Social Norms and the Effect on Forecasting

Perception always plays a large part in how people interact with one another.  The damage or gains those perceptions or the norms developed by society play an interesting part in today’s economy.  Understanding Society writes about the layers that people place on society, and how any stereotype will affect the perception (and potentially the outcome) of the act by another person. 

The concept is simple enough.  For my behavioral economics course, I have been reading Predictably Irrational, by Dan Ariely, which discusses the tricky nature of social norms.  People build these standards that would otherwise be unheard of; however, we have programmed ourselves to believe that the certain activities are true. 

An example would be connecting the bail out of Ireland in 2010 to Angela Merkel’s statements prior to the bail out.  Merkel, the Chancellor of Germany, spoke out to the EU and investors that Ireland (who at the time was struggling economically) was going to fail if Germany and the rest of the EU didn’t bail them out.  As predicted, the Irish economy collapsed.  But was the reason because of the actual instability of the economy or the perception of the economy?

Economists post bail-out believe that the perception of a bail out was enough to push investors over the edge.  Calculations made and data show that Ireland was easily self-sustainable for at least 6 months, but was unable to recover when investors wanted out.  Combined with the words from a powerful figure, the situation is merely a reaction from an action.  Is this good for our society?  In this case, it is easy to say no.

But when we look at the situation from the other side, the recent growth in the US economy could be attributed to big talk from large access points.  Certainly hearing Clint Eastwood tell one that the US is fighting back would help convince Americans that the US economy is on the rise, and numerous reports by CNN and Bloomberg supporting job growth and unemployment decrease can convince investors that it is time to invest in the US once again.  I find that the presentation to the public on these matters is really the crux to the short term growth.

Remember that most economists and America were convinced the housing bubble wasn’t a bubble, and the effects of overinvesting in the economy.  One can be certain that the market itself can certainly be disguised by the perception and layers that society presents at a domestic and global level.

References:

1. Ariely, Dan. “The Costs of Social Norms”. Predictably Irrational. 
2. “Social Subjectives”. Understanding Society. http://understandingsociety.blogspot.com/2012/02/social-subjectivities.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Understandingsociety+%28UnderstandingSociety%29

Wall Street: How Things Haven't Changed

After I wrote in a previous post on credit cards and consumer faith in the financial industry, I chose to turn the television on to relax my mind for a bit.  While scanning through the channels, I stumbled across Wall Street, the 1987 critically acclaimed film that portrayed the malicious world that is the free market.

Cutthroat, power hungry brokers and their investors push around shares of company's to make a simple dollar. As Charlie Sheen's character is sucked into the world of insider trading and other unethical trade practices, the film truly holds up what remains a problem in today's society, or at least how the public perceives it.

While the SEC has tightened greatly since 1987, we can still see why Americans have lost faith in capitalism.  The financial industry has seen tremendous growth in the number of members in the 1% category, and their wealth comes at the hands of many people's downfalls.  The concept of the art of unethical trading is questioned in the film when Bud Fox asks Wall Street legend Gordon Gekko, "When does the game end?"  The question lingers today, and begs the question of when the social costs have finally hit such a large hole?

If I learned anything from the film, the importance of expectations is a fact that I confirmed.  What the market perceives to be valuable (even if it is simply overstated by high volume traders) can cause an eruption.  A shot heard 'round the world.  On the other hand, a single whisper might send a thriving corporation into bankrupt.

Last year, the S&P bond ratings lowered the US bonds from AAA to AA, a downgrade that sent investors running to the hills.  Many economist felt the downgrade was unnecessary and put false perception in the eyes of investors.  The truth remains that control remains in the power of who controls the access points in society.

The S&P downgrades, which have been occurring often in the last year, should send warnings to investors, that perhaps putting all of one's eggs in the same basket isn't wise.  I am not saying S&P is a hoax; but, we should always gain access to as many sources as possible.  Make sure to check the credibility and react in ways that benefit not only ourselves but the social wealth of the American and global economy.

References:

1. Brandimarte, Walter. "United States Loses Prized AAA Credit Rating from S&P". Reuters.  http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE7746VF20110806 
2. Wall Street (Film). 1987.    

Credit Cards with More Risk than Rewards

Got bad credit? First Premier has introduced a credit card available and ready for practically anyone.  But, there is a catch: your wallet will take quite a hit.  

