Why We Hate Cheap Things by The School of Life

Why We Hate Cheap Things. In the past, pineapples were expensive and people who bought them kept them as status symbols until they rotted and fell apart. It had almost a ritual quality. Savoring one was like a luxury. The top of the South Towers of St Paul had this divine fruit being perched on it. By the end of the 19th century, technology enabled large plantations to be built. Now, it is no longer deemed as a rare fruit. When the price falls, we become less passionate. In the past, when flying was dangerous and expensive, it seemed thrilling. Now, taking a flight on a commercial aircraft seems a little boring. We definitely do not appreciate the skies as much as Leonardo da Vinci would. The same can be said about having a hot bath. In the past, heating the water was considered difficult. It was largely reserved for war heroes or for the very rich. Now, it is a very common experience and some might even view it as a waste of time. We view cheap prices with a lack of value. Due to the Industrial Revolution, we are now able to make things cheaply. In the past, because of hand labour, more expensive things were associated with higher quality. There was a price to pay for craftsmanship. People hoped that with industrialization, prices would fall. In 1911, the commercial car was born. However, industrialization might have robbed certain experiences of loveliness, interest and worth. Now, it might seem bizarre if we are interested over cheap things. We now favor the things that are expensive. A child’s mind is more curious and wonder-like in nature. Children do not understand money. They can be obsessed with things that do not cost a lot. To adults, costs = value. Over time, when children understand money, they believe that saving for a big purchase is good. The artist Paul Cezanne was obsessed with painting apples and noticing their texture. Every apple exuded their own colour and aura. He was excited over apples, even though he was extremely rich. The fact of life is that we can get great things for little money. We have given up on too many of our native loves. In the modern society, we are drawn into advertising. The issue is that cheap but useable objects do not have sufficient advertising.

We need advertising pursued with the same sense of drama and intensity and ambition but directed towards biros, puddles and olives. – The School of Life

There are two ways to get richer: one is to make more money; the second is to discover that more of the things we could love are already to hand. – The School of Life

Contemplation of the history of the pineapple suggests a curious overlap between love and economics: when we have to pay a lot for something nice, we appreciate it to the full. – The School of Life

A reduction in our esteem for an experience follows a reduction in the cost of obtaining it. – The School of Life

This means that we often end up feeling that we can’t afford good things and that our lives are therefore sad and incomplete. The money hierarchy constantly makes us feel impoverished, while the truth is that there are more good things within our grasp than we believe. – The School of Life

Why We Look Down on People Who Don’t Earn Very Much. If you don’t earn a lot, what you say is unlikely to command much respect. There seems to be a link between talent, effort, skill and income. This is capitalism for you. A person’s wages are determined by the scale of their social contribution. Economics would say that wages solely depend on demand vs supply. Christianity insisted that a person’s worth has no relation to their financial standing. Whether you go to heaven depends on merits. Karl Marx thought that workers should be paid based on their contributions to society. This meant that the wages of the hitmen, casino owners would do down while that of the nurse and the farmer would go up. In the past, lacemaking was a job which was poorly paid. Many painters noticed this and painted pictures of lace-makers at their craft. The artists hoped that through their paintings, more would appreciate the lacemaking craft. Art gives us a sense of a person’s true merit and a willingness to disregard wages. Art can be the answer to bridge the gap between money and human value.

We recognize the phenomenon in our society well enough: the more someone earns, the more they are likely to be admired by strangers, and perceived as interesting and exciting. – The School of Life

On Being an Unemployed Arts Graduate. Arts graduates complain about finding employment. Some of them are also underpaid. Some people can’t understand why artists should be paid to study history. People lack a real understanding of what the humanities are about and how it can benefit humanity. The universities also can’t explain why students should pursue humanities. Humanities are the closest we have to replace religion. They are bodies of work that teach us how to lead our lives. We need to reinvent universities. There are practical aspects of reading 19th century literature. Humans crave nourishment as well. There needs to be a new definition of culture.

Good Materialism. Materialism is generally seen as bad. Is there such a thing as good materialism? We have failed to distinguish good from bad materialism. Even religious people have made material items, like shrines, artworks etc. They did so because they believed it developed their souls. Some material possessions can be seen as transubstantiation, where they have both a practical and physical form. Material objects can have a spiritual role in our lives. They can give us a chance to understand ourselves better. We should only purchase things which can lead to the better encouragement of ourselves.

We are still enmeshed in the desire to possess – but we are encouraged to feel rather bad about it. – The School of Life

Why We Are So Bad at Shopping. We need to learn how to shop. Shopping for others is tricky, but we don’t seem to think so for ourselves. Capitalism is supposed to provide us with unlimited options. However, humans are influenced by group instincts. There are very standard consumer patterns in our economy. Our shopping choices are really not that personal. Humans like to follow trends etc. They like to buy what it is fashion in the modern age. We do not want to appear weird in front of our friends. We do not analyze pleasurable activities much. Product reviews don’t help us too much as well.

Part of the problem is that we lack the ability to know, looking back over experiences, what truly brought us pleasure. Our brains aren’t so keen on taking apart their satisfactions – and therefore plotting how to recreate them. – The School of Life

It isn’t that we are too focused on shopping, we are not thinking deeply enough about what we’re doing. We haven’t yet learnt to be doggedly precise enough about pinning down our own fun and making sure we get it. – The School of Life

Using Sex to Sell. Using sex to sell seems cheap and low-class. Ficino believed that humans will move from sex to love. The next stage would be to long and have the capacity to understand. To get someone to understand something, it would to get the person interested in sex. Ficino suggested to Lorenzo to paint pictures of beautiful and sexy people. There is nothing wrong to use it and it has been used in the Renaissance period. However, it is useful to sell something noble. Once our senses are ignited, it is easier to learn. However, there is a need to sell things like books related to wisdom and philosophy.



Enough by John C. Bogle

Is there no limit to what enough is in modern society? Capitalism is at play. Management earn obscene amounts of compensation. Greed can cause a system’s downfall. How long can materialism and greed last? I have been given enough, in more aspects than just financially. My great grandfather was incredibly thrifty. My family was fraught with financial difficulty. I had to work when I was young in order to feed the family. I learnt to accept responsibility when I was young. I did well in school and mum put in so much effort into investing in my education. My attitude in life has been influenced by my family. The first ‘diamond’ of my life was my admittance to the Blair Academy. My family was incredibly close-knitted and that helped a lot. Later, I got admitted to Princeton University on a full scholarship. Even then, I had to take up temporary jobs for me to get paid. However, my parent’s marriage fell apart after that. I discovered that the mutual fund was new at that time and wrote about it. Mr Morgan was the boss of Wellington Fund. When I was 35, he said I could take over the firm. After a disagreement with the other shareholders, I got fired. My business model was to manage our affairs internally and not require any external party to manage it. Vanguard would have to do everything in-house if it wanted to succeed. Before 1875, I founded the world’s first index mutual fund. The fund didn’t need to be managed as the returns would track a basket of stocks that were representative of an index. ‘If you build it, they will come.’ Thankfully, we got approval from the SEC too. A donated heart was one of my ‘diamonds’ too. This heart enabled me to live healthily. Be blessed by the number of diamonds you have. Humans are all too interested in short-term gains. Companies should recount their past values which enabled them to thrive. Virtue doesn’t come from money. It comes from doing good.

Some men wrest a living from nature and with their hands; this is called work. Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade. Some men wrest a living from those who wrest a living from nature and with their hands; this is called finance. – Old Epigram from 19th Century Britain

There is a food chain and the investor is at the bottom of it. The financial system cannot be too costly. We are often trading paper and paying bankers too much. In addition, the financial system is fraught with complexity. Young graduates like to enter banking. We should strive to do good in our jobs. Never let money alter your conscience. Do not invest in products which require you to pay high management fees etc. Serving your client is the highest priority. The sub-prime crisis was an example of extreme greed. The finance sector takes up too much of the earnings of the S&P 500. Sometimes, the markets crash but those people in IB keep making money. The ex-CEOs of Citigroup and Merrill Lynch were paid very well just before the sub-prime crisis. They were not penalised heavily after that. However, bankers earned nothing as compared to the hedge fund managers. The hedge fund industry demands high management fees and investors can’t survive. The number of CFAs are increasing all the time. There is an inherent disconnect between cost and value in our financial system. Humans have abandoned the traditional standards of investing. The author looks up to people like Benjamin Graham and uses value-investing. Speculation is rife nowadays. The cumulative costs keep growing. Does the financial system create more value than cost? My fear is that the finance sector is getting too big and out of control. There needs to be a financial system reform. As public investors, we should demand more from our financial system.

The motivation of too many of those rushing into finance is more aligned with what they can get from society than what they can give back to it. – John C Bogle

Too Much Speculation, Not Enough Investment. Investing is about long-term ownership of the business. Speculation is just the opposite and is about short term gains. One of Keynes’ famous works is the ‘General Theory of Employment, Interest and Money’. In the long run, the stock price must be aligned with the business fundamentals. Speculators cannot capture the inherent value in a stock. Markets are volatile because of speculators. In the expectations market, prices are set based on the expectations of investors. These are not based on ‘real value’ per se. We live in an era of speculation. However, it is true that investors win and speculators lose in the long run. Stock markets have crashed, just like on Black Monday in 1987. Short term outcomes can’t be predicted accurately nowadays. There have been little cases of black swans in the long term market. The financial system is prone to innovation. Learn to emulate tortoises. Market timing is not sound. Market timing doesn’t work. It is difficult to make the right decision consistently on market timing. We need to improve the balance between entrepreneurial innovation and more traditional values. We cannot allow the whirlwind of speculation to continue unabated.

