backed by gold (or at least something solid and real). Because fiat money is pure nonsense.
6. No interest. Because interest only makes sense with fiat money and if you want to allow the rich to get richer.

Islamic Banks vs. Islamic Finance?

And so we have a growing interest in Islamic banks as a replacement for the capitalist financial system. Which doesn’t sound right. An Islamic bank is NOT a financial system. It’s just a banking system. Only part of a whole financial system. We need to adopt the whole Islamic financial system instead.

Oh well, it’s a little bit better than nothing. But not by much.

Disclaimer: I’m not a professor of economics like Prof Harvey there. So if I made a mistake, feel free to point it out.

By Lutfi Torla • Reflections • 5 • Tags: