Chasing GNH vs GDP growth 


Ever heard of the Easterlin paradox? 

No, me neither. Or at least I didn't realise it had a name. 

The Easterlin paradox, named after Professor Richard Easterlin, the founder or happiness economics, expounds the theory that more national wealth does not necessarily translate to a happier nation once basic needs have been met. In other words, having more money does not necessarily make a person happier, once his or her basic needs have been met.

Perhaps I've put it a bit simplistically. Many people think that the more money we have, the happier we will be, because the money will enable us to achieve our needs and wants, our dreams and aspirations. Money to buy all the things that you want, to do all that you want, to stop working, to take care of your family well, to provide the best for them. While we admit that money can't buy everything, it sure can help especially to provide the best education, healthcare, service. Can't argue with that.

Hence, nations chase economic (GDP) growth as that signifies growth in wealth which in turn is expected to attain national happiness. But is that the right way to go? Can money buy peace of mind and security?

In a recent lecture at the University of Warwick, Prof Easterlin discusses how 'growing material circumstances was cancelled out by a substantial decline in peace of mind with their life, health and job satisfaction. Under socialism, jobs, healthcare and childcare had been assured.' 

(More about his lecture here at Warwick Knowledge - with a catchy headline like 'Does Money Make Us Happy? how could I resist reading it?)

Reading this really makes me think of Asia, and how people have such bad work-life balance because they are working so hard to achieve greater wealth and the material lifestyle they aspire to. I do realise that the cost of living - at least in Malaysia -  has risen substantially since we moved away in 2006, and that many people have to work long hours to provide the basic necessities for their family. 

Costs of living have gone up but the quality of living hasn't. Why? Because what is deemed as basic necessities - a safe and secure home, good healthcare, good education for one's children - are no longer at 'basic' costs. Property prices have soared thanks to speculation, and most middle-income families are opting for private education as well as healthcare, because they feel that public schooling and hospitals are not up to mark. 

Beyond those basic necessities however, there are also the aspirational (yes, that word again) wants which to me is fuelling the increasingly material consumerism that is very conspicuous in Asia. Yes, the Pradas, the LVs, the iPhones, the Beemers. But conventional economic theory says that more consumer spending/demand fuels economic growth which in turns generate more wealth. 

But does more of it really make us any happier? Or does it make us more stressed and pressured to climb the corporate/career ladder chasing better salaries (ie more wealth) to sustain the lifestyle we have grown accustomed to? 

On Wikipedia, it says that the implication of the Easterlin Paradox is that once basic needs are met, government policy should focus on Gross National Happiness (GNH) and not GDP or economic growth. 

I would second that, but then again I'm a sucker for achieving happiness (which I personally believe, is not necessarily directly correlated with great wealth). 

Rational vs Irrational debate

So, it’s the first week of Dan Ariely’s Coursera course and I have yet to find the time to check out the lecture videos. But what did catch my eye though, was the special offer to buy Ariely’s three books on Kindle for a special bundle price of £12.99, an offer only just made available outside the US and Canada, available only for students on his course.

I was already planning to get Ariely’s first book Predictably Irrational as I felt it was the best of his three books, and this bundle of three books looked like a real bargain. But it is fast becoming a test to my rational vs irrational side; an apt beginning to my journey on this course.

So, £12.99 for 3 books makes for £4.33 per book.  This is 34p than the £3.99 I was going to pay for the Kindle copy of Predicably Irrational, but  £2.66 savings on the Kindle copy of The Upside of Irrationality and a whopping £5.66 discount on his latest book The (Honest) Truth of Dishonesty.  What can I say? It’s a no-brainer, this bargain of a bundle.

Except that I wasn’t planning to buy the other two books, having already read them. But hey, this would be my chance to get all three of Ariely’s book. But it also means I pay £9 more for two books that I wasn’t planning on buying in the first place. But won’t it be great to own them anyway, now that I have a chance to get them on discount?  But do I need them? I may one day, they make great reference material for this blog? So do I make Ariely richer by buying more books, or save the £9 for something else?  How?

So goes the debate between the rational and not-so-rational (and easily distracted) sides of my brain. I figure it’s a good chance to apply some behavioural economic theory to my dilemma.

