Economics Newsletter Edition #26

Volume 1 | Issue 1 7.12.2022

Dubai Keynes Society Newsletter

It is better to be roughly right than precisely wrong John Maynard Keynes

This term’s Newsletter is organised by Eun Soo Park

7 Is It Ever Possible to Escape the Poverty Trap? (1) …………………………………………………… 8 Is It Ever Possible to Escape the Poverty Trap? (2) …………………………………………………… 9 Can the New Prime Minister Rishi Sunak fix Britain? (1) ………………………………..………… 10

Is the Promise of Prosperity of Hosting the World Cup a Myth? (1) …………..…………………… 11 Is the Promise of Prosperity of Hosting the World Cup a Myth? (2) ……………………..………… 12 Is the Promise of Prosperity of Hosting the World Cup a Myth? (2) ……………….…….………… 13

Behavioural Economics: Nudge …………………………………………………………..…………… 14

Game Theory: The Prisoner’s Dilemma (1) ……………………………………….….…….………… 15 Game Theory: The Prisoner’s Dilemma (2) ……………………………………….….…….………… 16

Editorial Note

As we approach the winter break, we have looked back on a hectic but rather successful term for the Keynes Society. It was a pleasure learning, teaching, and discussing a wide range of economic topics with students from all year groups. We have held a plethora of sessions ranging from "Environmental Economics" to "Admissions to the top business and economics programs".

We would like to thank all of those who have contributed to the ongoing success of the society, as well as the pupils and teachers who have consistently attended and actively engaged in the sessions. Finally, Jasim, Danyaal, and I would like to sincerely thank Mr. Christopher for guiding and advising us through the start of our journey as Heads of DKS.

Please refer to our weekly emails for any recordings of previous sessions!

"DKS has given me the opportunity to apply the theoretical knowledge I have learned in Alevels to real-world problems. Furthermore, it has enabled me to explore the subject in greater depth and go beyond the textbooks!"

-Aryaansh

JOHN MAYNARD KEYNES

John Maynard Keynes (1883 1946), an early 20th century British economist, best known as the founder of Keynesian economics and the father of modern macroeconomics

Most influential work: The General Theory of Employment, Interest, and Money → advocates government intervention as a solution to high unemployment.

COP 27: Is Progress Being Made?

Sitting in the Shikarpur district of Sindh, Pakistan, Baharah, 20, watched her home turn into rubble this October. Due to major flooding, her house collapsed, a wall falling on her son. In the span of a month, not only did she lose her only form of shelter but also her loved ones.

When we hear news about Climate Change, it can be easy to trivialize the extent of the issue. Hearing "33 million people were affected" in the Pakistan floods, unfortunately, is often overlooked. However, if we think about this in detail, that is 33 million people children, mothers, teachers, and fathers. These are people who, like us in DC, have had their most prized possessions stolen as a result of the effects of climate change.

For these vulnerable people (both now and in the future), it is important we come together and take concrete environmental action to mitigate the effects of Climate Change. A COP was put in place to do this.

Firstly, what is COP?

World leaders, firms, and climate activists all in one arena this is the scene at COP. COP is an international climate conference meeting held each year by the United Nations. It is short for "Conference of Parties", meaning those countries that joined are "parties to", in legal terms, the international treaty called the U.N. Framework Convention on Climate Change. (UNFCC) Countries host an annual meeting at which government representatives report on progress, set intermediate goals, agree to share scientific and technological advances that benefit the entire world, and negotiate policy. This year, COP took place in Sharm El Sheikh, Egypt.

https://www.climate.gov/news

features/understanding climate/what cop

In theory, this event sounds magnificent. However, I will be direct and get right to the point. COP27 had several structural issues, which made progress challenging.

First, geopolitics COP this year had to account for the Russia Ukraine War. Retroactively, many countries have been dependent on Russia for their gas supplies. However, with Russia straining pipeline supplies of gas, world leaders have been preoccupied with rising energy prices and the escalated cost of living crisis. Furthermore, COP 27 took place in Egypt, a natural gas exporter and frequent recipient of funds from Gulf Oil countries.

This manifested into two main areas of contention:

a) Dominance: in conversations, oil and gas producing nations became more influential at COP27. There were several complaints made against Egyptian officials, claiming sympathetic treatment was given to fossil fuel producers.

b) Renewables moving out of the picture the Arab group of nations and Russia, throughout the whole conference, avoided wording that emphasized the need for renewable power.

Considering the aim of COP is to minimize emissions, a lack of focus on low emission energy sources has been striking for the environmental movement.

