Simplicity Through Complexity

I just watched this interesting presentation on TED by Eric Berlow. Eric is a biologist that researches complex ecosystems and he has found that taking a step back and looking at the big picture often enables simple conclusions to be drawn.

Good economists follow a similar approach. It is important to expand your field of vision in order to understand a whole market, or a system of markets. Only once the whole system is understood can you draw conclusions about what is happening on a micro level.

The most important line I got from the presentation was:

'the more you step back and embrace complexity, the better chance you have of finding simple answers, and it's often different to the simple answer that you start with...(if you had not taken a step back)'

So next time you are faced with a complex issue, take a step back and try to understand the big picture. You might find that the answer you are looking for is more forthcoming in a big picture analysis, and you are likely to come to better conclusions as you will understand the flow on effects of your potential actions.

Where does the future start?

When forecasting or planning for the future, is our vision irreparably blurred or skewed by the present?

This morning I read the beginning of Keynes' 1919 book The Economic Consequences of the Peace. Keynes wrote this book because he was unsatisfied with the resolution of the first world war - he felt that the political and economic decisions made in the wake of the war were so one-sided and unfair that they would result in Germany rising up in anger once again.

He was right too.

But what struck me was Keynes’ observation of human nature – that we expect the status quo to go on forever.

I found the opening lines quite moving - it made me question what the future holds for Australia. It seems like Australians are happy to chug along in their lives, satisfied that the economy will continue to turnover at a great rate. This national resolution to relax and wait for the commodity royalties to trickle though the economy has won us plenty of attention throughout the world, but how long can the commodities be relied on?

The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Are we basing our plans for the future on sandy and false foundations? Are we too caught up in the present to realise how fleeting the present really is...was?

Thinking about it in modeling/forecasting terms, it appears that our estimates of the future rely too heavily on our most recent experiences. While we understand that the logical starting point for the future is the present, we may fail to recognise if the present is an outlier (not along the long-term trend line). If the present is an outlier, then it is not a good base for a forecast.

But is this the myopic nature of the human race? I find it somewhat ironic that our minds have sufficient power to know that we have to plan for the future, but they are not powerful enough to net out the effects of our current situation in order to make our future plans more realistic.

This bias for the present affects everything that we are; our mood as walk down the street, our ability to perform at work (or elsewhere) and our plans for the future (it can even affect our memories of the past). Everything that we do, see and perceive is affected by our present or our immediate past.

I wonder how I can best net out my current perceptions in order to better understand the future?

More importantly, how do I start planning for the future if the future doesn’t necessarily start with the present?

Driverless car to save us from the oldies

Googgle is making a driverless car to account for the dangers of the ageing population.

I say bring it on - I can't wait to be able to set the car to Autopilot and snuggle up next to Maple and Anna in the back seat. Sleepy time... here I come.

Sadly it's a few years off yet.

GenerationOne

Did anyone catch the address from Madeleine Madden last night?

GenerationOne looks like a great initiative- you should check it out.

Spending cash to save money??

Can cash make me skinnier? And, more importantly, can spending cash save me money?

A recent study has shown a link between using credit or debit cards for supermarket shopping trips and buying unhealthy impulse items. The study found that people who pay by cash for their groceries were less likely to purchase unhealthy impulse products than those paying by credit or debit cards.

The study suggested that the 'pain' of handing over cash for these types of products outweighs the 'benefit' that people perceive that they would receive from purchasing (and consuming) them. Paying on a card however dulled down this 'pain' such that the 'benefit' of purchasing the product relatively outweighed the pain.

This study was picked up by a few online news sites yesterday (news.com.au). The articles suggested that I could lose weight if I used cash for my grocery shopping.

In spite of yesterday's blog (questioning whether I should get a gym membership), it wasn' t the weight loss component of this article that interested me, but rather the question - could spending cash save me money?

The way I saw it, having a fixed amount that I could spend (and the relative 'pain' of handing over the cash) might stop the overspend that appears to happen when I walk into a super market.

In my ponderings, I realised that the vast majority of my family's grocery shopping was actually done by my wonderful wife, Anna. So, I sent the article to her. Just a little nudge, suggesting that she try using cash rather than card when shopping.

Anna's reply was timely and succinct. She suggested that, while this technique would save her money at the supermarket, it would cost her money everywhere else she goes. In her view, having cash made her spend more money. And, I'm inclined to agree with her, given my experiences.

Anna's hypothesis was that she generally won't put anything less than $10 on a card. While she acknowledged that there are a large number of shops that have a $10 minimum purchase for card transactions, this wasn't the reason. Rather, it was that she felt embarrassed making small purchases on a card.

What does this mean? If Anna is walking past a cafe and gets mesmerised by the smell of coffee, she will buy a coffee if she has cash on her, but will keep walking if she only has her card. the same guys for a cheeky chocolate bar, bag of chips, magazine... the list of potential impulse buys is endless.