The card, as reported by CNN Money, will be tacked with numerous fees, including higher charges for customer’s card limit ($400/year to start, then rises with higher limits) and an APR of 36%.  The high rates are to incentivize cardholders to pay off debt quickly and be able to gain credit when in all likelihood they would never stand a chance.  However, the card holds major flaws by attacking many people who may not understand or be able to handle the risks that are associated with the card.

Imagine the millions of people who don’t have a high enough credit score to qualify for a credit card with relatively standard rates.  The struggles of constantly being denied and unable to establish (or re-establish) credit would be extremely frustrating.  Now, a card is offered that grants one a credit card, but at extreme risks.  The acknowledgement of the real risk doesn’t necessarily equate to the cardholder, yet the act of passing on what has been denied so many times over may be too hard to overcome.  Is this a fair process? Perhaps potential cardholders should be inherently granted the knowledge of the risks, but in all honesty, First Premier would never be completely upfront with their risky clients.

Next, the problem we hold is the aspect of First Premier’s target market.  Cardholders of First Premier likely hold low credit scores for a reason.  A temptation to be given the “buy now, pay later” methodology highlights what First Premier and their competitors plan to do in this business scheme.  There is an incentive to see many cardholders fail to pay their monthly dues.  The industry may state their interest in helping those in need, but really, the gains of the cardholder come at too high of a risk to justify their so called “helping hands”.  There is a reason that Americans have lost faith in the financial industry.  The poor handling of investments and the untrusting hands of bankers and financial analysts make the consumer struggle with realization that these kinds of deals may not be of best interest in the long run.

While other competitors try to fight the bad reputation of First Premier’s credit card, they too have established interest rates that far exceed the benefits a person gains even with their risk due to low credit.  Until the balance is made, I can’t see a reason these companies should be trusted.  Unfortunately, the target market may fall into the pit for the first time or once again, pinning cardholders in the position they signed up to fight against: poor credit.  

References:

Ellis, Blake. “First Premier’s $400-A-Year Credit Card”. CNN Money. http://money.cnn.com/2012/02/09/pf/first_premier_credit_card/index.htm?iid=HP_River

Consumer Confidence and the Effect on the Economy

Many economists predict that the US economy is ready for a turnaround.  After three months of positive growth in the real GDP, all signs seem to point to this. However, consumers are still not on the same page as economists.  The Confidence Board, a private research group, released today a report that their consumer confidence rating had dropped from December to January, respectively at 64.8 to 61.1.  Many different reports have stated the reasoning behind this drop. 

The Wall Street Journal pointed out the sheer evidence of the report: consumer confidence is down because of the lack of finding jobs and the levels of expected income in the near future.  From December to January, there were 75,000 fewer jobs created. 

Along with this, Financial Times reports that housing prices continue to drop, which counters the benefits of growth in real GDP.  Consumers have also seen the prices of gas rise, another crippling effect that surely hinders the amount of disposable income for consumers. 

NASDAQ reports that DOW was going to have their best January ever until a shock in the stock market occurred over the consumer confidence rating.  Even through this, DOW has seen their best January since 1997, so those in the financial industry should still feel some excitement towards investor confidence.

The consumer confidence rating is out of 100 and is pegged to the year 1985.  Many economists had predicted that the rating would have risen from 64.8 to 68 this month, but as stated above, complications aren’t unheard of in the financial industry.

I find that the consumer confidence rating for January is supporting many of the beliefs that economists have had in recent weeks.  While everything looks good and grand with the real GDP growth in the United States, the economy is still far from being at the level that it should be.  The biggest indicators after reading these reports seem to be within the labor market, housing market and fuel prices.  Since these three markets have such a substantial effect on nearly every American, consumers are able to pin the success of the economy on these factors.  Until positive results can be seen in these markets, consumer confidence will lean unpredictable to negative growth rates.   

References:

1. Bond, Shannon. "Jobs and Fuel Prices Weigh on US Confidence". Financial Times. http://www.ft.com/cms/s/0/81cc9264-4c18-11e1-b1b5-00144feabdc0.html#axzz1l4fTe7lo
2. Dieterich, Chris. "US Stocks Fall After Weak Consumer Confidence Report". NASDAQ.  http://www.ft.com/cms/s/0/81cc9264-4c18-11e1-b1b5-00144feabdc0.html#axzz1l4fTe7lo
3. Madigan, Kathleen. "Consumer Confidence Unexpectedly Declines". Wall Street Journal.  http://blogs.wsj.com/economics/2012/01/31/consumer-confidence-unexpectedly-declines/