How about Ariely’s cost of zero cost theory (as expounded in the first book)? Technically, the books are not free. Although for the total saving of £7.98 through the bundle offer, I would technically be getting The Upside of Irrationality (and a portion of another book) free. Perhaps Ariely should have employed the framing theory on promoting this bundle by selling the ‘free’ part – sales will jump for sure if his theory is correct. Certainly, the ‘discount’ is enough to distract me to almost forget that I did not intend to buy the other two books in the first place.

 Or perhaps it’s the kiasu effect (research must be done on this phenomenon one day) which could be seen as a form of loss aversion – bird in hand worth two in bush and all that you know…

So will the rational or irrational side of me win? Save £9 by not buying two books I wasn’t intending to get anyway, or buy two books and get one free?

 Isn’t shopping mentally tiring?

Aspiring towards more Debt 

 'Aspiration Nation' - UK Chancellor George Osborne's buzzword for this year's Budget has been hitting the media's headlines today.

I must admit that I felt some discomfort when I first heard that phrase. I have nothing against aspiration and in fact, I think that it is good to want to aspire towards something; it gives a person some sense of direction and purpose.

What I am uncomfortable about however, is that 'aspiration' to me is closely related to 'aspirational'. And immediately what comes to mind are status-conscious consumers looking to acquire the next new material thing in the market to keep up with the Joneses, whether it is the newest iPhone (is a smartphone a necessity or a luxury?) or the latest Prada bag. Images of aspirational middle-class Britons driving their Volkswagen Golf GTi, painting their walls with Farrow & Ball, and equipping their kitchens with the ubiquitious Le Creuset pots and pans, Nespresso coffee machines and Kitchen Aid mixers.

Ok, perhaps I am too quick to judge people by what they buy. But what worries me about all this talk about 'aspiration nation' is whether that is really the direction we want to head towards. Wasn't that what got Britain into trouble in the first place? Cool Britannia aspiring to be top of the world, its citizens flush with money - easily accessible through credit cards, bank loans and 100% deposit mortgages - which led to a huge property bubble that eventually burst and left most everyone still nursing their wounds. Do we really want to go there again?

Osborne's Help To Buy scheme aims to help help first-time homebuyers secure mortgages with as little as a 5% deposit; the government will guarantee the remaining 15% needed to reach the minimum 20% deposit that most banks require for mortgages. According to the Metro newspaper, the initiative also includes an offer of interest-free loans for five years if people want to buy new homes, to be repaid only when the homeowner sells the property.

On one hand, it is a laudable move to enable more people to own their homes, many of whom are currently renting because they can't get onto the property ladder. On the other hand, it all sounds to me like a situation of easy credit all over again, and it potentially encourages people to get into more debt than they can manage.

Sounds to me like we're aspiring towards more debt.

Making better decisions?

Preparing for the Dan Ariely course next week by reading the pre-course material, and I'm still plodding through the Kahneman paper. To be more precise: Maps of Bounded Rationality: Psychology for Behavioral Economics which appeared in the American Economic Review. It's a revised version of the lecture Kahneman delivered in Stockholm, Sweden, on December 8, 2002, when he received the Nobel prize for his work in behavioural economics.

It's not an easy read, particularly for someone with no formal background in psychology such as myself. But there are lots of 'take-homes' from it, namely the few theories that Kahneman won the Nobel prize for, namely: prospect theory and the framing effect.

The framing effect in particular, set me thinking. In my profile for this blog, I say that I believe that financial education -- as well as a good understanding of our irrational behaviour -- can empower us to make better money and life decisions.

When I wrote that, it was an echo of the message that I used to drive home through my editorials in Personal Money (the personal finances magazine I used to edit). I used to write about how it is important to be informed, to have the necessary knowledge for your personal finances, to enable us to make the best decisions for our money. 

And I truly believed, at that point, that with the right information, you can make the right decisions. After all, that's what one of the first things we learn in Economics 101, right - that in a perfect market, an agent will have access to all market information to reach a stage of perfect information that will enable him or her to make the best rational decision. 


Except that is not what happens in the real world. There is no perfect information in the real world, no perfect market, and most of all, no best rational decision. And one reason for that is the framing effect. 

According to Wikipedia (which in turned quoted social psychologist Scott Plous), the framing effect is an example of cognitive bias, in which people react differently to a particular choice depending on whether it is presented as a loss or as a gain. (this seemed like a more straightforward explanation than Kahneman's paper). 