Second, there is a lack of concrete action. A major area of concern was that a lot of pledges were either delayed or lacked logistics. For example, at the end of the event, a ‘loss and damage’ fund was launched to dedicate towards climate action; this made headlines globally. However, there have been no concrete details about how large the funding stream will be, who will pay, and critically, who will control and manage these funds. Currently, only 10% of climate finance reaches local communities, and the A new facility would need to address this, which it has failed to do. Moreover, the COP 27 agreement has been unable to go beyond the 2021 Glasgow Climate Pact. This year’s text has announced no new targets or commitments. Instead, there has been a request for new country pledges for COP28 a year’s delay. This yet again threatens the goal of limiting temperature rises to 1.5 degrees Celsius, established seven years ago in the Paris Agreement.

Third, timing: week one of COP 27 took place during the US Midterm elections. Week two occurred with the G20 summit in Bali. As a result, many world leaders were unable to attend or could only attend for a limited time. For example, Biden could only arrive once the midterm elections were completed. In addition, this also meant that media attention was divided. The COP is usually known for attracting the most media attention; however, the timing of other significant events diverted attention.

To summarize, COP 27 had many issues. The lack of environmental dominance and prioritization in this conference rendered the event counterproductive. COP 28 is set to take place in Dubai will we see a positive change by next year? Well… that is for another article.

Will Economics Be Replaced by Artificial Intelligence?

Artificial intelligence (AI) is becoming an increasingly prominent part of the global economy. With multifaceted use in manufacturing, agriculture, and now services, the media seems to push an image of the world being taken over by robots. The question is, will occupations such as economists be taken over too?

Artificial intelligence (AI) can be defined as "the study of the modelling of human mental functions by computer programmes" and is used in the field of economics through the advantages produced by machine learning and being able to condense mass data, which economists are able to manipulate to create predictions. Because of the increasing quantitatively rigorous aspect of economics following the 20th century, there has been greater emphasis on the use of AI as the key tool to create precision and accuracy, which is crucial for the movement towards focusing on socioeconomic planning rather than wasting time on making calculations. Policies are now becoming motivated more based on statistics and figures rather than political doctrine as before. Thus, it does seem likely that economics will be replaced by these machines, which seem to do the job of predicting based on trends faster and more precisely than humans can, being able to run statistics and compile information that no longer needs to be curated by economists. But is this likely?

The answer: no

At its core, economics is a social science, focusing on the ways that MONEY is organised within society. It requires nuance that can only be undertaken through an understanding of human and emotional logic. Although, through machine learning, multiple complex equilibria can be found, it will ultimately be up to the human economist to decide which one is most suitable to use. In essence, economics and AI are complements, not substitutes.

As seen through the increasingly popular field of behavioural economics, assumptions of complete rationality, homo economicus, and habits fitting neatly into models are now being challenged. Statistics are unable to anticipate political power struggles and changes in policymaking that affect consumer behaviour. Friedrich von Hayek challenged the argument for AI by warning of the "dangers associated with an engineering mentality in economics"[1], by prioritising efficiency and making assumptions, AI seems to neglect the most crucial part of economics, society. In policymaking, it is not just what the theory says, but also how it should be applied given the social context. There is no one size fits all in economics, and although statistics do help to facilitate the pursuit of a final answer, it ultimately falls upon the knowledge about people and behaviour that characterises the study of economics.

1 Collins Dictionary (2022). Artificial Intelligence. Collins Dictionary. HarperCollins Publishers. https://www.collinsdictionary.com/dictionary/english/artificial intelligence

1 Bickley, S.J., Chan, H.F. & Torgler, B. Artificial intelligence in the field of economics. Scientometrics 127, 2055 2084 (2022). https://doi.org/10.1007/s11192 022 04294 w

Bhing Bhing Turongpun

The future of economics seems to be one which isn’t replaced by AI, but rather one which works to exploit the benefits of it. Despite our descent into technology as a society, humans continue to act irrationally and unpredictably, and so, while robots seem to take over in restaurants, serving food, it is highly unlikely that they will be taking the seats of the likes of Keynes in the near future.

Is It Ever Possible to Escape the Poverty Trap?

Imagine this. You are unemployed and have been seeking work for months. To some extent, government benefit programs have helped you cover the cost of necessities: rent, utilities, and food, but you are barely getting by. Finally, you hear back about a job application. You've received your first paycheck since months, and things seem to be turning around. But there’s a catch. Your new job pays just above the threshold to discount you as living in a poverty stricken state and enough to disqualify you from the benefit programs. To make things worse, you have to pay for transportation to work and childcare while you’re at the office. Despite finally finding a job, it seems as though money is falling out of your wallet rather than into it. Somehow you have less money than when you were unemployed. In a nutshell, this describes the demoralizing situation of the poverty trap.

The "poverty trap" can be understood as a set of self reinforcing mechanisms whereby countries start poor and remain poor: poverty begets poverty, so that current poverty is itself a direct cause of poverty in the future Furthermore, this situation depicts one where workers who earn low income are disincentivised from working in order to earn extra income, because it would result in having to either pay higher tax or lose some of their benefit payments. Ultimately, this perpetuating situation occurs for generations, and society is worse off.

