This past week I’ve had a slough of inspiration from women that I didn’t realize I admired so much.  While it’s not much about economics, I feel like sharing

” It’s four o’clock, do you know where your money is?”
-Maria Bartiromo (she’s on my desktop right now!)

You can’t help but be mesmerized by her presence on CNBC, where she’s worked since 1993.

Erin Burnett, the other “money honey”

Graduated Williams College, worked at Goldman Sachs, then made her path through different media outlets to finally being a rather newbie to CNBC.

Anna Schwartz, somewhat lost under the shadow of Milton Friedman

Received her master’s in economics at the age of 19 from Columbia University, it wasn’t long before she joined the National Bureau of Economc Research;  she joined Milton Friedman in writing ”A Monetary History of the United States,” which I’ll soon be getting to reading (it’s making for nice decoration on my desk!).

I swear I had more women I looked up to.  I think I’m just forcing it too much.  There are people in my life daily that I admire, but I’ll keep that to myself

Who gives you inspiration?

There’s nothing like blogging on a 6 hour delayed flight with the only TV on the plane that doesn’t work. Mind you, it’s JetBlue – I’ve sat on the plan an hour and a half before it took off.

This lends great time to actually getting some work done. Finally – can sit down and thoroughly think through what I’ve been wanting to write for a while.

In continuing this Friendman talk in his Selected Papers, there maintains this prudent versus reckless utility in the next chapter. He describes a person’s marginal utility to, in essence, gamble. Whether it be purchasing homeowner’s insurance, or buying a lottery ticket. A person is being charged a premium for the opportunity to ‘cash in.’ Unfortunately odds are against most.

But I’d like to take this a step in a different direction along with the perception of ‘prudent’ and ‘reckless’ behaviors, particularly pertaining to the financial markets. It is a strong belief of mine that going to Vegas and working in the stock exchange is one in the same. Granted, odds are different, but buying or shorting stock is placing your bets on personal profitability from a loss of the dealer (or company, security, or …government…). But there is a gamble, as there is a chance to profit, and a possibility of loss. Why is stock trading as a profession okay, but weekly trips to a casino seen as a personal problem?

Anyways – drawing that back with utility. Friedman quotes Vickrey saying:
“There is abundant evidence that individual decisions in situations involving risk are not always made in ways that are compatible with the assumption that the decisions are made rationally with a view to maximize the mathematical expectation of a utility function” (Friedman 28).
Individual decisions of risk are not exactly rational. Yeah we get that. Why pay a dollar every day for two weeks for the impossible chance of winning millions of dollars (only to be grossly over taxed)? Why not save that dollar and buy some hot tamales. That’s some utility I could actually enjoy. And it’s a safe bet – I will enjoy it. (I know – not apples to apples). My point is the dollar could be invested in something with guaranteed return, or at least return of more favorable odds.

But what if irrationality of the decision making wasn’t known to the decision maker? What if the gambler, or investor, believes that he’s making a sound decision based on his rationality?

One assumption that capitalism is based on is perfect knowledge. The markets are ‘perfect’ since knowledge is free flowing (granted if you lose based on stupidity and lack of research, that’s you’re own damned fault) and available. But not all knowledge is out there, not everything is known. Hence the purpose of the SEC, laws of insider trading, the growing graduate degree market for quantitative finance.

But seriously, if all entities acted perfectly – how could there possibly be perfection in knowledge? Seeing the current state of the markets, really, is there even the ability to fully research and anticipate investments? Who knew that you’d be paying the government to hold their debt?

Is there really rationality to analyzing a person’s own marginal utility curve towards gambling or investments? I don’t think so.

A quick post before a night out:

To balance out all the Keynesian reading, I’ve picked up a quick read: Milton Friedman on Economics: Selected Papers. The first chapter, his lecture for the Nobel prize = brilliant. And, well, a bit easier to digest after Keynes’ writing.

This quote particularly jumped out on me on inflation:

“The tendency for inflation that is high on the average to be highly variable is reinforced by the effect of inflation on the political cohesiveness of a country in which institutional arrangements and financial contracts have been adjusted to a long-tern “normal” price level. Some groups gain (e.g., homeowners); others lose (e.g., owners of savings accounts and fixed-interest securities). “Prudent” behavior becomes in fact reckless, and “reckless” behavior in fact prudent. The society is polarized; one group is set against another. Political unrest increases. The capacity of any government to govern is reduced at the same time that the pressure for strong action grows” (Friedman 16).

Interesting view back in 1977, huh? While talking about the risk of high inflation, he writes as if we’ve gone through this ish already. Currently, risky behavior – subprime borrowers, mortgage owners in general mind you, auto makers, investment banks – is getting assistance! Rewarded, even. Homeowners are now more apt to walk away (hell – I’m tempted to not pay my debts too!) thinking the TARP money will save their asses in the view of the bank. Auto makers are possibly dipping their hand in the cookie jar. Man, and now prudent investors are getting screwed! With their faith placed into the hands of the government, no longer are they worried about minimal interest baring investments. They want safety! (ahem – check with your bank – your money may be fully insured). Prudent investors are in theory paying the government for it to borrow their money.

Does anyone see something a bit frightening? The government borrowing free money to lend failed concepts. Ecuador has defaulted, California nearly bankrupt. Does anyone remember that there were budget issues with New York and Massachusetts? These states that are looked to as leaders in the union. Mind you, states can not go into debt, they must balance their books, but the federal government has that freedom. These states though are just an indication of what’s going on in the local level that may affect the federal level – that may affect these prudent investors.

My advice – if concerned with safety, don’t give the government your money right now. if concerned with returns, well stay away from Hedge funds. Faith in those should no longer exist.