This aligns perfectly with my experience. If I start the work week with no cash in my wallet, I can regularly get to Friday without spending a cent. However, if there is cash my wallet, I appear to haemorrhage it all over the place. The amount I can spend seems limitless.

What does this mean? While using cash at a supermarket may reduce the number of impulse purchases you make at the supermarket, it could actually increase the number of impulse purchases you make elsewhere. And, all other things being equal, there's a good chance that impulse purchases would be cheaper at the supermarket than at smaller stores.

But, does this mean that I have to plan my impulse buys?

Are you allowed to do that?

Maybe I'll just suggest that we use cash at the supermarket, and then hide the residual cash under the bed until the next week's shopping trip.

If nothing else, I'll try these tips for cheaper grocery shopping:

• Take a list - people who shop with a list tend to spend less.

• Use unit pricing to compare value for money, as buying in bulk is not necessarily always the cheapest option.

• Shop alone - people who shop as a couple tend to put more in their trolley.

• Avoid big supermarkets if you just want to pick up a few things - you're better off in a small store.

• Don't shop when you're hungry - it's a sure-fire way to end up with a trolley full of unnecessary purchases.

Inexplicable gym thoughts

I've been thinking of getting gym membership, but I'm not sure that I can bring myself to do it.

While I enjoy fitness, I generally don't like the idea of gyms, there is something unnatural about standing around in front of mirrors lifting metal. And, while I like the classes, these appear to be the 'women's territory' in the gym. It's not that I don't feel like I am welcome, it's more the looks I get from the beefed-up gents out in the manly metal-lifting section that make me feel uncomfortable.

I also appear to have some inexplicable moral issue about a business that makes its money by signing up 'members' and locking them into contracts so that the 'member' pays irrespective of her/his use of the gym. I often wonder how many gyms would operate profitably if only those that used the gym paid their membership fees. The flip side being how packed would a gym be if every member were to use it on a reasonably regular basis?

Not sure where the moral issue comes from. It seems like a reasonable business decision. It is also the same tactic that my telephone and internet companies use. But for some reason it irks me with gyms.

I should probably get over it.

The Parody of Parity

Australia is currently alight with conversation relating to reaching 'parity' with the USA dollar. While I am certainly happy about about the 1:1 parity being achieved, I do not think it deserves all the hype.

1:1 parity is an accounting benchmark. While it looks great on paper, the fact that our respective dollars happen to have passed each other in the night doesn't change anything.

The real benchmark is purchasing power parity (PPP), the exchange rate at which products in each country cost the same relative to the exchange rate. For example, a chocolate bar that sells for AUD$1.50 in an Australian city should cost US$1.00 in a U.S. city when the exchange rate between Australia and the U.S. is 1.50 USD/AUD. (Both chocolate bars cost US$1.00).

The benchmark for tongue-in-cheek PPP is The Economist's Big Mac Index. The Economist has been running the BMI for as long as I can remember and, despite its simplicity, it provides an interesting and tangible expression of over- and under-valued currencies around the world. This site has a 'live' version of the BMI which is updated daily in accordance with changes in the exchange rates.

Interestingly, the BMI suggests that Australia is really at parity with the USA at an exchange rate of around 0.85USD, but this is somewhat higher than the exchange rate that matters to me.

To me, 1:1 parity and PPP are far less important than my arbitrage parity - that is, the point at which it is cheaper for me to import my consumer goods (technology, clothes, shoes etc.), than to purchase them here in Australia. In essence, this is the same as PPP, but also takes into account transport costs, exchange rate costs (bank fees etc.) and a risk premium (which I apply to all internet purchases).

I were looking to purchase a Big Mac, my arbitrage parity would be at some point above 0.85USD, but it seems like most of the goods I like to purchase I can source considerably cheaper in the USA. As such, my arbitrage parity is typically at an exchange rate of approximately 0.65USD. Anything on top of that is cream on the cake - or savings in the bank as the case may be.

When purchasing running shoes for instance, I can source shoes from the USA for $125USD (including postage) that would cost upwards of $250AUD. This reflects an arbitrage parity of 0.5USD. In addition to this (and the original reason for importing shoes), I am able to import the shoes that best suit my feet.

Technology often provides a lower discount in the USA and, therefore, my arbitrage parity is higher. A Macbook for instance costs $1,000USD and $1,250AUD. By the time I find someone willing to sell it to me (Apple USA won't ship to Australia), and pay for postage, my arbitrage parity would be closer to the BMI parity of 0.85USD.

The most considerable benefit to me of the 1:1 parity is that it widens the scope of goods that I can reasonably import - that is, as the exchange rate improves, a greater range of goods will become viable to import.

I wonder what I should import next?