Why does such a spiralling mechanism, which forces people to remain poor, exist? Essentially, the reasons as to why the poverty trap exists are a compromise of far more than low income; the inability of people to get capital to acquire basic things or meet their needs, lack of capital or limited access to capital, corrupt governments, poor infrastructure, violence, natural disasters, severe environmental conditions, poor health and education are all major factors that contribute to the persistent, self reinforcing conditions of the economy. This results in an underdeveloped economy which is stuck in a viscous cycle of poverty.

What is the importance of this? Well, simply speaking, the poverty trap hypothesis has major policy implications. Programs like the job seeker’s allowance, provision for the poor, and universal credit only go to those below a certain income level who are eligible for benefits, therefore limiting government costs and ensuring that only those who are in need of aid acquire it. Therefore, once you have passed the qualification agents, you are no longer entitled to such benefits. We all know that economic agents are rational. They weigh their costs and benefits before making decisions that will, in turn, provide the most satisfaction. If economic agents are aware that they will gain no benefit from working, they will stop looking for work, putting them at the epicentre of the return to government assistance in order to circumvent the problem of the demoralising situation earlier mentioned.

This raises the question of whether it is possible to escape the poverty trap. Although there have been some proposed solutions, none have effectively eradicated poverty altogether. Some solutions include the continuation of receiving benefits for a given period of time, which phases out gradually as income increases and people get financially stable. Furthermore, the introduction of a universal basic income a relatively newly proposed notion would permit all citizens of a given population to regularly receive a legally stipulated and equally set financial grant paid by the government. This would increase the stable income floor below, below which no one can fall, preventing many from falling into poverty in the first place. Yet, this is highly hypothetical and would incur a tremendous opportunity cost, reduce the inventive to work, and allocate extra money to those who don’t "need" it. The most reasonable and short term solution put forward is the improvement of government services and the increased provision of benefits such as education, childcare, and medical care equally across society.

Despite this, there have been some interesting cases where economies have successfully escaped the poverty trap. For example1, China introduced new methods of data collection and analysis to map out coevolutionary processes of development, identified challenges involved in making

adaptation work, and thereby suggested the sources of adaptative capacity Instead of conceptualizing countries and locales as fixed points, China presented each unit as a moving trajectory made up of multiple points that are connected over time. However, it is important to recognize that China is an anomaly, and in reality, very few countries have been able to escape the poverty trap

To conclude, although the world has seen a prevalent and substantial proliferation in terms of economic growth and poverty reduction over the last few decades, extreme poverty continues to persist simultaneously.

It is not enough to know that someone is poor. We need to know why they are poor and what is limiting their ability to advance into prosperity.

It is clear that this is a significant problem that must be responded to, and we must recognize that the world leaders’ commitment to eliminate "extreme poverty" by 2030 as part of the sustainable development goals is not enough. The world is unlikely to meet such a longstanding goal of ending poverty as a whole. A more radical solution must be devised.

1 Adato, M., M. R. Carter, and J. May. 2006. “Exploring Poverty Traps and Social Exclusion in South Africa Using Qualitative and Quantitative Data.” Journal of Development Studies 42 (2): 226 47.

Eun Soo Park

Can the New Prime Minister Rishi Sunak Fix Britain?

Following former PM Liz Truss’ resignation after her disastrous "mini budget", which left the UK economy in shambles, Rishi Sunak entered No. 10 on the 25th of October as the country’s third prime minister in seven weeks, making history as Britain’s first prime minister of colour. At 42, he is also the youngest person to take the office in more than 200 years after winning a fast tracked Conservative Party leadership contest. He faces unprecedented challenges: a Conservative Party in chaos, a spiralling economic crisis, a war in Europe with no end in sight, and a call for an immediate general election to replace him.

With inflation at an all time high in 41 years and rising energy prices due to Russia’s war with Ukraine, the cost of living crisis is increasing at an alarming rate, and a record wage rise remains outpaced by soaring inflation, depicting a time of desperation and hunger for many in Britain. Sunak highlighted his experience as the Chancellor of the Exchequer (finance minister) under Boris Johnson’s Cabinet during the pandemic to illustrate his competency and how he plans on dealing with the challenges ahead, continuing to "protect the most vulnerable", in his first Prime Ministers' Questions (PMQs). His appointment alone had managed to calm financial markets, as the pound sterling did not plunge further against the dollar and government borrowing costs fell a sign of stability that the country desperately needs. In the long awaited Autumn Statement, announced on the 17th of November, Chancellor Jeremy Hunt, the man behind the reversal of Truss and his predecessor Kwazi Kwarteng’s controversial ‘mini-budget’, revealed tax rises and spending cuts worth billions of pounds aiming to mend the nation’s finances. This includes an increase in the national living wage of nearly £1 per hour and an extended household energy price cap of £3,000 per year, up from £2,500 previously. Despite this, tough decisions remain to be made by the Prime Minister and his Chancellor, with the UK expected to enter recession first and emerge last out of any developed economy.