In other words, our reaction depends on how a certain situation is presented to us. And more crucially as Kahneman and Amos Tversky found in their work on prospect theory, 'a loss is more devastating than the equivalent gain is gratifying' (quoting Wiki again..)

So if an investment advisor wanted to push Fund A over Fund B, he or she could highlight how much Fund B could lose compared to Fund A, instead of mentioning that Fund B has a lower investment cost and better potential gains, albeit with higher risk. In other words, she frames it negatively rather than positively. 

So do we make the best rational decision - after dispassionately considering the research done on both funds and weighing the calculated risks? But what are the chances that many of us will make the decision based on our emotions, ie fear of potentially losing more money with Fund B than Fund A? And the fact is that we will do so because of the way the information was presented to us (ie how it was 'framed') plus the fact that we fear losses more than we value gains (loss aversion theory, also expounded in the paper).

So understanding our own irrational behaviour is important to help us see beyond the framing effect. But it doesn't necessarily mean we will  make the best decision for our money. More importantly, it should help us make a better decision for ourselves and our lives, based on our own risk appetite or what allows us to sleep at night. Does that make sense?!

Flying money

Talk about money behaving badly.

I'm just reading about the whole situation with the banks in Cyprus and the government’s savings tax plan.

According to the Guardian, 'an RAF flight carrying €1m (£850,000) in low denomination notes set off for Cyprus to provide cash for 3,000 British service personnel based on the Mediterranean island'. Apparently, ‘banks have been shut since Friday and electronic transactions halted, although cash machines are still working and the Ministry of Defence said the euros were being flown in as "contingency measure"’.

Serious measures indeed. In the past few years of the global financial crisis – from the near-collapse of the banking system to the more current Eurozone troubles – this hits a new 'high' in terms of crisis. Sure, the Northern Rock worries sparked a mini-bank run here in the UK back in 2008, and the IceSave debacle saw lots of UK savers – including city councils and charities – caught when IceSave's parent bank Landsbanki went bankrupt. But these people eventually got their money back because their deposits were covered under the UK’s Financial Services Compensation Scheme, and the UK government covered the rest. And it was just one bank, and people still had money in other banks. 

But with all the banks in Cyprus closed to avoid a bank run, this means that people are not able to get to their money.Let's not even go into the absurd notion to levy a tax on people's savings, which triggered the Cypriot panic in the first place. Just imagine not being able to access your money.

Love it or hate it, we all need money to be able to live, and not being able to access what you have in the bank must be so scary. We all take ATM machines - and our access to our money for granted. So imagine what it must be like to lose that access or worse, to see your savings lose their value.  It reminds me of stories about ‘banana money’ during the Japanese occupation of Malaya, and how it had no value when the war ended. It makes me think those in Libya who lost their property which were seized by the government under Gaddafi’s rule, as depicted in Hisham Mattar’s book In the Country of Men.

It really does make me think about our relationship with money, and how dependent we are on money as a means to an end, whether it is to achieve the necessities of food, shelter, health, and education, or to go beyond needs to satisfy wants.  

So as much as some of us may hate to admit it, money does indeed make the world go round. Otherwise, why the need to fly in money to a cash-locked island.

Ramblings about money, behaviour and psychology

Ok. My umpteenth attempt at blogging. Will this one last?

For me, this is a year of learning. Financial and geographical constraints mean that I am unable to pursue any post-graduate study for now, but it doesn't mean that I can't learn. I can read books, so I have started doing so. I can do free online courses, thanks to Coursera, and I can follow other people's work and research, thanks to social media like Twitter and the Internet.

So what do I want to learn? I want to learn more about psychology, behaviour, behavioral economics aka why people do irrational things particularly with their money. I'm not a natural blogger, but a blog seems like a good way to record my learning journey, and a good forum to express my thoughts about my pet topics of people and their behaviour with money, as well as financial literacy.

And this is a good time as any to start, as I am due to begin my Coursera course with Dan Ariely on Irrational Behaviour. Having read two and a half of his three books, I am psyched to begin, though rather daunted by the workload and expectations of the course. Have already downloaded the pre-course recommended reading materials, including Kahnemann's Nobel Prize address, so I think there will be lots to write about, if I can be disciplined about it.

I want to find ways to tie what I am learning about with my own personal experiences, and also my observations of behaviour around me. Let's hope that'll help me sustain this blog.