In investing, tortoises tend to win far more often than hares over the turns of the market cycle…Placing large bets on an unknown future is worse than gambling because at least in gambling you know the odds. Most of the decisions in life motivated by greed have unhappy outcomes. – Peter L. Bernstein

Too Much Complexity, Not Enough Simplicity. Simplicity has been the key to successful investing. Technology has complicated our lives. There are many middlemen in a CDO offering. Some banks are also not concerned with the creditworthiness of such offerings. The market has been flooded with interest rate swaps, credit default swaps etc. The value of the derivatives market is huge. ‘As long as the music is playing, you have to keep dancing.’ The Federal Government has also backed such offerings. It is better to buy an index fund as it has better returns. Innovations have hurt investors. The winners are usually the fund managers or distributors. Innovations like stock index fund, bond index fund have done investors well. ETFs are great. However, they are being traded too frequently, leading to speculation. Some ETFs also do not contain stocks that track the stock market index. There are many different types of funds nowadays, like market neutral, hedging, commodities, private equity etc. However, please examine the track record before buying. Commodities are purely speculative in nature. Fund expenses must be cut if investors are to gain. Fund failure rate is very high amongst idiosyncratic funds. Some funds are not concerned with shareholder performance. It is time to get down to basics. The author believes that the simple way is the best way. The mutual fund industry often fails to provide market-beating returns. The fund manager should serve investor’s interests.

Too Much Counting, Not Enough Trust. We often place too much emphasis on numbers and trust them. Then, we have optimistic views on the future because of them. Even numbers produced by the government can be questionable at times. We need to understand the sources of stock returns. Do not project future returns based on past historical rates. This causes the expected rate of return of investments to rise. The bubble of investor optimism will have to burst someday. It is smarter to set your expectations for future earnings on basis of current sources of returns. There is a bias towards optimism in the future. CEOs often paint too optimistic pictures for earnings and analysts tend to agree with them. The standard for analysts has changed from GAAP earnings to operating earnings. Pro-forma earnings also exclude all the one-time losses etc. Creative accounting is a big issue nowadays. Pension holders might lose money on their investments and this will have other repercussions as well. Businesses like to use M&A to create ‘value’. For each M&A deal, the bankers and lawyers earn huge sums of money. ‘Paper’ companies have acquired ‘rock’ companies that make. In Vanguard, we believe in organic growth, not forced growth. Nowadays, we do not know how to ask without any numbers and this is a scary fact. Trust is important.

The first step is to measure what can be easily measured. This is okay as far as it goes. The second step is to disregard that which cannot be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what cannot be measured really is not very important. This is blindness. The fourth step is to say that what cannot be measured does not really exist. This is suicide. – Daniel Yankelovich

Modern capitalism has two parts: there’s business, and there’s finance. Business is renting you a car at the airport. Finance is something else. – Michael Kinsley

Too Much Business Conduct, Not Enough Professional Conduct. Professional associations are now run like business enterprises. However, professionals should be responsible and selfless in their service towards their clients. Times have changed nowadays. Professional conduct is less well regarded as in the past. Too many banks are seeking competitive advantages at the expense of their customers. The battle for professional independence is never won. Trust and be trusted. Capitalism has eroded as well and this is a big issue. Owners’ capitalism has been transformed to managers’ capitalism. Institutional investors are a big thing nowadays. Managers are not acting as they should for their principal. Beware of negligence and profusion have prevailed among corporate management. How much should the CEO be compensated? It is hard to determine how much value a CEO has added. Sometimes, their salary growth outstrips the corporate profit rate. There are accountability issues. Institutional money managers hold a lot of power. CEO stock based compensation should be based on intrinsic value and not actual stock price. The compensation consultant has also become more popular. Many CEOs are also paid according to how they fair in their peer group. A basic set of ethical principles is needed to guide the profession. Financial engineering is getting more and more popular. Capitalism must be fair, regulated and ethical.

Money management extracts value from the returns earned by our business enterprises, and in the process of maximizing its own commercial benefits, the industry seems to have lost its professional bearings. – John C Bogle

Too Much Salesmanship, Not Enough Stewardship. The industry is characterized by salesmanship too. Mutual fund size has grown by a tremendous rate recently. Fund investors start trading funds instead of simply holding them. The holding period for stocks has been cut from 6 years to 1 year. Fund costs have soared as well. The fund industry is more like a marketing industry now. Investment focus has been truncated. Some funds are only created because of the latest market fad. There is a need for reform. We need to cut down costs for investors. Serve the investor for a lifetime. There are too many choices of funds out there and this makes people confused. There is a need to have long term investment horizons. Serve the long term investors. We must all return to the index fund. Put fund investors in the driver’s seat. Shareholder education takes time. The industry should aim to be objective and unbiased. We need to have an industry that is of the shareholder, by the shareholder, and for the shareholder. We need a mutual fund industry with vision and values. We must build companies that stand for something. Stewardship will pay off. It is important to keep the faith every day.

Too Much Management, Not Enough Leadership. Our large corporations are over-managed but underled. Managing and leading are completely different. The leader is more original. The leader should be able to inspire. They should care about the deeper values of the organization. There are 10 rules for building a great organization. 1) Make caring the soul of the organization. 2) Forget about employees (call them crew members instead). 3) Set High Standards and Values – and Stick to Them. 4) Talk the Talk. Repeat the Values Endlessly. 5) Walk the Walk. Action Speaks Louder than Words. 6) Don’t over-manage. 7) Recognize Individual Achievement. 8) Loyalty is a Two-Way Street. 9) Lead and Manage for the Long-Term. 10) Press On, Regardless. A superior company thinks about its dream. It also applies unconventional thinking. We were based on value profit chain concepts. I built a company that would endure. Businesses should have purposes besides making money.

The institution must be the object of intense human care and cultivation. Even when it errs and stumbles, it must be cared for, and the burden must be borne by all who work for it, all who own it, all who are served by it, all who govern it. Every responsible person must care, and care deeply, about the institutions that touch his life. – Howard W. Johnson

Too Much Focus on Things, Not Enough Focus on Commitment. Where are the things by which one measures one’s life? Don’t let things measure the man instead. Life is never smooth and we might lose our wealth one day. However, your character is the one that will endure. Boldness and commitment is all important. Commit the most to make a second life. It is crucial to be committed to your family. Commitment to neighbours and the community is also important. We thrive as human beings and have faith in ourselves. Give credit to those who have helped you along the way. You didn’t succeed on your own. Be bold and summon your magic.

Too many 21st century values, not enough 18th century values. Do not move away from the truth. Facts are everywhere. The Age of Reason occurred in the 18th century. Many of the great leaders spoke about the period of Enlightenment. Benjamin Franklin was a great leader in the 18th century. Joseph Schumpeter also described what an entrepreneur ought to be. Entrepreneurs and capitalists are not the same. Have the will to conquer, and the joy of a good battle. Franklin invented many tools for the public’s benefit. There are other motives for business other than profit. A man should have a mind to improve, a heart to cultivate and a character to form. Keep striving to improve. Return stewardship to capitalism. Lead with purpose. Virtue is all important. Franklin listed 13 virtues. He started his day by asking ‘What good shall I do this day?’ and ended it with ‘What good have I done today?’ His energy and persistence helped him in his public life.

Knowledge is not the personal property of its discoverer, but the common property of all. As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously. – Benjamin Franklin

The real test for an honest and productive society is not what a society has achieved, but what it aims to achieve. It can put honest people on a pedestal even if they do not maximize their personal benefits and preferences…and discard and shun as models of failure dishonest people who achieve their highest ambitions by fraud and abuse of trust. – Tamar Frankel

Too Much ‘Success’, Not Enough Character. We often chase success but success continually eludes us. Is success all about achieving wealth and fame? Financial wealth is not a good measure of success. Fame is a flawed measure too. Fame is used for other purposes now. One can contribute to society in a great way but yet not be famous at all. Power should not be used capriciously and arbitrarily. Power should be used for a worthy cause. Have we been chasing the fake rabbit of success? Success isn’t about meeting other people’s expectations too. You should just base success on your own expectations and make the most of your talents. We should admire those people in professions where they can contribute to society, but not achieve any fame or recognition. Modern life has forced people to be competitive. Life demands much more of us nowadays. What are you competing for? Without character and courage, nothing else lasts. To hone character, one must undergo tribulations etc. Be yourself and strive to be better. With age, you should better understand where the rabbits are. Challenge yourself and strive to be better. Chase the real rabbits of your life.

Success can be measured in our contributions to building a better world, in helping our fellow man, and in raising children who themselves become loving human beings and good citizens. Success, in short, can be measured not in what we attain for ourselves, but in what we contribute to our society. – John C Bogle

I long to accomplish a great and noble task, but it is my chief duty to accomplish humble tasks as though they were great and noble. The world is moved along, not only by the mighty shoves of its heroes, but also by the aggregate of the tiny pushes of each honest worker. – Helen Keller

Highly educated young people are tutored, taught, and monitored in all aspects of their lives, except the most important, which is character-building. But without character and courage, nothing else lasts. – David Brooks

What’s Enough? What is the relationship between happiness and success? Success is not the key to happiness, happiness is the key to success. Humans are resilient. Money only provides a transitory form of happiness. Autonomy, social interaction and competence are all important. How much money do you need? I want to give something back to the less fortunate. For example, give back to your alma mater. I also offered scholarships to the Blair students. It has been a thrilling ride indeed. I was born to save rather than spend. Our shareholders also have received superior returns. I do not like extravagance. My retirement plan is the largest in the family balance sheet. Saving early and regularly is the key for wealth accumulation. Postpone your first payment for Social Security. Stick with low-fund fees. There are still many people living in poverty in the US. The income disparity is growing. You must remember that you are fortunate but not all fellow Americans are enjoying it. The domination of the US will not happen forever.