In Sunak’s first speech addressing the public as prime minister, he vowed to "workday in and day out to deliver for you. "This government will have integrity, professionalism, and accountability at every level." This, however, has heavily contrasted his first decisions in forming his cabinet, after re appointing Suella Braverman as Home Secretary less than a week after her resignation due to breaching ministerial code and leaking confidential information, which has led to calls for an independent investigation into Ms. Braverman’s behaviour. Not only is Sunak facing an economic crisis, but his own party is divided and has lost ground to the opposition Labour Party in opinion polls following five months of political mayhem and financial market chaos. The Prime Minister is already under intense fire from opposition politicians, who are demanding a general election, especially since his journey to No. 10, like Truss's, was not through winning a general election, but by being the leader of the Conservative Party and therefore automatically becoming prime minister as the governing party. Although it is not unusual for a prime minister to come into office without an election, the fact that Sunak is the UK’s third prime minister since the last general election in 2019 and the second to come into power without a public vote adds to the pressure.

The next general election is set to happen no later than January 2025, however, it is highly unlikely that Sunak will call a general election before this date, especially with Labour’s dominating lead in opinion polls. Yet, it is also highly unlikely for the Conservatives to change leader after the political instability of the past few months, therefore, Sunak is expected to lead the Conservatives into the next general election. With the UK set to enter what is expected to be the longest recession on record, Rishi Sunak is forced to make difficult decisions in order to help the people of Britain in the current economic climate, while also maintaining the support of his fellow MPs in order to face realistic prospects of remaining in power after the next general election.

Shyan Ann Teoh

Is the Promise of Prosperity of Hosting the World Cup a Myth?

The FIFA World Cup is the most prestigious football tournament in the world and one of the biggest sporting events on the global calendar. With potentially billions of spectators tuning in to see sports stars like Ronaldo and to watch their national team battle it out on the pitch, it is not surprising that alongside ticket sales, sponsorships, and merchandise, there is a monumental amount of cash kicking around an event like this. Hosting the event is often portrayed as an honour for a nation’s economy and reputation; however, although these benefits are often voiced by mainstream media, the reality is that these perks are largely exaggerated. This article considers whether the glory of hosting the World Cup justifies the magnitude of economic challenges incurred, as well as why many countries aspire to host despite their predecessors frequently becoming financially worse off.

The three main ways the World Cup supposedly boosts a host country's economy are through infrastructure, tourism, and ticket sales.

FIFA has strict guidelines for stadium facility requirements that demand a minimum capacity (around 40,000 seats

for the group stages and 80,000 for the final); this creates many short-term jobs in the country as the host country heavily invests in the construction of these new stadiums and transportation improvements. Infrastructure can promote businesses as workers spend their income locally, which consequently helps to stimulate the economy, and contribute to the GDP of the host country. This can potentially create opportunities to provide citizens with access to healthcare and education, as well as expand several sectors of the economy such as recreation and shopping. This is demonstrated by the fact that, according to Lee and Taylor (2004), more than 31,000 jobs were created during the 2002 World Cup, generating $1.35 billion in output as well as $ 1 billion in income and value collectively.

Additionally, a report by N. Matsuoka De Aragao shows that the World Cup added 0.5% (R93 billion) to South Africa’s GDP in 2010 indirectly due to the creation of 130,000 construction jobs. Matsuoka De Aragao’s report describes the investment in infrastructure as a "legacy," as telecommunications and transportation would not have been improved in developing countries such as Brazil and South Africa as quickly. However, areas

FIFA has strict guidelines for stadium facility requirements that demand a minimum capacity (a that arguably needed the most rehabilitation in these developing countries were overlooked as the majority of investment went to mostly developed and safe areas for tourists.

The main criticism levelled at large infrastructure investments is the opportunity cost. Opportunity cost is "the value of what you lose when choosing between two or more options”. Every decision has trade offs, and opportunity cost refers to the potential benefits you will miss out on if you choose one path over another. As sporting infrastructure takes up high value real estate and is often expensive to construct, the opportunity cost is reduced by instead investing in education or the health sector. According to the World Economic Forum's Inclusive Growth and Development Report, economic growth should be inclusive, with sustained improvements in living standards for the majority of the population, rather than simply increasing government spending to increase GDP.

The Arena da Amazônia built in 2014 for the Brazil World Cup cost taxpayers over 270 300 million dollars to only be used for four matches, and the stadium is so underused that it took in only 180,000 million in the first four months of 2016 but spent 560,000 in operating costs.

This stadium, along with many other abandoned ones, displays the potential economic burden that comes along with hosting FIFA's World Cup.

