Inequality

Rich is now defined as having 30 million dollars

The bottom 60 percent has negative net worth.

At the bottom money can buy happiness

Happiness by survey  vs.  GDP per capita

from Page Model Thinking Course

Life is a series of financial shocks.

Illness

Disability

Death of a spouse

A child

College

Unemployment

Retirement

Liability

Insurance is the pooling of risks to limit random gratuitous inequality

Health insurance

Disability insurance

Life insurance

Unemployment insurance

Social security

Liability and homeowners

Workers Compensation

Bankruptcy was an improvement of the ancient Greek method of becoming a slave for 3 years to ones creditor for non-repayment.  Student debt is now not dischargeable by bankruptcy   

OYC Capitalism Course

The utility of money is an S curve.  This means at the bottom there is little utility to getting a few dollars.

Incentives at the bottom are different.

So a Starbucks treat is a rational choice to saving.

In the US  food, shelter, healthcare, and  insurance are considered options.

Government plays the major role in covering risk through tax and welfare and education

(Government is essentially an insurance company with an Army - Krugman )

Charity fills some of the gap

Robert Owen coined the term socialism to pool risk.   

He tried creating New Harmony, Ind.   Where everything was shared and it didn’t work.

Piketty Model

 if R >g inequality will increase.

Economics of Inequality 

Thomas Piketty

Deng Xiaoping  -  “we are all going to get rich but some will get rich first.”

 John Oliver on the subject

These are some excellent resources to learn computer coding from general to specific for ios.  I ran across that are on iTunes U and  You Tube

The first three  are basic computer courses

Harvard CS50  2013 

Programming Methodology  Standford

Object Oriented Programming Swinburne University

Developing ios 7 Apps for iPhone and iPad   Stanford

Advanced iPhone Development  2010  Madison Area Technical College 

Swift Programming Tutorial 

A helpful book is Sams Teach yourself ios 7 Application Development although now you would probably want to start with Swift which is easier.   You can download the free Swift book from Apple.

Why we have the Affordable Care Act  (ACA)

Insurance or the pooling of risk should shield people from the financial risk of disease.  Unlike, other types of insurance, the healthcare marketplace has some unique problems including moral hazard and adverse selection.    With  asymmetric information, healthy people tend to round their low risk estimation to zero and drop out of the insured pool, which raises the average cost to insure everyone left to a level above that which low risk people will pay.   On the other hand, when insurance companies assess applicant risk and underwrite in order to price profitably, 1 in 7 applicants prior to the ACA were  rejected for individual health insurance. 

 Like electricity, phone, and cable markets the healthcare marketplace is not competitive but consist of local monopolies.   Other problems include that people can not assess their utility (probability of loss times the amount) , they aren’t aware of taxes, and that the interest of future generations is not reflected in the market.

Most people get insurance from their employer sine the insurance benefit is not taxed and employers generally have a healthier risk pool.  Most large companies self -insure their risk.   The risk is that employees who get sick loose their jobs and then their insurance. 

One original health insurance model was that insurance companies would offer pairs of insurance policies.  The healthy would buy the less expensive and less generous plan, which the sick would avoid.  That is how the market would segment.   Experience showed many comprehensive plans were not profitable due to adverse selection.  

If the average cost is higher than the demand curve the market brakes down

The ACA has been implemented and there is a lot of complaining by some.  So why do we have this.  It was the reaction to a problem.  15% of us didn’t have healthcare insurance and 13% of us were underinsured.     Healthcare costs were increasing at an unsustainable rate and expected to grow to 35% of GDP.  

            In 1963, the economist Kenneth Arrow predicted medical insurance would increase the demand for medical care.   The Rand experiment and Oregon experiment showed that providing health insurance increases annual spending by 25%.   Rand showed people spend less up to their stop loss limit.  However the amount is 25% less than the  predicted amount because people foresee that at the end of the year their marginal cost of healthcare is zero.  High deductible plans often have a self-pay to $3000 and then the insurance pays.   

The provision of healthcare insurance increases moral hazard and the price and quantity used but the lack of healthcare insurance leads to under utilization and a lower quality of life.   Leaving Medicaid to the states leaves areas of third world healthcare access with third world healthcare outcomes in poor areas of the US. This contrasts with Rwanda which is able to provide a uniform level of basic healthcare throughout the country.