Quitter by Jon Acuff (Part 1)

Closing the Gap between Your Day Job and Your Dream Job

Don’t Quit Your Day Job. I hated my day job and the feelings of Monday mornings. I felt that my dreams were crushed. I had 8 jobs in 8 years. Many employees are also looking out for new jobs. The average tenure of a job is only 3.1 years for the younger generation. Now, we converted from stayers to leavers. We hate our jobs and only see work as a means to pay money to fund our lifestyle. We often feel that work is miserable and that it is possible to separate our work from our personality outside of work. Quitting your job is one of the worst things you can do. It sucks when you have a lousy boss and the only person he can manage is you. We always assume things will be rosy once we quit. All your financial responsibilities will creep up on you. Your wife will start arguing with you. You will get scolded if you watch too much TV. Quitting your jobs might throw your relationship into chaos. You can get to your dream job, but that doesn’t involve you leaving your day job immediately. When you don’t have a job, you don’t have a good bargaining tool to get what you want. If you have a day job, you can still reject shitty offers. The cost of raising kids is very high nowadays. I got to earn some cash speaking in front of a crowd. You lose leverage if you quit without a job. At the heart of a dream is change. People do not like change in general. Financial commitments are tight and inflexible. Stay true to your dream and do not quit your day job. People with jobs have more creative freedom than those without jobs. Once I started a diet, I realized that other aspects of my life was improving as well. Discipline begets discipline. Men need to work and need a project/ need progress at all times. Money issues are very sensitive. Humans need to work. We need to learn to be successful at work. Having a day job will stabilize your marriage.

The unfortunate truth is the escaping the land of bad bosses is just a fantasyland. The second you quit your bad boss you get dozens of new bosses. And some are more demanding than the one you just left. – Jon Acuff

You effectively lose that option when you quit. You lose that freedom when you jump without a net. You lose the power of the walkout or the shredded contract. – Jon Acuff

When you keep your day job, all opportunities become surplus propositions rather than deficit remedies. You only have to take the ones that suit your dream best. – Jon Acuff

Discipline begets discipline. When you step up to a challenge before you, your ramped-up resources rub off on other areas of your life. You wouldn’t think eating less ‘fat’ would impact how closely you monitor your family’s financial budget, but it’s all tied together. – Jon Acuff

Quitting a job doesn’t jump-start a dream because dreams take planning, purpose and progress to succeed. That stuff has to happen before you quit your day job. Often it should occur months and even years before. – Jon Acuff

Removing the ‘I’m’ From Your ‘But’. It feels sexy to quit. We usually label quitters as winners. This is the “I’m, but’ generation. This means that ‘We don’t know what we want, but this isn’t it’. People seem to know what they want to do without even trying that thing. There are ways to find out what your dream job is. For instance, one could work on personality tests. The truth is that most of us don’t know what our dream job is. So ask yourself, so what do you want to do? We often think that what we want to do is going to be a revelation. The author believes that it is more a process of recovery. Somehow, you lost it along the way. Everyday distractions are bad and divert us away from our dreams. Being busy is an excuse. Do not simply discount your dream. You will always meet people in your life who dismiss your dreams, who think that you are not good enough. Nothing can’t hurt you. Nothing is comfortable. Nothing is normal. We are embarrassed to share our big dreams. Don’t believe that you have no gifts in life and you have nothing. It is difficult to answer the question what do I want to do with my life because is a discovery question. Learn to look for hinge problems. Mercedes Benz redesigned the SLR range to appeal to the rich. They added a hinge to the ignition. You needed to open the cover and then press the ignition button with your thumb. It was like launching a missile. That made a tremendous difference to the car’s outlook and appeal. The lamination of your text makes it seem like you are a true published author. My dad also sent my book for publishing and that was great. My dad believed in me, that was one of my hinge moments too. However, most hinges are difficult to recover. Ask yourself the following questions to figure out hinge moments. 1) What do I love enough to do for free? 2) What do I do that causes time to feel different? 3) What do I enjoy doing regardless of the opinions of the people? 4) If only your life changed, would that be enough? 5) Are there any patterns in the things you like doing?

If you recognize that, if you admit that there is a chance that you are good, perhaps even great at something, you should feel a little uncomfortable. Because if your gift is not nothing, that means it is something. – Jon Acuff

A hinge moment occurs when you are planning to do something standard and normal, and then seemingly out of nowhere, a small detail usually hinges you in a different direction. – Jon Acuff

What Lies Between a Day Job and a Dream Job. Every dream has risk associated with it. When you stare at risk, you tend to make irrational decisions. We will now examine 3 risks associated with a dream. They are ‘The Magnifying Glass’. We blow things out of proportion. The next is ‘The Kaleidoscope’. Your dream is also connected to every aspect of your life. This is basically overthinking and thinking of all the worst case scenarios. The last fear is ‘The Telescope’. This is the best as you view from a safe distance and see the big picture. Risk is holding us back from pursuing our dream. Perfection is a real problem. This is because it tends to make you procrastinate and not do anything. Get organized and get things in motion. Perfect is not possible. This does not mean you should write half-hearted work. It is still better to pursue your dreams rather than leave it not pursued. Once you decide, just do it. We often like to say I could be so-and-so if I really wanted to. This leads to apathy. We ask ourselves ‘What if I try and I fail and it turns out I’m not really a writer?’ Apathy is about being a fake somebody. The chance of you failing to get your dream job and then rotting away and going to waste are extremely slim. If you do not attempt your dreams, you fail 100% of the time. We often say that we are too busy to pursue our dreams. However, most of us are also busy. However, everyone can set aside time for time management. Instead of time, learn to focus on the amount of tasks at hand. Financial foolishness is different from being committed to your dream. Do not take drastic measures. Money can be a huge obstacle if you are not careful. I hate the words ‘by now’. We say this when it is too late to pursue our dream. What if I did the wrong thing? Your past career can still teach you valuable lessons. Do not keep saying things like ‘It would be easier if …’ For instance, people say ‘It would be easier if I didn’t have a full-time job’. Having a lot of money will not save your life. Do not blame your kids, marriage for not being able to pursue your dreams. This is simply outrageous.

90% perfect and shared with the world always changes more lives than 100% perfect and stuck in your head. – Jon Acuff

Money will become a high-walled border around your dream if you don’t control it. It will limit what you can do and when you can do it, like a barbed-wire fence at a prison. If you can control it though, money can be a strong, stable place to jump from. – Jon Acuff

I know sometimes it’s scary to think that you might do the wrong thing. But let me assure you, nothing you do will be wasted. Every decision you make, every path you take, has the ability to contribute something you need to succeed at your dream. – Jon Acuff

We always assume that more free time will equal more productivity but often that isn’t true. I personally tend to get more done when I am busy. – Jon Acuff


The Money Game by Adam Smith (aka George Goodman)

This book is a decade old. This is an updated version of the book. The book is ‘about image and reality and identity and anxiety and money’. The stock market isn’t necessarily fully rational. The 60s were a crazy people with many greedy people. Professional money managers are over-rated. The first rule to make money is not to lose it. More information doesn’t make you smarter. Many brokerage firms were out of business in the 1970s because of reduced commission rates. The fee structure changed completely.

The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer. – George Goodman

You (Identity, Anxiety, Money)

Why did the master say ‘Game’? Adam Smith thought of himself as a moral philosopher. He wrote ‘The Wealth of Nations’. I used a pseudonym for Wall Street. It was my Sunday recreation name. I called myself Adam Smith. It was a great name as not many people known the real one anyway. Keynes was very perceptive of markets. In the past, the holders of money were thought to be prudent. Keynes’ mentioned that investing is like a game. Game Theory has a huge impact on our lives. The stock market is too complex for game theoreticians. However, it has been hard to put into equations and quantify at the moment. The stock market is a great national pastime. Preferred stocks and bonds are not part of the game as they are more boring in nature. Investing has a lot to do with human psychology. You have to guess how the crowd behaves. More and more information is available in the market. The professional managers are getting more skilled by the day. You can be rich but even then you still realize you want to invest and to continue to be thrilled by it. There are people who are really addicted to it and love the stock market. Of course, the aim is to make more money. This book is not suitable if you want to rely on a professional money manager.

To what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power, and preeminence? – Adam Smith

It is very hard to get excited over a bond basis book, where your index finger traces along a column until it gets to the proper degree of safety and yield. – George Goodman

Mister Johnson’s Reading List. There are a lot of books telling you how to get rich. One good book is Security Analysis by Benjamin Graham. Security value is subjective. Fears, greed, hopes all play a part. Value is one thing. Liquidity is important too. It is important to consider that. Fidelity did very well in the past. It is a fund. They have a brilliant reputation. The market is an art, not a science. He has read many books too. He delegated responsibilities and work to the money managers. Some people do not pick stocks, but they sense market sentiments. Markets rely on emotions. You should not try to over-analyze them. It is important to know yourself. Does a market have a personality of its own? It is important to develop your own personality when investing. Why is the emotional aspect not well explored? Is it even worth exploring in the first place?

There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions. It often happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. – Gerald Loeb

If you don’t know who you are, the stock market is an expensive place to find out. – George Goodman

The stock market is like a beautiful woman – endlessly fascinating, endlessly complex, always changing, always mystifying. I have been absorbed and immersed since 1924 and I know this is no science. It is an art. – Mister Johnson

There are fundamentals in the marketplace, but the unexplored area is the emotional area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describe an emotional state. – George Goodman

Can Ink Blots Tell you whether you are the type who will make a lot of money in the market? There are simple tests to determine whether you are a good investor. What will you do with your free time? Analysts and aggressive portfolio managers will answer the questions differently. The accountants will get the answer right. Analysts like to use inductive reasoning. The portfolio manager just likes to win, no matter what. One must learn to operate without anxiety and stay cool. The important question is to ask how you behave when everyone is roaring the other way. Is the market really a crowd?