It can be argued that tourism similarly generates income for a variety of businesses and creates employment opportunities, as there is often an increased demand for accommodation as well as a high demand for public transport. However, tourism does not automatically result in a pareto improvement. The concept is named after Vilfredo Pareto, an Italian civil engineer and economist, who used the concept in his studies of economic efficiency and income distribution. Pareto improvement is a situation that harms no one and helps at least one person. In this context, rising hotel prices during the World Cup do not always equate to rising worker wages; thus, capital returns are likely to be higher than labour returns. On the other hand, some countries do benefit largely from tourism, as during the 2010 German World Cup, the German government reported that tourism revenue was up $400 million as they made about 3 billion more dollars in retail sales such as jerseys and other paraphernalia regarding the Cup.

Nevertheless, the majority of profit from the World Cup stems from ticket sales and television rights; these profits belong to a subsidiary company owned by FIFA, as do marketing rights.

Furthermore, the host country’s tax revenues exclude tourists' purchases of drinks, merchandise, or any FIFA partner brands due to tax breaks for FIFA that are required in the bidding process. According to John Vrooman, a sports economics professor, advertising the World Cup as a good economic investment with benefits such as increased tourism and jobs is a "self promotion scheme" to justify the use of public funds to market professional football.

Qatar, the 2022 World Cup host country, has spent approximately $220 billion on the event, which promises to create over 1.5 million jobs and attract 1.2 million visitors. They were able to reduce costs of infrastructure by building all the stadiums in one city, but as a result, FIFA has allocated a large sum of 440 million dollars in prize money.

Designed by world renowned architects, there are eight air conditioned, zero carbon stadiums, multiple fan zones, training sites, and accommodations for tourists. However, while evidence suggests that losing the World Cup has few financial benefits, some things are more important than money.

Hosting a World Cup can help a country increase its influence through a display of soft power. It gives nations an opportunity to give the world a snapshot of their assets as well as an illicit sense of pride and community. Khristo Ayad, a consultant at InStrat, an independent research and advisory platform in Doha, told Al Monitor, "World Cup related investments have in turn further elevated and solidified Qatar’s position as an important hub. In Qatar, the event has sparked excitement, enthusiasm, and national pride; it has also put a magnifying glass on a very young nation with deep traditions. After all, the FIFA World Cup 2022 will be the first event of that global scale ever hosted in the Arab world."

Is the cost worth the international prestige?

Adina Hunter

Behavioural Economics

Behavioural economics, put simply, is the study of how individuals (or institutions) make economic decisions. It combines elements of economics and psychology to develop theories about human decision making. Unlike neoclassical economics, which assumes that consumers act rationally and make well informed decisions, behavioural economics recognises the fact that consumers will not always act in an internally and logically consistent manner. Humans, influenced by their emotions, circumstances, and environment, will frequently seek short term benefits over long term ones.

In his book "Toward a Positive Theory of Consumer Choice,"1 economist Richard Thaler identified several factors2 influencing consumer behaviour (opportunity costs, overconfidence, and self control) that would later become major principles in behavioural economics. He drew these conclusions from the work of psychologists Amos Tversky and Daniel Kahneman, who developed "prospect theory” also referred to as the "loss aversion theory”. The "prospect theory" states that investors will opt for the product that results in the greatest perceived gains. According to the prospect theory, if the end result is receiving $10, the recipient would rather receive $10 than £20 and have to return $10.This is due to the fact that a single gain is seen as more favourable than a larger gain followed by a loss. Prior to this, they studied a phenomenon that they labelled ‘availability heuristics’ which describes the mental shortcut that causes one to make a decision based on cognitive bias. It prioritises infrequent events based on vividness and frequency. For instance, news coverage about a plane crash can elicit an emotional response using vivid images and stories, which may lead people to develop a fear of flying. However, the likelihood of getting killed in a car accident on the way to the airport is far higher than getting killed in a plane crash this is where the cognitive bias appears.

Cognitive bias in consumers can be seen in other aspects of daily life and is taken advantage of by firms. It can be split into three different biases: anchoring, confirmation, and bandwagon biases. On a new Lays crisps packet, a serving of a product claims to contain ‘40% less fat"3 than ‘other chips." At first glance, consumers are unlikely to notice "than other chips," as the font is much smaller. Due to the high level of competition within crisp brands, Lays uses the anchoring technique to stand out to its customers: nowhere on the packet does it mention the alternative (unhealthier) chip brand with which it is comparing its own. Therefore, consumers are inclined to believe that the crisps are 40% healthier and are thus more likely to purchase them. Furthermore, within supermarkets in particular, people’s heuristic weaknesses are regularly exploited through the use of nudges. A "nudge" is any aspect of the choice architecture that alters people's behaviour in a predictable way without forbidding any options or significantly changing their economic incentives.

