Relativity in Behavioral Economics

<h2><strong>Relativity is not just for physics.</strong></h2> Nicolae Naumof posts a very good introduction to the foundational concept of <i>relativity</i> in behavioral economics. <a href="" rel="attachment wp-att-2320"><img class="alignright size-medium wp-image-2320" alt="relativity" src="" width="300" height="168" /></a>Through two examples he describes how we use mental references, environmental factors, and comparisons to make what are sometimes less than purely rational decisions. From Naumof: "<b>The pond effect shows us that people don’t evaluate size of the carp as being 50cm per se, but rather as being a big or a small fish compared with its environment and fellow fish." </b> <a href=""> <h3>Click here to read the entire article on relativity in behavioral economics</h3> </a>                   Image courtesy of Idea go

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Suffering From Financial Repression

<h2>Feeling repressed? Take two aspirin and call your central banker in the morning.</h2> <a href=""><img class="alignright size-medium wp-image-2047" title="ID-10079004" src="" alt="" width="300" height="225" /></a> By <a href="">Larry M. Elkin</a> Those of us who like to save and invest money, or who start businesses - I'm guilty on both counts - tend to be glass-half-full optimists. We do not overlook today's challenges, but we assume that hard work and thoughtful planning can make for a better future. Lately, however, a lot of us are seeing the glass half empty. Our carefully nurtured Wall Street "animal spirits" have departed for greener pastures. Trying to borrow money from a bank for personal or business reasons will put you through underwriting hell. You may not get the loan anyway. It can seem as though the bank has only a few carefully guarded dollar bills hidden in a vault somewhere, whose release requires the approval of a cabinet-level official. Yet if

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Guest Article: Are You Seeing What I’m Seeing in the Economy?

<div class="rpuEmbedCode"><!--rpuEmbedStart--> <script type="text/javascript" src="" data-cfasync="false"></script> <div class="rpuArticle rpuRepost-dc07ab6a9adfb6f92927af0ee8ad32a9-top rpuNoTitle" style="margin: 0; padding: 0;"><a class="rpuThumb" href="" rel="norewrite"><img style="float: left; margin-right: 10px;" src="" alt="" /></a> <a class="rpuTitle" href="" rel="norewrite"><strong>Are You Seeing What I’m Seeing?</strong></a> (via <a class="rpuHost" href="" rel="norewrite">Market Shadows</a>)<a href=""><img class="alignright size-medium wp-image-1943" title="ID-10076071" src="" alt="" width="300" height="300" /></a> <p class="rpuSnip">Courtesy of Jim Quinn of The Burning Platform Is it just me, or are the signs of consumer collapse as clear as a Lowes parking lot on a Saturday afternoon? Sometimes I wonder if I’m just seeing the world through my pessimistic lens, skewing my point of view. My daily commute through West Philadelphia…</p> </div> <div class="rpuKeywords" style="display: none;">household income, middle class, debt, median household income, Wall Street, Lowes, real estate, Montgomery County, strip mall, real median household, malls, commercial real estate, Federal Reserve, vacancy rates, parking lot, retail, Wall Street banks, big box retailers, sales, consumer, Ridge Pike, Lowes parking, Hatfield store, Wall Street bankers, housing

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When Good Incentives Lead to Bad Decisions

  <div class="rpuEmbedCode"><!--rpuEmbedStart--> <script type="text/javascript" src="" data-cfasync="false"></script> <div class="rpuArticle rpuRepost-afe33a5d11b87ba9e1c2a223db016697-top" style="margin: 0; padding: 0;"><a class="rpuThumb" href="" rel="norewrite"><img style="float: left; margin-right: 10px;" src="" alt="" /></a> <a class="rpuTitle" href="" rel="norewrite"><strong>When Good Incentives Lead to Bad Decisions</strong></a> (via <a class="rpuHost" href="" rel="norewrite"></a>) <p class="rpuSnip">Among the culprits contributing to the recent financial crisis were bank loan officers who approved mortgage loans that were doomed to fail. Many of these frontline workers were motivated by bonuses and other <i>incentives</i> to approve quantity over quality. Critics decried their voracity. But new research…</p> </div> <div class="rpuKeywords" style="display: none;"><u>incentives</u>, recent financial crisis, bank loan officers, HBS Working Knowledge, Good Incentives, frontline workers, deeper exploration, mortgage loans, simple greed, associate professor, Bad Decisions, Finance Unit, Harvard Business School, new research, Shawn</div> <!-- put the "tease", "jump" or "more" break here --> <div class="rpuArticle rpuRepostMain rpuRepost-afe33a5d11b87ba9e1c2a223db016697-bottom" style="display: none;"></div> <h3><!-- How to customize this embed:!shash=afe33a5d11b87ba9e1c2a223db016697 --><a href="">Return to home page</a> <!--rpuEmbedEnd--></h3> </div>

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Do High Salaries & Bonuses Make CEOs Poor Decision-Makers?