If you really know what’s going on, you don’t even have to know what’s going on to know what’s going on. – George Goodman

Is the Market Really a Crowd? The crowd is wrong because it behaves normally. Are all the uninformed people part of the crowd too? People in a crowd usually act differently from how they would act alone. Some people get hypnotized when they are in crowds. They often respond or react to suggestions. Crowds do not reason. Often, they only think that they reason. Crowds tend to play up emotions and intensify them. Often, it feels comfortable to be in a crowd. It is very difficult not to give in to temptation and follow the crowd.

Eighty percent of the market is psychology. Investors whose actions are dominated by their emotions are most likely to get into trouble. – Unknown

You Mean That’s What money Really Is? Money has a mystical quality. Money in itself is useless. We have to change our perception of money and see where that leads us. When you chase after money, does it just show that you are greedy? Is it a dehumanization of human nature? Why collect something so useless? Money is condensed wealth. The stock market is thrilling because you need to save up and work hard before you participate. Seasoned investors never really spend the money that they make. However, they are still compelled to continue. What is it that makes them continue to play?

It is true that you have to work long enough to acquire a surplus enough to buy some chips for the Game, but the money you make playing the Game isn’t work, it’s play – or are you making it seem like work? – George Goodman

What are they in it for? If most investors don’t make money from the Game, why are they still playing it? Some people are in because it sounds cool. There are people who are seriously irrational and won’t sell the stock simply because it might have appreciated a little in the past. To some, when the stock goes up, they get nervous. People always look back with regret on the stocks they didn’t buy and appreciated in future. Even though your portfolio might be up, you might still kick yourself because you missed out on others. There is always another stock going up more than the one you bought. Some people are weird enough to tell the broker that they only wanted to make a specific sum of money and not more. There are people who hate brokers for making so much commissions. They feel brokers like to lie. They feel brokers are touting for more business. Some just want the broker to talk to and to provide information on the stock for them. They just want to be part of what is going on.

But he didn’t feel very good about it. If the stock went up, he should have bought more, so he was stupid there, and if it went down, that proved he was stupid there. – George Goodman

Identity and Anxiety. Why are we not growing rich? Markets mean different things to different people. Greed and fear are the most common emotions. Greed occurs when others have made money on stocks which you hadn’t bought. Obviously, no one wants to buy at the top. Prices get pushed up even though the fundamentals do not support them. Some people expect their money to double in a few years. The trick is to have a firm identity which is not influenced by people speculating. One has to avoid anxiety situations. One important thing to realize is that the stock doesn’t know you own it. The stock is a piece of paper who doesn’t love you. Do not be emotionally attached to any stock. The key is to start out with no preconceived notions. Every day is a new day. The end object of investment should be serenity. Will you feel serene after earning a million? Or will you want more? Will you compare yourself with more successful people? People in society are usually measured by how much they can earn. A lot of people define themselves by how much money they make. The stock market is a zero sum game, there will be winners and losers. The trouble is that people who get burnt do not learn and want to continue playing.

If you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday. – George Goodman

What’s the difference whether you have twenty thousand dollars or sixty thousand? You can buy a few more things, but it’s not enough to buy freedom, not enough to change your life. You’re either a wage slave or you’re not. You have to go for the quantum jumps. Why are we on Wall Street? To make money. – Harry

Where the Money Is. As outside investors, it is not possible to make outrageous amounts of money. The ones making a lot of money are the inside stockholders of a company. These are the people who started a company and then IPO. Most people can’t do this unless you have a capital at the start already. The possibilities of different businesses which can go IPO are endless.

Mr. Smith Admits His Biases. How do you correct your biases? One idea is that you buy good stocks and put them away and in the long run you can’t go wrong. The problem is that nothing works all the time. Sometimes, inaction is the better option. Inaction is also considered action. Some people try to anticipate business cycles to make money. However, this will not make you very rich. Some companies’ earnings are cyclical. Some people anticipate swing in interest rates. You can also buy the turnarounds, rotten companies which have sold off unprofitable segments and have new management. The examples involved require some knowledge. However, be wary of companies where earnings shot up way too quickly. However, the problem is that past performance is no indication for future performance. Companies with earnings growth consistently must have something unique about it. They must have a competitive advantage. This thing must not be easily replicated or copied. Can you just buy good stocks in the past like IBM, Xerox, Polaroid and lock them away? The rate of growth of earnings matter too. Note that it is important to examine the P/E ratios too. A great product can be ruined by bad management. The larger you grow, the harder it is to keep the % of growth constant or increasing because of a large base. Another tip is to concentrate on a few holdings and do not diversify too much. How to find great stocks? The company should be adaptable to change and stay innovative. You can get ideas from smart people. That is one of the rules. You can use the scuttlebutt technique, which is to talk to a lot of people associated with the business. Find your own stocks and your own coloured stocks.

If playing the Stock Market game has been fun, it may be difficult to stop playing, even when that button of yours is burning your finger. Repeated shocks will give you anxiety, and anxiety is the enemy of identity, and without identity there is no serenity. – George Goodman

Part 2: Systems

Can Footprints Predict the Future? Almost every firm has a research department. It is important to know what everyone else is doing. Everyone has limited time available. Charting is looking for trends and repetitions. Charts can very well prove to the traps as well. A chart can reflect volume and price range. The four stages are 1) Accumulation; 2) Mark-up; 3) Distribution; 4) Panic Liquidation. Can charts indicate the future? The assumption is that what happens yesterday will happen again tomorrow. Can the footprints of price movements really predict the future? Is the market fully efficient?

When the stock doesn’t get anywhere after a rise, but churns around at the same price level, the chartists call it an area of resistance. When a stock drops to a point where it doesn’t drop any more, and churns around, they call this an area of support. – George Goodman

What the Hell Is a Random Walk? Charting seeks to find order in something that happens. Random walk means there is no order. Random walk theory was proposed by academics. He is Eugene Fama. It basically says ‘prices have no memory, and yesterday has nothing to do with tomorrow.’ There is no way to predict the future performance. You might as well select stocks by throwing darts. It assumes that the market is completely efficient. It also assumes that stocks have an intrinsic value. The actions of investors should cause actual price to wander randomly around its intrinsic value. However, in reality, the actual price might not be equal intrinsic value. The analysts all try to make the market more efficient. The Chartists certainly don’t believe in the random walk. The analysts also feel that their analysis is useful. The fact is that the market is reasonably efficient. The chartists can certainly be a force in the market. Can intuition be programmed? Chartists are happy that now everything can be programmed.

Computers and Computers. Railroad Bill is a computer. Computers revolutionized investments. Computers can screen too. The good thing was that it could perform many calculations simultaneously. Analysts pore through all these data and try to pick out trends. The computer can pick out stocks which are behaving out of pattern. Computers now do the buying and selling themselves. With the prevalence of computers, do individual investors still stand a chance? This result is kind of disturbing for the individual investor.

But What do the Numbers Mean? Earnings must be assessed using proper accounting standards. There are certain items which must or must not be included. It allows for comparisons between different companies too. Useful lives might be applied differently between different companies. Some companies use declining balances. There are different accounting policies that can be adopted and all these are permitted. Earnings management is often practiced. Accounting firms can get sued if they present inaccurate figures. Free-form companies are those which acquire others. Companies’ management is really important. Some management like to juice up the accounting or practice creative accounting. Wall Street loves constantly growing and stable earnings.

Why are the little people always wrong? Find out what the average investor is doing. Once you know, just do the opposite. They are not little people. It just refers to the ordinary investor who doesn’t have a lot of money. Will do the opposite theory work? Some people trade on inside information. There are those who like to participate in the market because they feel it makes them intelligent.

Part 3: The Pros

The Cult of Performance. These are the powerful people with enough information and money to move prices. Now, there is a lot of regulation. Is it even possible? There are many institutions, like mutual funds, pension funds and insurance companies. Stocks crashed in 1929. There was massive panic selling. There was a point where fund managers wanted huge growth and started buying growth stocks. Concentration and turnover seem to matter a lot. The higher the turnover, the higher the volume and the happier the brokers are. However, in the market, many are only concerned with short term performance and speculative behavior. Institutional investors tend to hoard shares and when it is time to exit, it might be difficult to find buyers. Sometimes, trading might be suspended as well. Remember that liquidity is the cornerstone of every market. Performance managers want a quick buck.

Lunch at Scarsdale Fats’. These are institutional investors. They get treated well. These bankers are treated to fat dinners. It is a networking event. Scarsdale wants to know more information from others. These are essentially lunch with commissions and many funds get invited.

Losers and Winners: Poor Grenville, Charley, and the Kids. Chartists tend to trade short term and very aggressively. Many investors want immediate results. Wall Street love firms who can meet earnings projections. When the market crashes through resistance levels, sometimes you will yourself, where is the bottom? Markets can be very irrational. Computer leasing stocks were damn hot in the past and could generate super-normal returns.

We live in an age of charts and computers, and the thing about charts and computer studies is that they show what is moving, and if everybody plays this game, then what moves is what is already moving. – George Goodman

But the market does not follow logic, it follows some mysterious tides of mass psychology. Thus earnings projections get marked up and down as the prices go up and down, just because Wall Streeters hate the insecurity of anarchy. – George Goodman

Timing, and a Diversion: The Cocoa Game. Timing is crucial, not just the financials of the company. You have get the stock ahead of others. Those who play the Game will know it is very difficult even when the markets are not favourable. At that time, the Cocoa Exchange was leveraged and unregulated. People could be involved in that when the stock market was bad. The price depends on demand and supply. This was the birth of forwards.

If you are in the right stocks at the wrong time, you may be right but have a long wait; at least you are better off than coming late to the party. You don’t want to be on the dance floor when the music stops. – George Goodman

Part 4: Visions of the Apocalypse – Can It All Come Tumbling Down?

My Friend The Gnome of Zurich Says a Major Money Crisis is on its Way. They are miners who work near gold and can be informants. He can predict when gold prices will rise. Some currencies are pegged to gold prices. However, governments and central banks might choose to unpeg as well. He is basically a cynic who believes governments can’t manage debt well and enter deficits and eventually crash.