3

For example, more expensive items will typically be placed at eye level on the shelves, since such products tend to be the most convenient for consumers to select. This is also seen at cashiers, where consumers are enticed with last minute treats and chocolates that they perhaps didn’t initially intend on purchasing. Nudges may also be used for the benefit of consumers, where healthier options are placed in a more visible location than unhealthier ones in the hopes of encouraging consumers to purchase the healthier item. Nudges and heuristic weaknesses are constantly being exploited by firms in order to gain higher profits, but they can (and should) be applied to instances that can benefit society as a whole.

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Game Theory: The Prisoner’s Dilemma

A murder has been committed. Two suspects are accused. You are one of them, and your best friend is the other. Both of you are in separate rooms and unable to communicate. Authorities are interrogating you, and both of you face a choice: either cooperate and admit to the crime or remain silent. Your choice will have four outcomes:

1. If you both confess, you will each receive a 5 year prison sentence

2. If Prisoner 1 confesses, but Prisoner 2 does not, Prisoner 1 will get 1 year and Prisoner 2 will get 8 years.

3. If Prisoner 2 confesses, but Prisoner 1 does not, Prisoner 1 will get 8 years, and Prisoner 2 will get 1 year.

4. If neither confesses, each will serve 2 years in prison.

It is beneficial to both of you simultaneously if you cooperate and remain silent, as you will face the least amount of time in prison. That is, if your friend doesn’t betray you…

WHAT WOULD YOU DO?

Lavinia Skandalis

1 Thaler, R. (1980) Towards a Positive Theory of Consumer Choice. Journal of Economic Behavior and Organisation, 1, 39 60

Nagatsu, Michiru. (2015) “Behavioral Economics, History of.” Elsevier Ltd,

Meccariello, Garrett. (13 April 2018) “How Cognitive Biases are Influencing The Way Shoppers Buy and Experience Products.” Works Design Group,

In the late 1940s, mathematician John Von Neumann and economist Oscar Morgenstern proposed game theory, which is now widely accepted and actively used. Game theory is a theoretical framework for conceiving social situations among competing players. In some respects, game theory is the science of strategy, or at least the optimal decision making of independent and competing actors in a strategic setting. There are many hypothetical theories that fall under game theory, such as the Prisoners' Dilemma, which was previously explored

The paradox of the prisoner’s dilemma: both criminals can minimise the total jail time that they will face (2 years) only if they both co operate and stay silent, but the incentives that they each face separately will always drive them each to defect and end up doing the maximum total jail time between the two of them of 10 years total.

If we look at the prisoner’s dilemma in the context of firms setting prices, we see that the same predicament occurs. For example, when there are two competing firms

• If both keep prices high, profits for each company increase by $500 million (there is an increase in demand).

• If one firm drops its prices (defects) but the other does not (cooperates), profits increase by $750 million for the former because of greater market share and are unchanged for the latter.

• If both firms reduce prices, the increase in consumption offsets the lower price, and profits for each company increase by $250 million.

Here, the best possible outcome is if firm A reduces prices while firm B does not, as this will result in the most profit ($750 million) for firm A while firm B’s will remain the same (the same would occur vice versa). However, if both firms act in their best interests (the most likely outcome), both profits will only increase by $250 million. The dilemma demonstrates that if both parties act in their own self interest, their outcome is worse than if they had both cooperated.

However, we make the assumption that both ‘players’ are rational agents that will always decide to maximise their benefit by ‘defecting’. In reality, this is not always true, and people don’t always defect like the model predicts. In one study, almost 20% of people tried to cooperate at least once when faced with the dilemma, as most people think in terms of group decisions and positive outcomes for both players collectively.

Should We Have a Single, Global Currency?

We have all imagined that life and the economy would run a lot smoother if there was only one global currency used to execute any financial activity. With exchange rates being dramatically volatile between countries, it may seem easier and more beneficial for us and financial institutions to abolish different currencies. The argument for one single currency is certainly not a new one, and one of its most frequently cited backers was the legendary economist John Maynard Keynes.

One of the most significant advantages that comes with a single currency is the elimination of conversion costs. While exchanging from one currency to another, an additional fee charged by the bank to actually perform the service is added; this can often be as much as the initial money being exchanged. This same situation happens when transferring money abroad; therefore, using one currency creates the perfect solution to completely remove this problem. This would hugely benefit foreign travellers and migrant workers who send money back home to their families.

On the other hand, a huge downside of the single currency would be the loss of independent monetary policy to regulate national economies, as monetary policies would have to be enacted at a world-wide level, not on a nation wide. To put it into perspective, consider the 2008 financial crash in the United States, The Federal Reserve was able to lower interest rates to unprecedented levels and increase the money supply in order to stimulate economic growth. This therefore lessened the severity of the recession within the U.S., but this type of aggressive management of a national economy would not be possible under the global economy.