            The growth in healthcare spending led to to an increase in investment and development of new technology.   The demand increase was led by these improved technologies with their low cost to patients and the moral hazard of providers who are rewarded for their use.   Provider side moral hazard is demonstrated by the 15% drop in Medicare hospital length of stay with the introduction of DRG financing which paid a fixed amount for each hospital admission.  ACA does try to reduce cost buy encouraging Accountable Care Organizations, which would provide care at a fixed cost and by taxing luxury health plans. 

            Thus we have multiple problems including the rising cost of healthcare, unequal access and distribution and lack of social services which lowers US healthcare statistics to that of Cuba, and that without an individual mandate that makes everyone pay into the system people won’t buy healthcare insurance until they are ill.   The ACA is one improvement step but not the final answer.   

           

I recommend  Andrew W. Lo’s Mit Finance course on I tunes U. Lecture 19

Behavioral Finance :   Watch the one on efficient markets 2

Are markets efficient?  Buffett says clearly no. They are subject to animal spirits.    Market efficiency requires rationality which comes and goes in waves.  Behavioral finance says people suffer from loss aversion, overconfidence, overreaction, herding, and mental accounting.

Daniel Ellsberg,  most famous for releasing the Pentagon Papers in 1969 came up with the Ellsberg paradox.    People will pay less for a gamble with less clear odds.   When there is uncertainty about risk people shy away. We are hard wired to avoid things we don’t understand because these could kill you, to avoid hidden crocodiles.  That is why when markets get scary people shy away although the expected return is increased.

Frank Knight looked at why entrepreneurs are paid so much.  He decided that it is because they take on uncertainty and not just risk.   Uncertainty is the risk that no one can quantify e.g. Nanotechnology. 

Lastly, people tend to see only what they are looking for. 

Since people are unable to assess odds, they are susceptible to be Dutch Booked.

It is though that his provides a limit to irrationality.  Smart people will take advantage and the market will correct.   An example is arbitrage. 

Efficient market folks feel that market forces will force people to be rational if there are enough rational people around.

However Keynes said the market can stay irrational longer then you can stay solvent. 

Antonio Damasio, a neurosurgeon, wrote a book DescartesError in which he argued that rationality stems from emotion.   He describes a patient who had a brain tumor removed.  Although he tested normally in math or logic he was unable to function in the world and quickly lost his job.  After the surgery he had no emotion reactions as shown by eye blink tests.   You have to be able to feel to act rational.

This relates to the triune brain.    The reptile brain regulates heart rate and vital functions. The mammalian brain sits over this and it regulates fear, greed, love, and emotion.   The hominid brain or neocortex is responsible for language, math and logical deliberation.    Under the stress  of shock such as loss of blood the reptile brain shuts last.   People faint but keep breathing.   In fact you can be brain dead and continue breathing.  Of the remaining brains the hominid brain shuts down first when under stress.   Evolution favors running from thetiger.   Experiments have shown under stress or pain the neocortex does not resume normal function for hours after an insult.  Under stress, body shunts blood away from the cortex.   When stressed people cannot use the cortex and don’t think. 

That is why love makes you stupid.

Emotion is necessary for rationality but too much emotion impairs rationality.

Best advice:  Be clear about your goals.  Decide what you want to achieve and ask will my current actions help or hinder the objectives. 

Lo developed the Adaptive Market Hypothesis

He says that prices in the market reflect available information and the number of species in the economy.  Species means professionals, pension managers, hedge fund managers, and individual investors.    When people are stressed either positive or negative, they are not rational. 

This theory takes a biological view of markets.  We are both creatures of our rational brains and emotional brains.

Adaptive market theory properties are that:

Individuals act in their self-interest

They make mistakes

They learn and adapt

Competition drives adaptation and innovation

Natural selection shapes the market ecology

Evolution determines market dynamics

It takes negative feedback to cause us to learn and develop adaptive heuristics or thought process shortcuts . 

The implications of the Adaptive Market Hypothesis are that:

Risk reward is not stable because individual preferences are not stable

Risk premiums are time varying. 2007 is different from 2008

Limited arbitrage (free lunches) exist from time to time 

Strategies wax and wane

Adaptation and innovation are key to survival

Survival is all that matters

Market efficiency goes in cycles that depend on the population of investors that are interacting with each other.   These cycles can be anticipated and perhaps  some profit can be made.