If All The Half Dollars Have Disappeared, is Something Sinister Gaining on Us? Will there ever be an international currency? The issue is that governments are expected to care for their people in order to win votes, resulting in them over-spending. People have to believe in what their governments are doing and how they are spending. If not, the market will simply crash. Luckily, the apocalypse has never arrived.

Part 5: Visions of the Millennium

Do You Really Want to Be Rich? Should you ought to be rich? Do you want to be evaluated by your wealth? Has capitalism gone too far? What did Keynes think of the Money Game? Why do men continue to want to make money? That is because they have a purpose. They think long term and want to grow and forward their interests. He believed that future generations will strive more for virtue and sane wisdom than pure money. If you know the Game is not your thing, then jolly well stay away from it completely.


How to Worry less about Money by John Armstrong

There is a distinction between money worries and troubles. Worries are connected with imagination. Troubles are when you have difficulty paying your bill. Most advice for money problems is to find ways to increase one’s wealth. The more important to ask is ‘How much money do I need’. What will you be buying with that money? ‘What’s the link between money and the good life?’ Similarly, there is a difference between training and education. The way we have taught about money matters is more of a training than an education per se. Karl Marx didn’t believe money did any good on society. There are also schools of thought where money is viewed neutrally. Ask yourself, what is the role of money in your life? What is your equivalent theory of money?

Thinking about Money

What are money worries really about? My life will have a lot of pains and hassles? ‘Money will force me to spend a lot of time just making enough to get by’. ‘I’ll miss the good things that I long for.’ ‘Money is like a virus’. The important questions to ask are ‘What is the best way for me to get that money?’; ‘What are my economic responsibilities to other people?’ There are definitely underlying causes to one’s worries that must be addressed. Sometimes, people worry about things when they compare what they own with others around them. They don’t want to be judged by others. One should think hard before buying a new car. People worry once they compare themselves to admirable people. If your objectives and worries are vague, all the more you need to pay attention to them.

A Good Relationship with Money. Money brings a certain level of spending power. Instead of addressing the quantity of money, it is better to address your relationship with it and the feelings you have. Some form of angst is inevitable. The aim of adult life is to worry well.

You might grow up (as I did) in a grim environment and long to make enough money to escape it. But that can feel like losing your roots. Or, in order to make enough money to survive in a competitive world, you might feel you have to sell out and never devote yourself to the things that you wish you could focus on, like family, creativity, changing the world or simply cultivating your garden. – John Armstrong

Part III: The Secret Meaning of Money. Emotional baggage can cause problems. Some people feel that money means an enviable time together. A money solution is unlikely to solve a romantic problem. Money may not ease relationship tensions. Some people feel that they always want more and that what they have is never enough. Sometimes, it is important to confront your insecurities. Some people just want to earn and spend more than others so that they can feel better about themselves. Others may not want so much money as their money management skills are poor and the money often gets squandered away. People often view others’ self-worth based on their wealth. This is creepy indeed and should not be the case in society. Wealth can create social classes and strata. Sometimes, money can be seen as a form of goodness. Money should just be a neutral mechanism for exchange. Money can cause us to behave in strange ways. We need to improve our relationship with money as a whole.

How to Strip Off. Acknowledge that you treat money in strange ways. Associate some words with money. Do you associate hassles with a lack of money? Do you associate a lack of money with ‘I’ll never escape’? Your troubles will not simply go away with more money. Do not feel happy when others are unhappy. What’s your most embarrassing moment with money? What are your worst fears about money? Ask yourself these deep questions. Stripping away basically means clarifying one’s own relationship with money. How do we find people also interested in this conversation? You should try to look out for the following people. 1) People who encourage us to be realistic. Setting too high expectations might make you disappointed. 2) People who don’t use money as a way of humiliating others. Avoid these people at all costs. 3) People who don’t spread despair and resentment about money. 4) People who encourage good habits. 5) People who are open about their own economic experiences. 6) People who listen – and don’t project their situation onto yours. Do not use others’ lives as a model for your own. 7) People who open our minds to thinking more clearly about our situation, opportunities and difficulties.

What is Money? It is essentially a means of exchange. Barter trade happened because of this. Money can buy you possessions and experiences. How efficient do you use your money to turn it into possessions and experiences? How do you turn work into money? The problem is some people see education as earning potential or a painting as just a price tag. Do not view every possession just as money or the ability for it to make you more money. View your house as a home rather than an economic vehicle.

Another common fear is that even when there is enough money, one is not actually able to translate it into good enough possessions and experiences. Money on its own does not show you how to do that. – John Armstrong

The task of life is to translate efforts and activities that are inherently worthwhile into possessions and experiences that are themselves of lasting and true value. – John Armstrong

Money and the Good Life

Money as an Ingredient. Money is an instrument. It should be used efficiently and effectively. Understand the diminishing return in terms of happiness when you accumulate more money. Even you lead a glamorous lifestyle, it is possible to be depressed. Money cannot buy happiness. We should talk about flourishing and not happiness. Most people like to do things with others. Flourishing means doing things that are important to you, even if they might be unpleasant. It also means making the best use of our capacities and abilities. Be involved in things that are worthwhile. Money creates potential for flourishing. However, money is not the sole cause of flourishing. It is simply an ingredient. The important question is ‘How much do I need?’ What are your real objectives? What does money contribute?

Money can indeed buy things that make you feel serene: the plush hotel etc. But there are many possible sources of serenity, such as a good temperament, stable relationships, taking physical exercise, possessing a religious belief, listening to music etc. – John Armstrong

A good life is still a life. It must involve its full share of suffering, loneliness, disappointment and coming to terms with one’s own mortality and the deaths of those one loves. – John Armstrong

Jane Austen’s Theory of Marriage. Is money connected to love and sex? Love benefits from a healthy economic conditions. There are other foundations required for a good relationship. If you have a good salary, but have an extravagant lifestyle, you are unlikely to be rich. The important lesson to learn is that money is necessary, but not sufficient. It is important to marry someone of decent financial background. It is a crucial ingredient in marriage. Money worries can cause conflicts in a relationship.

Envy as Education. What if you have a dream but your current income level is far from achieving it? Take it seriously. Learn to be creative. Do not simply copy others. Think about the elements of your dream that can be incorporated in your life now even though you have less money. Try to reproduce the underlying virtues. Often, you don’t need radical changes in your life to feel happy.

When a person dies, we know we have to take the sorrow seriously. We don’t pretend that the person didn’t die or that it doesn’t matter. In a less intense but still important matter, we should mourn the loss of other things we love. – John Armstrong

Creating Order

Need vs Want. How important is that object in your life? What can it do for you? A violinist NEEDS a really expensive bow. This is because the bow has played a central role in that person’s life. Hence, meeting a need can be out of reach. However, it is a worthy pursuit as compared to a want. Some purchases will not help you to develop or flourish. How do you differentiate need from desire? How good will it be for this thing to enter my life? Do not simply tell yourself that if you can’t afford it, it doesn’t matter whether you have it or not. The trick is to work out your needs without taking into account the price of the items. There are higher needs that might enable you to flourish as an individual. Distinguish between middle and higher needs. Middle-order needs relate more to sociability and status. There is an indirect costs of higher needs. Do not do things just to gain status. Higher needs are not simply about craving for status. It is okay to envy someone, however, we must know exactly what aspects of the person we envy. We need to find the right type of company.

How Much Money Do I need? Instead of being realistic about what you can afford, be realistic about what you need. Write them down a table. This is a sober reality check. Then after it’s written down, ask yourself what can be done in order to get closer to meeting your true needs. You can live in a bigger house if you move to the suburbs. Is a holiday more important than presents? What things are good for my long-term well-being?

Price vs Value. Value is a personal judgement and it depends on your character, perspectives etc. Some people are resourceful, but that doesn’t make them stingy. Some of them have good taste and don’t follow fashion. Learn to be creative. Spending money is an art, not a science. Learn to pay attention to the hints around you to draw inspiration from. You can be creative.

Longing and Fear. Keep your house neat. Do not clutter. The fear has to be overcome. To me, the thought of organizing my money drawing makes me fearful. The solution is about money. I feel bad about my relationship with money. Labour can be dignifying if it leads to a grander aspect of existence. Spread the difficult task over a few days. Cultivate the art of tracking your domestic finance. There is indeed a beauty to neatness and clarity. When confronting a difficult task, it is best to do it in stages. There is beauty in going about our ordinary lives.

How to Make Money and be a good person at the same time

Having and Doing. Money is like a ‘virus’. For a child, he thinks that the more fun an activity is, the more good things flow from it. However, this doesn’t often happen in reality. Some children believe that money equals happiness. A lot of people want to make enough money and care about what they are doing too. We need to care about both having and doing simultaneously. If you want to maximize intrinsic good for society and through the course of it, you make a lot of money, that’s alright. It is very difficult to escape capitalism because it is so prevalent in society. However, we can be more hopeful over it. Is it so difficult to be a good person and to flourish financially?

What Rex Got Wrong and Other lessons. Is it possible to make money and meet the higher needs of humanity? Learn to pay attention to the cause of profits. Sometimes by commercializing something, you cheapen and degrade it. Commodification is a bad thing? Create an economic base. Standardization causes something to lack a soul. Industrialization has its benefits. We need to understand the ends, so that we will know what means to take. Constantly ask what is the good that is being served? Society needs to answer the question of what good does art serve. Money can be made in so many ways. It is important to ask how they made it.

My Place in the Big Picture

The Problems of the Rich. The desire for wealth is almost universal. However, the rich have their problems as well. Wealth from inheritance is pure lucky and it is through no effort on your own. If you receive it, you should not feel any superstitious sense of entitlement etc. Even wealthy people become envious over others. Having money might not free you completely. Rich people often feel like they can do whatever they want. Rich people have to fight off temptations as alcohol is detrimental to health etc. They feel they have the power to destroy others if they wanted to. Rich people don’t usually rise up to philanthropic examples of people in the past.