However, using a single currency breaks down currency barriers, which leads to an increase in trade among nations. We saw this

in Europe when it switched to the euro and trade increased from 5% to 20%. As well as this, there would be a fairer playing field in the economy since nations would no longer be able to appear more competitive on the global market by using currency exchange to make their goods cheaper. China is one of these nations that has been manipulating its currency by undervaluing it and therefore making it cheaper to export to other countries. This in turn makes them a prime spot for investors to build their factories there and stimulate economic growth. However, it can be argued that there is a loss of financial autonomy for nations like China as they no longer have the power to execute the same policy under the global currency. This could mean a huge loss in profit for the Chinese government as they would have to give up this practice.

Conversely, the single currency market provides the perfect opportunity for the economy to stabilise which would be advantageous for developing countries. It would form the basis of a stable economy, which would help countries that have suffered from some of the worst hyperinflation crises in history, such as Zimbabwe. The Zimbabwean dollar experienced so much inflation that it was replaced with foreign currencies, including the US dollar.

Overall, introducing a single currency for the whole world at present would be unsuitable as different countries have different economies with different needs that have to be met. Although establishing a central bank would create a more equal and fairer economic world to live in, it would be impossible to release monetary policies that would benefit every nation. This shows how, in theory, there are aspects of a single currency that are significantly beneficial, but it is highly impractical to apply it to the real world.

Forcing a single currency on the world would likely do more harm than good.

Aoife Palmer O’Riordan

An Introduction to the Stock Market

The collection of exchanges and other locations where the purchasing, selling, and issuing of shares of publicly traded businesses take place collectively are referred to as the stock market. A stock is a symbol of a company's partial ownership. You can claim future profits and a tiny portion of the company's assets by purchasing shares. An investor can profit from stock appreciation, which is an increase in a stock's price or worth, or from dividends, which are payouts of a company's earnings to its shareholders.

A firm can often obtain funds by selling shares through an initial public offering (IPO) on a stock exchange. As a result, the corporation goes from being privately traded to being publicly listed. a stock market Shares of publicly traded corporations are traded on a stock exchange. The New York Stock Exchange, which was established in 1792, is the largest stock exchange in the world. The electronic trading only takes place on the more contemporary NASDAQ stock market. Tech businesses like Facebook and Apple can be found here. This is where indexes come in; if you want to know how the stock market is performing, you need to know how these two exchanges are doing. Indexes combine several stocks into a single large number. The S&P 500, which measures the 500 largest firms on both the NASDAQ and the NYSE, is one example of a popular index. The DOW Jones is far more specialized and exclusively tracks the 30 largest corporations that it views as being the most significant.

There are a few things to keep in mind when trading if you are a new investor. When investing, you should continually diversify your portfolio as much as you can. Diversification is a risk management strategy in which various investments in a portfolio are mixed together. A diversified portfolio includes a variety of stocks to reduce exposure to any one asset or risk. When it comes to investing, spreading out your investments is always preferable to making them all at once. You could be unlucky and invest all of your money at the peak of the stock market, or you could be lucky and invest all of your money during a significant market decline. A more conservative approach to investing is to buy equities gradually in small amounts. Avoid penny stocks when you initially start out with investing. As the name suggests, penny stocks are companies with shares that usually cost less than $1. It's easy to understand how amateurs are seduced by the idea of investing a few cents in a business and then profitably selling it when the price soars to multi dollar levels. Liquidity may be a major problem with penny stocks; it's not unusual for an investor to be stuck in a position for days or weeks while they wait for sufficient supply or demand to enter or exit a position.

Jasim Yousaf

A Timeline of Key News (Term 1!)

Danyaal Zobairi

WHO IS YOUR FAVOURITE ECONOMIST?

TALLY:

My favourite economist is Karl Marx because he has had the greatest influence on the global economy over the past 100 years compared to any other economist. Furthermore, I think that his ideas have widened the thinking and broadened the spectrum of economic ideologies in modern economics!

RONAN MEWAWALLA

ADAM SMITH: III

JOHN MAYNARD

KEYNES: VIII

My favourite economist is Adam Smith because he most accurately predicted how most modern economies function which is in the form of a free market.

ANNIE NAVALEKAR

Mr. Christopher because he is funny, and he is a great economist. JUHA LEINONEN

Karl Marx! I just think he is just so incredible. He is my role model as he was revolutionary in his thinking. He inspired me to learn Russian and made me a better person.