<a href=""><img class="alignleft size-medium wp-image-1761" title="1136584_61497057" src="" alt="decision-makers"width="300" height="225" /></a> <h2>Decision-makers perform worse as financial incentives increase</h2> Research by behavioral economist Dan Ariely (see video below) found that high financial incentives actually make individuals perform worse than when given low to moderate financial incentives. These results were most dramatic when the tasks involve cognitive elements as opposed to mechanical elements. The reason is that loss aversion (people's tendency to strongly prefer avoiding losses to acquiring gains) causes stress that negatively impacts performance. So if highly compensated individuals are counting on their salaries and bonuses they are afraid of losing them, and are more likely to feel stress and make poor decisions. So what does this tell us about highly compensated CEOs, other executives, and highly incentivised Wall Street traders? Might their high compensation cause loss aversion resulting in stress and worse decision-making than average employees?  Is it possible their fears about losing their

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4 Challenges of ‘Teaching’ Business Ethics

<h2 align="center"><strong><a href=""><img class="alignleft size-medium wp-image-1733" title="ID-10068675" src="" alt="" width="198" height="300" /></a>'Teaching' Ethics is Not as Easy as it Seems<br /> </strong></h2> <p>By Holly A. Bell</p> <p>The perpetual drone of news stories describing corporate scandals has lead to criticisms that business schools aren’t doing enough to teach ethics. This criticism is not surprising when you look at the self-interested microeconomic decision-making models we teach based on the rational choice tautology of marginal costs and marginal benefits. Yet, ultimately business is not physics. It cannot be explained with mechanical-mathematical models alone. Business is a social science that includes the values/ethics of individuals in the decision-making process and the actions businesses take. To teach ethics we have to know how these individual values are formed. However, reviewing the theories of value formation leads to one significant concern for those who wish to include ethics education in the business curriculum: Can ethics be ‘taught’ or only

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Guest Article: ‘Nudge’ Theory at Work in the Adult Playground

<div class="rpuEmbedCode"><!--rpuEmbedStart--> <script type="text/javascript" src=""></script> <div class="rpuArticle rpuRepost-28f3969ad2bf4bb9c688b654915e78eb-top" style="margin: 0; padding: 0;"><a rel="nofollow" class="rpuThumb" href=""><img style="float: left; margin-right: 10px;" src="" alt="Nudge"/></a> <a rel="nofollow" class="rpuTitle" href=""><strong>The rise of the adult playground</strong></a> (via <a rel="nofollow" class="rpuHost" href=""></a>) <p class="rpuSnip">Glossy exercise machines are cropping up in parks, near the brightly-coloured swings and slides for children. It’s the latest bit of government “<b>nudge</b> theory”, writes Sophie Robehmed. Kids heading down the slide headfirst, babies talking gobbledygook in the sandpit and a golden retriever bounding…</p> </div>   <!-- put the "tease", "jump" or "more" break here --> <a href="" class="more-link"><span aria-label="Continue reading Guest Article: ‘Nudge’ Theory at Work in the Adult Playground">(more…)</span></a></div>

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5 Reasons to Dislike Numbered Lists (Especially in Business Articles)

<a href=""><img class="alignright size-medium wp-image-1381" title="72946n4ba3mh6ii" src="" alt="business"width="225" height="300" /></a> By Holly A. Bell Like I do most mornings I started my day by going to a popular website that is supposed to bring together some of the best <b>business</b> articles on the web. The front page alone had 6 articles containing lists of allegedly important information you need to know. Among them: “7 Easy Ways to Speed Up Your <i>Business</i> Computer” and “5 Mobile Trends Brands Need to Watch”. It’s nice to know most <u>business</u> issues can be summed up in a few salient points. I’m not a great fan of the “list” article, yet online editors seem to love them. Here are 5 reasons to dislike these articles: <strong>1.    </strong><strong>Quick fixes not long-term solutions. </strong>While I can appreciate the ability to take complex business problems and break them down into bite size pieces, the oversimplification created by these articles makes me

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U.S. Manufacturing Shows Signs of Growth

<div class="rpuEmbedCode"><!--rpuEmbedStart--> <script type="text/javascript" src=""></script> <div class="rpuArticle rpuRepost-5649c6ac553ba8921ad7478be7018ffb-top rpuNoTitle" style="margin: 0; padding: 0;"><a class="rpuThumb" href=""><img style="float: left; margin-right: 10px;" src="" alt="" /></a> <a class="rpuTitle" href=""><strong>Oil surges on strong US manufacturing data</strong></a> (via <a class="rpuHost" href="">AFP</a>) <p class="rpuSnip">World oil prices surged Monday after stronger-than-expected <i>manufacturing</i> data in the United States, the world's top crude oil consumer, offset weaker figures in Europe. John Kilduff at Again Capital noted that with the beginning of the second quarter trading Monday, "there will be new money coming…</p> </div> <!-- put the "tease", "jump" or "more" break here --> <a href="" class="more-link"><span aria-label="Continue reading U.S. Manufacturing Shows Signs of Growth">(more…)</span></a></div>

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Headlines You Might See During An Economic Recovery

<a href=""><img class="alignright size-medium wp-image-1231" title="newspapers" src="" alt="recovery"width="300" height="225" /></a>By Holly A. Bell The newspaper headlines seem to be a mix of positive and negative economic indicators lately. On the positive side we’re hearing new jobless claims and unemployment are down, corporate profits are up, and the stock market is at its highest level in years. However, the negative does seem to prevail this week. Headlines have included housing sales losing ground while mortgage interest rates increase, FedEx has warned they are lowering their financial expectations for the near-term due to predictions of slower economic growth, and others have even started to mention stagflation. A <a rel="nofollow" href=""><em>Wall Street Journal </em>article</a> this week outlined some “silly” economic indicators of improved economic conditions. They include more people going to sit-down restaurants, increased demand for liposuction, and more visits to dry cleaners. While I (and the author of the article I might add) think

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