The Virtues of Poverty. Is there anything we can learn about it? This means indifference to possessions. Voluntary poverty might be good. Some people see possessions as corrupting. Being poor frees you from being preoccupied with getting and spending. Inner security is the key here.

The Intimate Relationship with Money. Money worries are vastly different from money troubles. We need to be more attentive to our experiences with money. Worrying less helps. Ask what does money mean to you.

How to Worry Less About Money_4




The Business Book (DK) (Part 2)

Culture is the way in which a group of people solves problems. Tradition, culture and structure are important for a company. Culture is a shared history of what the company has. It is a narrative. There are basically 5 dimensions of culture. They are 1) power distance; 2) individualism vs collectivism; 3) uncertainty avoidance; 4) masculinity vs femininity; 5) long vs short-term orientation. Power distance refers to distance in authority between managers and executives. Culture matters a lot. Organization culture is non-static and can change over time.

Emotional Intelligence is the intersection of heart and head. EQ is the ability to perceive, control and evaluate emotions. There are 5 domains to EQ. It is an essential trait in highly effective business leaders. They are 1) self-awareness; 2) self-regulation; 3) motivation; 4) empathy; 5) social skills. EQ can grow with age and experience. Emotional balance is a key factor in commercial success.

Management is a practice where art, science, and craft meet – Mintzberg’s management roles. Management roles fall into these 3 categories: 1) informational; 2) interpersonal; 3) decisional. Effective managers must use all three and know when to use them appropriately. Management is both an art and a science. Management is complex and multi-faceted.

A camel is a horse designed by a committee – Avoid Groupthink. We tend to nod in agreement even if we disagree. This is because we want to feel like we ‘belong’ to the others. Groupthink can be so strong that proper analysis might not be conducted at all. It encourages extreme risk taking. Managers must encourage all to talk and encourage dissent in order to avoid groupthink.

The art of thinking independently, together – the value of diversity. Males have the tendency to employ other males. Greater diversity means scope for creativity. Diversity can combat groupthink.

Making money work: Managing finances. Finance strategy has emerged in importance nowadays. Leverage is a double-edged sword. Is it the director who is responsible when things go wrong? Learn to ignore the herd instinct. There may be wisdom to listen to your customers. For instance, China has a huge potential. Management accountants work hard to derive accurate costing. ABC is a good way to do this. Financial accountants must play by the rules and abide by FRS and their principles. Often, companies are trying to make ‘money’ from ‘money’ rather than concentrate on their core operations.

Do not let yourself be involved in a fraudulent business. Learn to err on the side of caution. Consider rules plus morality as well. Do not inflate profit figures if you are an accountant. Prudent approaches must be made with regards to the provision of bad debt. Directors must be alert to any creative accounting being employed. IFRS relies more on principles as compared to rules-based US GAAP. Is mark-to-market accounting misleading in times of economic boom? No set of rules can govern ethical behaviour.

Executive Officers must be free from avarice. Managers can act in their own interests. They must not be opportunistic and simply interested in personal gain. Shareholders are now even more concerned about governance and gain.

If wealth is placed where it bears interest, it comes back to you redoubled – Investment and dividends. Dividends are more rare nowadays. Share buy backs are more common. In periods of high growth, companies should reinvest a great amount in order to grow the business. When growth is slow, companies should pay dividends. Apple only started paying dividends in 2013.

Borrow Short, Lend Long – Make Money from Money. However, this is a short term strategy. Invest in financial products. The treasury function emerged in the late 1970s. Speculation via derivatives can be risky indeed.

The Interests of the shareholders are our own – Accountability and Governance. Governance must be proactive and ethical in nature. Lines of responsibility are clear. Board members must be fully informed and work in the long term interests of business and shareholders. Board members must be alert. Many board members had no idea what risks the company faced. Good governance is necessary.

Make the Best quality of goods at the lowest cost paying the highest wages possible – your workers are your customers. Sale of stable groups are growing rapidly. Sometimes, your workers will also be your customers. This will be good. China is the biggest market for consumer spending. There is a lot of potential in this market. Bosses need to focus on workers’ delight and fulfilment more than ever. Encourage the workforce to manage themselves.

Utilize OPM other people’s money – Who bears the risk? In the event of liquidation, shareholders tend to lose out as they are the last to be paid. Staff might lose their job when the company fails. The pension funds might be wiped out and hence affecting employee welfare.

Swim upstream. Go the other way. Ignore the conventional wisdom. You need to have a contrarian view to make money. Public shareholders should not follow mass trends. Do not stampede to make takeover bids. This is because the company will tend to overpay. Do not buy other businesses for diversification sake when others are doing so. Avoid followership and imitate market innovators. Learn to swim upstream

Debt is the worst poverty – Leverage and excess risk. In the long run, taking leverage is not good. However, in the short term, it might help the company to grow. The optimal debt should be about 25 to 30%. Leveraged buy-outs exist in the market. For instance, LBOs rescued MGM Grand.

Cash is King. Profit vs Cash Flow. For fast growing companies, cash flow is more important than ever. Profit is an accounting concept. Those with weak cashflows can use overdrafts and supplier credit. However, in times of recession, cash is king. Companies must be able to tie over the period of negative cashflow in order to survive unscathed.

Only when the tide goes out do you discover who’s swimming naked. There is off-balance sheet risks. Not all liabilities may be reflected on the BS. Losses can be parked with subsidiaries or SPVs and not consolidated.

ROE is a financial goal that can become an own goal. ROE is vital. Share repurchases help to boost ROE. However, this results in a risky capital structure. Hence, ROE can be misleading at times.

As the role of private equity has grown, so have the risk it poses. PE involves loading debt onto the business, similar to LBO. Debt has inherent risk. Managers are pressured to perform to pay off the debt. Hence, there is more incentive for short term performance rather than long-term gain. Those who make PE purchases are usually institutional investors. The trick is to try to turn the company such that it becomes profitable.

Assign costs according to the resources consumed. Use ABC. Overhead costs can be vague in nature. ABC calculates the actual overhead costs. This allows the company to make better decisions. This is good for non-standard products. To do this, one needs to identify the cost drivers for each activity.

Working with a Vision – Strategy and Operations. Everyone should have a common objective. Strategy is vital. Companies must be nimble and change course if necessary. There is a need to balance long and short term objectives. Flexibility is important. Regulation is taking centre-stage now.

Turn every disaster into an opportunity. There are many success stories that emerged because of failure. There are opportunities in disasters. Analyze every failure and learn from them.

If I had asked people what they wanted, they would have said faster horses. The company that leads the way can dominate an industry even if they are copied. This is because people associate the concept with them first. This is known as first-mover advantage. Do things that no one else is willing to do. Being the first is everything. You need to get into the mind of your customer. Toyota created the Prius car.

The main thing to remember is, the main thing is the main thing. Protect the core business. Diversification usually does not bode well for companies. A business should focus only on what they are good at. Outsourcing some non-core functions is possible. The outsourced function must be managed well.

You don’t need a huge company – Just a computer and a part-time person (Small is beautiful). Internet had disruptive power. Google was phenomenal. eBay is a very successful auction house. Anyone can sell unique items on such platforms. Internet allows business to be run at a much cheaper cost. Cost and speed of delivery are important too. Customer service is increasingly important in this modern age. Feedback is always useful for business owners. Customization is possible for small businesses.

Don’t get caught in the middle – Porter’s Generic Strategies. Companies generally choose between cost leadership or differentiation. This is how companies develop a competitive advantage. For low cost strategy, companies might be worried that their idea will be copied. Bose is a company that pursues a differentiation strategy. A focus strategy is good to target a niche market. Ryanair is a typical low cost carrier. SIA pursues a differentiation strategy.

The essence of strategy is choosing what not to do – Good and bad strategy. Choosing what not to do is as important as choosing what to do. Good strategy should be developed from SWOT. Kodak is an example of a company which used bad strategy. They neglected the potential of the digital camera.

Synergy and Other Lies – Why takeovers disappoint. The purpose of merger and acquisition is to create synergy. The most reason why things don’t work is because the two companies cannot agree on a common strategy. There might be a mismatch in organizational culture.

The Chinese word ‘crisis’ is composed of two characters: ‘danger’ and ‘opportunity’. Crises can strike anywhere. Crisis management is important. Leadership must be swift and decisive. It is always crucial to care for the well-being of your customers. Sometimes, product recalls are necessary.

You can’t grow long term if you can’t eat short-term. There is a need to balance the two. It is a delicate balance. If you only think long term, you might not have the immediate capital to fund your business. It is important to preserve the core of the business and yet stimulate progress.

Market attractiveness, business attractiveness. MABA is a business framework. It is also known as the GE-McKinsey Matrix. This helps to plot the relative profitability of business units or products.

Only the paranoid survive. RIM did not innovate. It is normal to relax when things are well. Every business faces change. Intel had to reposition themselves when Japanese companies could produce memory chips at a lower cost than them. This is known as a strategic inflexion point. Leaders must make the right decisions during inflexion points or the business has a high chance of failure. Leaders need to look out for black swan events that might hurt the business. Keep asking ‘why’ till you get to the root of the problem. Managers must question processes. They need to constantly ask whether there is a better way of doing things. Victorinox started selling watches after its business for pocket knives were hit.

To Excel, tap into people’s capacity to learn (The Learning Organization). Companies need to be devoted in development and education. The community will benefit as a whole. Peter Senge made headway in his research. The two traits are discipline are personal mastery and mental models. The other three are team learning, systems thinking and building a shared vision. Turnover is a big problem in major organizations. This could be due to poor management practices. Honda is an example of a good learning organization. Those organizations which focus on learning have better hope for the future.

