One of those days.

Some days you wake up and just know it is going to be one of those days. It happens to all of us. But why? Why do we give in and decide (yes, decide) that it is going to be a bad day? We have the whole day ahead, is it really worth spending it in such an unpleasant state of mind?

After doing some research, I soon reached the conclusion that behavioral theory behind decision-making also applies here. According to Daniel Kahneman, we have a natural desire for cognitive fluency, where the intuitive part of our mind processes information to acquire meaning without the usage of reasoning. Where we “just know.” If we can’t find meaning that way, the logical part of our mind takes over and works out a more rational approach to meaning. The brain is lazy and likes a compelling story to guide it; the latter process takes more time.

Nothing dramatically negative happens during those days. Maybe you have a long day ahead of you, the coffee machine isn’t working, you can’t find the right shirt, or you didn’t get a good nights sleep. We take our own interpretation of reality and make conclusions about our situation – convenient.

How do we change that?

Look at the inputs and acknowledge them. Whether it is stress, anxiety, frustration, or something else – identify it. Dwelling over how bad the day will be does little to improve the situation. We have a natural tendency to over-weigh the negative and easily loose track of the positive, similar to how people tend to remember negative things more strongly and in more detail. We need to be aware of what shapes our reality and realize that sometimes, if we pick the easy way, we get to the wrong answer.

Conclusion: Those days are what you make of them.

Sources: Daniel Kahneman, Thinking Fast and Slow; Jonah Lehrer, How We Decide.

Milton Friedman.

The question “Why is there No Milton Friedman Today?” was discussed in an Econ Journal Watch symposium at a panel on George Mason University’s campus on September 19, 2013. GMU Economics Professor Tyler Cowen argues that if there is a Friedman today, it’s Paul Krugman.

Did that catch my attention.

Krugman is the polar opposite of Friedman on important matters of economic theory and in politics. Clearly that could not be argument for any similarity. Friedman’s economic theory and public-policy changed and engaged the minds of so many, it is hard to believe that would be the argument either. Friedman challenged policy makers, economists, politicians, and most importantly, the average person on the street. He consistently tried to make them think in a way they hadn’t before. Friedman dedicated his time to explaining why so many accepted economic policies were wrong.

Friedman sought to change people’s minds.

Cowen argues that in areas such as professional achievement, public engagement, and popularity, Krugman is surprisingly similar to Friedman – both Nobel Prize winners with a large popular audience. I guess the discussion was mostly about Friedman’s academic achievements, the time at which he peaked, and how there isn’t a Milton Friedman today. Cowen continues to write:

“In short, I don’t expect we will be seeing another Milton Friedman anytime soon.”

I agree.

The U.S. Postal Service.

The U.S. Postal Service is in the midst of a financial disaster and needs to make drastic changes in order to keep operating. To provide some insight on the USPS’ situation, the post office expects to lose about USD 6 billion this year, after loosing USD 16 billion last year.

Currently, the Postal Service is an independent agency that receives no tax dollars for its day-to-day operations. It is, however, subject to congressional regulation. Under federal law, the post office cannot raise its postage prices more than the rate of inflation without approval from the Postal Regulatory Commission. USPS backed down from its plan to cut mail delivery on Saturdays starting this summer, as Congress prohibited such a move. This would reportedly save the USPS USD 2 billion annually.

The Postal Service is also looking to reduce its annual payment for future retiree health benefits, which amount to USD. 5.6 billion annually. It has failed to make this payment twice. The Postal Service is the only organization in the U.S. required to have pension money set aside for retirees 10 years beyond the newest employees retirement date at one hundred percent. How is the Postal Service expected to function as a business with such absurd regulations? A congressional mandate requiring it to prepay 75 years worth of retiree benefits within a decade?

Take a took at a few key metrics:

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Source: CapitalIQ

Decision making.

Behavioral economics has made a significant contribution to increasing our understanding of when and how individual decision-making stirs away from the rationality assumption core to microeconomic theory. It raises a series of questions around why people sometimes make irrational decisions and why their behavior does not follow the predictions of economic models.

Consider our own flaws in perception and thought… It only takes a few seconds to realize that, like markets, people are not perfectly efficient. We do not always act out of rational self-interest, as the economic theory of expected utility maximization would predict. Nobel prize-winning Psychologist Daniel Kahneman identified common cognitive biases that cause people to use faulty reasoning to make irrational decisions, including the the planning fallacy, the illusion of control, and the anchoring effect. People make decisions in uncertain situations and use irrational guidelines based on emotions and memories over logic.

Having identified that our biases at times lead to irrational decisions, why can’t we correct our thinking and always make the most logical decision? I like to think I am a reasonably logical person and when making big decisions, my go-to is a weighted pros and cons list: prioritize, weigh each argument, let it sit, revisit and decide. If every time I come across an important decision and map out the inputs, I should be able to see the incompleteness of the story I tell myself, right? Not always the case. Sometimes I only see the missing piece after the decision has already been made. In discussions on the subject, I was presented the following argument: we don’t always know what is best for ourselves and we need an outsider’s opinions to see that.

The flickering light bulb turned on.

Always making the best decision on our own is extraordinarily challenging given the way we create our own stories. Even when we want to make sense of our own behavior and rationalize non-optimal decisions, we sometimes fail. We are wired to construct stories out of imperfect evidence. The data we have could be partial or biased, but we automatically make the best story possible. Any big decision will evoke strong emotions and memories that alter our thought process, whether positive or negative, it will fundamentally skew our opinions. Having someone who knows us provide a different perspective will allow us to see past our own created “reality”. While we tell ourselves the simplest stories about our situations, it is usually a lot more complex.

Source: Daniel Kahneman, Thinking Fast and Slow.

The Beveridge Curve.

Economists continue to search for evidence of structural unemployment. Why?

Structural unemployment implies a mismatch of the skills of the unemployed and of the available jobs. If the high unemployment rate we are experience is a result of structural issues, simply using macroeconomic policy to create more demand won’t be of much help. It would imply getting the unemployed the right skills or in the right location for the jobs that are available. That is an extremely challenging and complex problem.

Some Economists have been referring to outward shift in the Beveridge Curve. The Beveridge Curve looks at the relationship between the unemployment rate and the job openings rate.  Changes in the supply of or demand for labor cause movements along the curve. Higher rates of unemployment are associated with lower vacancy rates. In the last couple of years the Beveridge Curve has been shifting outwards – showing some increase in the vacancy rate without as large a drop in unemployment:

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The outward shift in the Beveridge curve may be due to a greater mismatch between available jobs and the unemployed in terms of skills or location, or that employers are delaying hiring due to economic uncertainty. Another important factor is the rise in unemployment benefits. Workers can now get benefits for a much longer period of time and become increasingly choosy about accepting a job, or simply maintain a status of “actively searching” for a job in order qualify for benefits.

What I would like to see is the weight of the impact related to employer behavior versus the impact from extended benefits. While I do not agree with all the structural arguments, I certainly do see both these factors as having a significant impact in the labor market today.

Source: BLS, JOLTS, and CPS