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🔗 Finance & Investment 🔗 Economics

In finance, the greater fool theory suggests that one can sometimes make money through the purchase of overvalued assets — items with a purchase price drastically exceeding the intrinsic value — if those assets can later be resold at an even higher price.

In this context, one "fool" might pay for an overpriced asset, on the assumption that he can probably sell it to an even "greater fool" and make a profit. This only works as long as there are new "greater fools" willing to pay higher and higher prices for the asset. Eventually, investors can no longer deny that the price is out of touch with reality, at which point a sell-off can cause the price to drop significantly until it is closer to its fair value.

🔗 Economics

The men's underwear index (MUI) is an economic index that can supposedly detect the beginnings of a recovery during an economic slump. The premise is that men's underwear are a necessity in normal economic times and sales remain stable. During a severe downturn, demand for these goods changes as new purchases are deferred. Hence, men's purchasing habits for underwear (and that of their spouses on their behalf) is thought to be a good indicator of discretionary spending for consumption at large especially during turnaround periods.

This indicator is noted for being followed by former Federal Reserve Chairman, Alan Greenspan.

🔗 Environment 🔗 Agriculture 🔗 Economics 🔗 Futures studies

A Malthusian catastrophe (also known as Malthusian check, Malthusian crisis, Malthusian spectre or Malthusian crunch) occurs when population growth outpaces agricultural production.

🔗 Climate change 🔗 Economics 🔗 Electrical engineering

Different methods of electricity generation can incur significantly different costs, and these costs can occur at significantly different times relative to when the power is used. The costs include the initial capital, and the costs of continuous operation, fuel, and maintenance as well as the costs of de-commissioning and remediating any environmental damage. Calculations of these costs can be made at the point of connection to a load or to the electricity grid, so that they may or may not include the transmission costs.

For comparing different methods, it is useful to compare costs per unit of energy which is typically given per kilowatt-hour or megawatt-hour. This type of calculation assists policymakers, researchers and others to guide discussions and decision making but is usually complicated by the need to take account of differences in timing by means of a discount rate. The consensus of recent major global studies of generation costs is that wind and solar power are the lowest-cost sources of electricity available today.

🔗 Economics 🔗 Business

The principal–agent problem, in political science, supply chain management and economics (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent"), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard. Issues also arise when companies have an incentive to become increasingly deferential to management that have ownership stakes. As shareholders are dis-incentived to intervene, there are fewer checks on management. Issues can also arise among different types of management.

Common examples of this relationship include corporate management (agent) and shareholders (principal), elected officials (agent) and citizens (principal), or brokers (agent) and markets (buyers and sellers, principals). Consider a legal client (the principal) wondering whether their lawyer (the agent) is recommending protracted legal proceedings because it is truly necessary for the client's well-being, or because it will generate income for the lawyer. In fact the problem can arise in almost any context where one party is being paid by another to do something where the agent has a small or nonexistent share in the outcome, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs.

The principal–agent problem typically arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in their (the principal's) best interest, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe (see moral hazard and conflict of interest). Often, the principal may be sufficiently concerned at the possibility of being exploited by the agent that they choose not to enter into the transaction at all, when it would have been mutually beneficial: a suboptimal outcome that can lower welfare overall. The deviation from the principal's interest by the agent is called "agency costs".

The agency problem can be intensified when an agent acts on behalf of multiple principals (see multiple principal problem). When one agent acts on behalf of multiple principals, the multiple principals have to agree on the agent's objectives, but face a collective action problem in governance, as individual principals may lobby the agent or otherwise act in their individual interests rather than in the collective interest of all principals. As a result, there may be free-riding in steering and monitoring, duplicate steering and monitoring, or conflict between principals, all leading to high autonomy for the agent. The multiple principal problem is particularly serious in the public sector, where multiple principals are common and both efficiency and democratic accountability are undermined in the absence of salient governance. This problem may occur, for example, in the governance of the executive power, ministries, agencies, intermunicipal cooperation, public-private partnerships, and firms with multiple shareholders.

The relationships between investment managers and corporate management is an especially common example of the principal–agent relationship. There are several drivers of agency problems that affect investment managers of index funds and mutual funds include. First, investment managers receive a fraction of the benefits resulting from stewardship activities while having to handle all the costs. competition among investment managers is can also contribute to agency problems.And, lastly, another driver of agency problems is that investment managers can be heavily influenced by private incentives provided by the managers of corporations.

Various mechanisms may be used to align the interests of the agent with those of the principal. In employment, employers (principal) may use piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or the threat of termination of employment to align worker interests with their own.

🔗 Economics 🔗 Philosophy 🔗 Philosophy/Logic

In economics, hyperbolic discounting is a time-inconsistent model of delay discounting. It is one of the cornerstones of behavioral economics and its brain-basis is actively being studied by neuroeconomics researchers.

The discounted utility approach states that intertemporal choices are no different from other choices, except that some consequences are delayed and hence must be anticipated and discounted (i.e., reweighted to take into account the delay).

Given two similar rewards, humans show a preference for one that arrives sooner rather than later. Humans are said to discount the value of the later reward, by a factor that increases with the length of the delay. In the financial world, this process is normally modeled in the form of exponential discounting, a time-consistent model of discounting. A large number of psychological studies have since demonstrated deviations in instinctive preference from the constant discount rate assumed in exponential discounting. Hyperbolic discounting is an alternative mathematical model that agrees more closely with these findings.

According to hyperbolic discounting, valuations fall relatively rapidly for earlier delay periods (as in, from now to one week), but then fall more slowly for longer delay periods (for instance, more than a few days). For example, in an early study subjects said they would be indifferent between receiving $15 immediately or $30 after 3 months, $60 after 1 year, or $100 after 3 years. These indifferences reflect annual discount rates that declined from 277% to 139% to 63% as delays got longer. This contrasts with exponential discounting, in which valuation falls by a constant factor per unit delay and the discount rate stays the same.

The standard experiment used to reveal a test subject's hyperbolic discounting curve is to compare short-term preferences with long-term preferences. For instance: "Would you prefer a dollar today or three dollars tomorrow?" or "Would you prefer a dollar in one year or three dollars in one year and one day?" It has been claimed that a significant fraction of subjects will take the lesser amount today, but will gladly wait one extra day in a year in order to receive the higher amount instead. Individuals with such preferences are described as "present-biased".

The most important consequence of hyperbolic discounting is that it creates temporary preferences for small rewards that occur sooner over larger, later ones. Individuals using hyperbolic discounting reveal a strong tendency to make choices that are inconsistent over time – they make choices today that their future self would prefer not to have made, despite knowing the same information. This dynamic inconsistency happens because hyperbolas distort the relative value of options with a fixed difference in delays in proportion to how far the choice-maker is from those options.

🔗 Economics 🔗 Business 🔗 International development

The O-ring theory of economic development is a model of economic development put forward by Michael Kremer in 1993, which proposes that tasks of production must be executed proficiently together in order for any of them to be of high value. The key feature of this model is positive assortative matching, whereby people with similar skill levels work together.

The name comes from the 1986 Challenger shuttle disaster, a catastrophe caused by the failure of a single O-ring.

Kremer thinks that the O-ring development theory explains why rich countries produce more complicated products, have larger firms and much higher worker productivity than poor countries.