The future of business is selling less of more (The Long Tail). This means low volumes of an increasing large number of products. Customers are now buying niche items from online sellers. iTunes offers a wide range of music that no one else can compete with them. Physical stores can only offer a limited variety of items.

To be an optimist, have a contingency plan for when all hell breaks loose – Contingency planning. One must have an adequate plan to tackle a crisis. It is important to be able to manage disasters well.

Plans are useless but planning is indispensable. Ask what is likely to happen the next few years. Shell managed to diversify into other energy sources when there was an oil embargo.

The strongest competitive forces determine the profitability of an industry. They are the power of suppliers, buyers, rivalry among existing firms, threat of new entrants and threat of substitutes.

If you don’t have a competitive advantage, don’t compete. Companies can add value at any stage of the value chain. Companies must know how to analyse their value chain.

If you don’t know where you are, a map won’t help (The capability maturity model). Processes must be proactively applied and then managed and monitored. Continuous process improvement is crucial.

Chaos brings uneasiness, but it also allows for creativity and growth. Companies need a flatter structure with more flexibility. A company has to re-visit its strategy frequently. Workshops and team briefings are important.

Always do what is right. It will gratify half of mankind and astonish the other. There is morality in business. Companies may cheap because they want to boost performance. Some companies engage in price fixing etc.

There is no such thing as a minor lapse in integrity – Collusion. There is a fine line between collaboration and collusion. Accountability is important and must be emphasized.

The Business Book

The Economics Book (DK) (Part 1)

The book serves to give a better understanding on economics theories. The power of economics is felt everywhere. Economics is what moves countries. It is not just about numbers and graphs/charts. The subject is more of an art than science as it is driven by the rational/irrational behavior of humans. ‘The Wealth of Nations’ by Adam Smith in 1776 kicked start modern economics. Soon came the market economy. This is generated separated into macroeconomics and microeconomics. A hands off approach is known as laissez-faire. Others such as Karl Marx believed in state intervention. Neoclassical economics occurred in the 19th century. There are many other schools of thought now.

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability. – John Kenneth Galbraith

The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregards the first lesson of economics. – Thomas Sowell

Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. – Steven D Levitt

Let Trading Begin (400BCE to 1770 CE). Trading, even barter trading occurred a long time ago. Plato and Aristotle wanted to come up with a normative (moral implications) approach on an economy. In the 15th century, governments started to monitor fiscal surplus/deficits, imports/exports, taxes. In the 17th century, the stock exchange was established. In the 18th century, economics became a lot more scientific. This was when the macro-economy was born.

Property Should Be Private (Property Rights). Aristotle believes that private property will give people the incentive to trade and get rich. There are three different beliefs here. The first is that everything is common and that everyone can use them. The second is that the property be held and used collectively. The third is that property is private and that people can do as they choose. 3 reasons against public property (no one will maintain it, people have little incentive to trade, people will be selfish). Government can take over private property as well but usually the home owner will be compensated with the market price.

It is clearly better than property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition. – Aristotle

What Is A Just Price? (Markets and Morality). Some believe that prices are a function of supply and demand. In the past, it is believed that sellers get to fix their prices. The moral issue is that the seller gets excessive profits and deceive customers. Thomas Aquinas believed in a ‘just price’ setting. There are different views to this, depending on whether you are for government intervention.

No man should sell a thing to another man for more than its worth. – Thomas Aquinas

You Don’t Need to Barter When You Have Coins (The Function of Money). Kublai Khan used money in the 13th century. Money is ever-present in today’s society. It is hard for barter to work in the long term. ‘Money is transferable and deferrable’. There are two types of money: commodity (example gold coins) and fiat money (paper money).

Make Money from Money (Financial Services). It started off from the Medici family in the 14th century. The initial tools were to finance trade in commodities. The next was to open many branches, managed by different partners. The last was to accept customer deposits. Long ago, banks already dealt in foreign currencies. The economics of banking include lending wisely, gathering deposits, spreading risks to earn economics of scale. Banks must be careful to avoid ‘a run on the bank’ situation. Bills of exchange were developed to guarantee delivery of goods. Derivatives brought about the financial crisis of 2008. Banks engage in ‘network externalities’, meaning that they collaborate with each other to get more information. Co-operatives started (example is Grameen Bank, Rabobank). Bank failures can have serious implications on the economy. That is why regulation is in place to prevent them from going under.

A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. – Mark Twain

Money Causes Inflation (The Quantity Theory of Money). Jean Bodin came up with this idea. An increase in money supply increases inflation levels. This is because as people become richer, there is too much money circulating and not enough goods, leading to inflation. Real and nominal side of the economy emerged. People chase ‘real money’, not ‘nominal money’. MV=PT ‘P is the price level’; ‘T is the transactions that take place’; ‘M is the supply of money’; ‘V is the velocity of money (a constant)’. However, recent research has proven that velocity is not constant. V affects output and employment. A rise in interest rates will lead to rise in V. Quantitative easing is when central banks print money and buy government debt. This helps to reduce interest rates.

Inflation is always and everywhere a monetary phenomenon. – Milton Friedman

Protect Us From Foreign Goods (Protectionism and Trade). Limiting import of goods causes more money to be retained in an economy. Some believe in a free market, some believe in protectionism. There was causing that money outflow will lead to currency devaluation. Thomas Mun concluded that how the trade and payments balance out matters. His idea was to import and then value-add on the product before exporting it. Adam Smith believed the wealth of all nations as a whole mattered. Nowadays, many people believe in free trade. Hence, the FTAs signed between countries. Protectionism is quite rare nowadays.

The Economy Can Be Counted (Measuring Wealth). William Petty attempted to measure national income and GDP. He wanted to quantify different countries’ performances. GDP is the total value of all the goods and services exchanged for money within a country in a particular period. Other indicators have emerged, such as GPI (Genuine Progess Indicator), HPI (Happy Planet Index).

Let Firms be Traded (Public Companies). The purpose of the stock market was for more efficient capital allocation and diversification of risk. The East India Company was one such example.

Wealth Comes from the Land (Agriculture in the Economy). Wealth stems from production and the output of the farmer. Manufacturing can also produce surpluses. Theodore Schultz also believed in the power of agricultural development, especially in poor countries. Henry George believed that land should be held in common. However, Adam Smith believed more in labour than in land.

If we knew the economics of agriculture we would know much of the economics of being poor. – Theodore Schultz

Money and Goods Flow Between the Producers and Consumers (The Circular Flow of the Economy). The circulation of money is very important. The ‘multiplier effect’ was introduced in the economy. That is why government stimulus package is crucial. Quesnay believed in low tax and investing in equipment to generate more money. Macroeconomic performance via income accounting was born (income and expenditure flow). The classical model focuses on three factors: land, labor, and capital.

Private Individuals Never Pay for Street Lights (Provision of Public Goods and Services). Public good (hard to prevent someone from benefitting, by enjoying it you can’t diminish someone’s else enjoyment, can’t stop non-payers from using them). Government has to step in to provide these. Problem of ‘free-riding’. Non-excludability and non-rivalry.

Where the riches are engrossed by a few, these must contribute very largely to the supplying of the public necessities. – David Hume

The Age of Reason (1770 to 1820). A fresh approach of looking at the economy was needed. Adam Smith was central to this development. He believed in a free market, capitalism, with a limited role for the state. This was also the period of Industrial Revolution. David Ricardo was also very influential. He showed how less productive countries could benefit from free trade. The relationship between supply and demand was established.

Man is a Cold, Rational Calculator (Economic Man). Individuals are all self-interested and want to maximize well-being. Yet, they want to minimize cost in achieving the above. Cost-benefit analysis. People are rational. This is how behavioral economics comes about.

The Invisible Hand of The Market Brings Order (Free-Market Economics). Man, even without his knowledge, acts in the wider interests of society. This is known as laissez-faire (leave business alone) economics. When demand for a product exceeds supply, people will bid up the price. Suppliers will see this opportunity and compete to supply more products. This will eventually reach equilibrium. Same works for employment: also based on the invisible hand. However, recent criticisms to his theory is that market might only produce products for the rich and fair prices may change in times of scarcity. Innovation and competition can help lower prices. Consumption is the sole end and purpose of all production’ – Adam Smith. There are two types of labor ‘productive’ and ‘unproductive’. Division of labor results as there are more specializations. As there is more capital, there can be more savings in the economy. Later on, neoclassical economics emerged. Maths was used to seek a solution on how prices can reach equilibrium. Keynesian economics believed in government intervention. This debate has carried on till today.

The Last Worker Adds Less to Output than the First (Diminishing Returns). This is the diminishing marginal returns theory. It explains not only why it costs more to produce more, but also why countries struggle to get richer if their population expands without improvements in technology.

The earth’s fertility resembles a spring that is being pressed downwards where the effect of additional weights will gradually diminish. – A R J Turgot

Why do Diamonds Cost More Than Water? (The Paradox of Value). Hardly anything can be exchanged for water. However, a diamond doesn’t serve much uses but is worth a lot as it is in limited supply. Diminishing marginal utility. Water is abundant, but diamonds are scarce. One extra diamond has a high marginal utility and so commands a much higher price than an extra cup of water.

Make Taxes Fair and Efficient (The Tax Burden). Tax allows the transfer of happiness from one group to another. Efficiency means both effectiveness in collection and maximizing tax revenues. Fairness needs to be taken into account when designing a policy. In the past, people believed that only agriculture was value adding. Modern tax suggests final tax to goods sold to customers. Taxation on market failures is also common.

Divide Up Pin Production, and you get More Pins (The Division of Labour). Focusing on a task can mean more speed and skill. Therefore, leading to higher productivity. Although a division of labour might lead to poor job satisfaction. It is good to specialize in something. Nowadays, companies like to outsource certain parts of the process.

Every expansion of the personal division of labour brings advantages to all who take part in it. – Ludwig von Mises

Population Growth Keeps Us Poor (Demographics and Economics). Thomas Malthus argued that population growth puts a strain on resources. Social and economic reforms are very common. ‘Mathusian trap: higher living standards are always choked off by population growth.’ However, this is not true in modern society. People are becoming increasingly affluent. Technology and productivity has improved, leading to better standards of living.

Meetings of Merchants End In Conspiracies to Raise Prices (Cartels and Collusion). Competition drives down prices. Monopolies set prices by restricting output. Oligopoly is when a few suppliers collude. This is how cartels are formed. It is possible to use legislation like anti-trust laws to counter this. Small cartels are easier to manage. There is the possibility of self-interest in a cartel. A famous cartel is the OPEC. There is usually an enforcer in a cartel. Cartels are not common as it is hard to maintain.

Economists have their glories, but I do not believe that antitrust law is one of them. – George Stigler

Supply Creates its Own Demand (Gluts in Markets). Jean-Baptiste Say didn’t believe it was possible to over produce. Once a product is made, it creates a market for other products. This is the flow of money. People will have to spend the money that they eventually earn. ‘Supply creates its own demand’. Overproduction is very rare. On the other hand, Keynes believes that growth only comes with increased demand. He believed that if people saved money, it would no longer be in circulation. This would lead to a decrease in demand for goods, causing unemployment.

Borrow Now, Tax Later (Borrowing and Debt). It makes no difference whether the government borrows or taxes now. Borrowing is deferred tax. People are indifferent to the method used. This is the Ricardian equivalence (debt neutrality). The modern debate is that borrowing and taxes occur at different rates and timing. Life expectancy matters as well. It predicts that if government uses fiscal stimulus measures and spend more now, the people will receive heavy tax in the future. Therefore, people are indifferent now. This is not true. ‘There is a limit to which governments can borrow and tax’.

The Economy is a Yo-Yo (Boom and Bust). Under consumption and over production are the causes of economic turbulence. The economy is cyclical in nature. How to fuel the boom. People will get richer during a boom. However, when the supply exceeds demand then it will force companies to cut prices. This will lead to a downturn. Government intervention can help cool a heated economy.

Universal competition or the effort to always produce more, and always at a lower price…has been a dangerous system. – Jean-Charles Sismondi

Trade is Beneficial for all (Comparative Advantage). Time is essential. Make what you are good at doing best only. The others will make the reminder of the products. Then trade to exchange these goods. Setting price floors and restricting imports lead to deadweight losses. You will profit by doing what you are best at. Whether you are capital intensive or labor intensive, you will have an edge if you trade. Protectionism normally doesn’t work. It appears that those countries which have cut tariffs have achieved better growth.

Industrial and Economic Revolutions (1820 to 1929). Capitalism started. There was a shift from agriculture to industralisation. The supply and demand curve was developed. Marx believed in less of a market economy, but rather one where production is owned by workers and there was no private property.

How Much Should I Produce, Given The Competition? (Effects of Limited Competition). Duelling duopolies. The Nash equilibrium is making an optimal decision when you not know what the opponent will do or react. This is an example of game theory. The optimal output for a duopoly is more than a monopoly but less than perfect competition.

Phone Calls are Dearer Without Competition (Monopolies). A monopoly is generally defined as having more than 25% of market share. The problem of a monopoly existed almost 2000 years ago. John Stuart Mill believed that collusion is more common than a pure monopoly. Monopolies push up prices by limiting supply. The monopoly market can also enter the labor market. Monopolies produces deadweight losses and less consumer surplus. Sometimes, a monopoly can lower the price and also achieve greater revenue. They also have to advertise less as they are already quite large. They can engage in predatory pricing. Most countries have natural monopolies running the utilities. For some natural monopolies, fixed costs are so high that forcing them to lower their price might lead to losses. This is when the government needs to step in.

Whatever renders a larger capital necessary in any trade or business, limits the competition in that business. – John Stuart Mill

Crowds Breed Collective Insanity (Economic Bubbles). Bubbles occur when there is speculation, causing prices to veer from the fair value. This is dangerous as bubbles will eventually burst. “Let the buyer beware” is good advice. ‘Crowds breed collective insanity’. Never underestimate the power of mass media.

Let the Ruling Classes Treble at a Communist Revolution (Marxist Economics). Some places have planned economies. Marx believed in a different economic system. Feudalism was born. Communism will be brought about by revolution. He believed capitalism will eventually hit a downfall. Bourgeoisie vs the proletariat. Those who held production were ‘the ruling party’. He felt that a commodity’s value depends on the labor necessary. Companies will want to pay as little wages as possible. They will also seek to improve technology in the company. This often leads to less human involvement or a poor work environment. The ruling class will tremble once the working class have a revolution. Capitalism believed in the formation of monopolies. Socialism is when the majority of the people have the power. Marx believed in moving a planned economy based on common ownership. Modern society has proven Marx wrong. Death of communism.

The proletarians have nothing to lose but their chains. They have a world to win. Working men of all countries, unite. – Karl Marx

The Value of a Product Comes From the Effort Needed to Make It (The Labor Theory of Value). A certain amount of effort is needed to convert a raw material to a finished good. Marx had his labour theory of value. ‘All commodities, as values, are realized human labour.’ – Karl Marx. Ultimately a value of a good must be derived from the labor costs. Value is determined by the normal amount of labour we expect its production to take. Marx believed in seeing the fruits of your labor and going through the whole process, not just a tiny step of the process.

Prices Come From Supply and Demand (Supply and Demand). Value can be derived from the previous chapter. It needs to be fair for both the consumer and producer. The supply and demand curve was formed. ‘The Marshallian Cross’. The equilibrium is the intersection between the supply and the demand. Firms are price takers (assumption). There is a need to separate fixed and variable costs. Prices are not the only factor that affects demand. Customer tastes and preferences also matter. Producers can entice demand by advertising and giving promotions. Short term products need more price alterations to achieve equilibrium.

In every case the more of a thing is offered for sale in a market the lower is the price at which it will find purchasers. – Alfred Marshall

You Enjoy the Last Chocolate Less Than the First (Utility and Satisfaction). Consumers will only buy more of something if the price falls as they don’t enjoy as much utility from the subsequent purchases. Too much of a useful thing would be no use. Law of diminishing marginal utility. Alcohol is different. The more of which is consumed, the more people enjoy it. People make decisions based on risk appetite and not really their DMU.

When the Price Goes Up, Some People Buy More (Spending Paradoxes). These are Giffen goods. Demand rises when price rises. It has to be an inferior good, where people buy less of it when their income increases. This is because there are other sources/alternatives around. Substantially a large percent of their spending is on the product. No alternatives currently to the product. There is need to outweigh the substitution effect.

A System of Free Markets is Stable (Economic Equilibrium). Leon Walras attempted to establish equations for the general market equilibrium. This is similar to Newton’s three laws. The sum of all excess demand in an economy equals zero. His work builds on the supply and demand graph. The whole economy is interlinked. His equation was reduced to just price and quantities. Flaws in the model. His equations were too technical for most to understand. John von Neumann exposed flaws in his model. Arrow and Debreu, in the 1950s, derived conditions in which Walras’ model would hold. Partial equilibrium analysis is the basic.

The equilibrium re-establishes itself automatically as soon it is disturbed. – Leon Walras

If you Get a Pay Rise, Buy Caviar not Bread (Elasticity of Demand). Changes in income alter the level of demand. This is how the elasticity of demand came about. When prices for bread changes, demand doesn’t vary much as there are few substitutes. Other more expensive items might be more price-elastic. Engel’s law ‘demand for food is income-inelastic’. Demand for expensive items grew as quickly as the increase in income. Inferior goods are those when demand falls when prices increase.

Firms are Price Takers, Not Price Makers (The Competitive Market). This is due to perfect competition. There are a large number of firms. Every firm is selling the same product. There are no barriers to entry. An opportunity for excessive profit will drive more firms to enter the market. There is almost no industry in reality which can fit this model. The world is dynamic and not as flat and static as Marshall’s model.

Make One Person Better Off Without Hurting the Others (Efficiency and Fairness). Pareto efficiency. Pareto believed in ‘ordinal utility’ or relative happiness, rather than ‘cardinal utility’ or absolute happiness. ‘No one can be made better off without hurting someone else’ This is Pareto optimality or Pareto efficiency. Everyone is assumed to know what they want and want to trade to maximize their own utility.

The Bigger The Factory The Lower The Cost (Economies of Scale). Fixed costs is the same, variable costs is reduced. Average cost decreases. Specialization in labor and investment in machinery can aid this process.

The Cost of Going to The Movies is the Fun You’d Have Had at the Ice Rink (Opportunity Cost). This is known as opportunity cost. True cost include both direct costs and opportunity costs.

Economics brings into view that conflict of choice is one of the permanent characteristics of human existence. – Lionel Robbins

The value of something was determined by what had to be given up in order to get it. – Friedrich von Weiser

Workers Must Improve Their Lot Together (Collective Bargaining). There are more employees than workers, therefore they hold the balance of power. Therefore, workers need to act together to fight for their rights. There are unions present to help them with it. However, those jobs that are protected by the Union enjoy better benefits than those which are not covered by the Union.

If a group of workmen concert together, and send representatives to conduct the bargaining on behalf of the whole body, the position is at once changed. – Beatrice Webb, Sidney Webb

People Consume to Be Noticed (Conspicuous Consumption). Rich like to purchase expensive goods to flaunt their wealth and status. This is known as ‘Conspicuous Consumption’. Expensive goods or branded goods are also known as ‘Veblen Goods’.

Economic behavior is driven by psychological factors. – Thorstein Veblen

Make the Polluter Pay (External Costs). Government can step in and force polluters to pay. These are known as negative market externalities. This idea came from Arthur Pigou and the tax is known as ‘Pigouvian tax’. Governments use this to reduce carbon emissions. However, how much to tax can be big issue.