CONOR AIR

New York City Economics Trip 2022

On 25th November 2022, 19 students and 2 staff took off at 2.30am for the bright lights of the Big Apple. Straight from JFK airport the group started as we meant to go on: a full on, high octane tour taking in some of the world’s most iconic cultural, historic, sporting and of course business/economics related sites most of us had ever witnessed. The itinerary was jam packed and I’ll leave it to the students below to give their highlights but mine? Quite a few…I loved the Gospel church service in Harlem. Amazing sounds and music made all the more interesting by an impromptu appearance from inspirational speaker Senator Kirstin Gillibrand or an evening spent at MOMA where we bumped into former DKS head Khwaish or perhaps a tour of the tenements where we traced the lives of an Italian family who emigrated in search of a better life. Oh, and Hamilton on Broadway wasn’t too bad either! MR. CHRISTOPHER

The New York trip was an incredible experience! We delved into NY culture and sat through live entertainment such as NBA, NHL and my personal favourite: Hamilton. As a year 13 student looking to start a degree in politics and economics, visiting the asset management firm Neuberger Berman, as well as the UN, helped me grasp different career opportunities and really motivated me with interesting prospects. The city itself was inspiring, and I’m grateful to have been a part of the wonderful trip DC put together! HAIZEA HERRERA

The entire trip was amazing, especially the sports games. We saw the NY Knicks vs the Memphis Grizzlies at the MSG on Sunday for NBA then the NY Rangers vs the NJ Devils also at the MSG on Monday. I already loved basketball, and seeing it live was incredible; especially since the game was so close and Ja Morant scored a triple double. I had never seen an ice hockey game before but I am excited to say I'm a new fan: the vibe amongst the crowd was so lively. Another highlight was the Columbia University tour; I got to see some DC Alumni and the campus was beautiful to view. It was also great to see US university life and ask the students questions about the school.

ANGELIQUE MELI

A favourable experience of mine was the NBA game: York Knicks facing off against the Memphis Grizzlies. We got great seats in the grand Madison Square Garden and the atmosphere was amazing with the Knicks crowd cheering for their team (and booing the Grizzlies). It felt great booing the referee with the large crowd. Unfortunately, the Knicks lost with 123 to 127 points; however, the experience was made even better since the game was this close so there was tension throughout the game especially at the end.

I also found that even just New York City was spectacular. Walking through it and taking the subway could have been a trip on its own and I would have enjoyed it since there's such a charm and a beauty to the city. It really felt as if I was in a movie. The sounds, views, atmosphere, surroundings and vibes were immaculate.

As someone who has never traveled to the United States, let alone New York, I was immediately captivated by this opportunity to travel there and soak up this new atmosphere. One of the highlights of the trip was walking to the Wafels and Dinges warehouse and observing how they make their Liege waffles. We learned how they employ the division of labour in the waffle making process, where each step is handled by a small group of people. This means that these employees are specialised in whatever section of the process they do, from kneading pearl sugar into the dough to finally cooking the waffle. We got to eat a freshly made batch which was delicious, many of us even ended up asking for seconds! It was fascinating to watch and learn how such delectable items are being mass produced.

EMMA THOMAS

A SHORT ECONOMICS QUIZ!

Test your knowledge!

The Term water in economics refers to:

A) the physical good water

B) money flow

C) free good

D) cash flows

Whose opinion is “rent is a creation of value” not of wealth?

A) David Ricardo

B) Adam Smith

C) John Maynard Keynes

D) Mr. Chrisopher

In _______consumers will get similar and differentiated goods:

A) Planned economies

B) France

C) Free markets

D) Monopolistic Competition

Name the two economists who put forward game theory?

A) Hayek and Marshall

B) Malthus and Tobin

C) Marx and Keracher

D) Neomann and Morgenstern

Who put forward the “contept of multiplier”?

A) Adam Smith

B) David Ricardo

C) John Maynard Keynes

D) Karl Marx

Finish the phrase: animal …

A) goods B) spirits C) souls

D) economics

Keynes was born in …

A) 1865 B) 1938 C) 1956 D) 1883

Who was last year’s DKS heads?

A) Arjun, Kian and Viha

B) Sehaj, Kwaish and Eun Soo

C) Viha, Sehaj and Arjun

D) Eun Soo, Jasim and Danyaal C, A, D, D, C, B, D, C

DKS: Speaker List (term 1)

Date Speaker Year Group

Topic Brief

28/09/22 Himakshi Shastri Year 12 Environmental Economics Economic Growth, Environmental Protection, and analysis on whether it is possible to achieve both objectives simultaneously.

05/10/22 Jahangir Aka External Global Impact of UK Political Situation from Bankers Perspective

Director at Neuberger Berman, a top investment management company. He will speak about the UK and the global impact of UK political situations from a Neuberger Berman perspective.

12/10/22 Aryaansh Rathore Year 12 Experience from an Internship at JP Morgan

26/10/22 Ruhell Amin External Demystifying Careers in Finance

He will be talking about his internship at JP Morgan and Arqam Capital as an investment banker. He will also discuss getting started with finance and the tools and mentors that helped him along the way.

Currently working as an investment analyst for a US based investment advisory firm, based in London. Amin graduated from LSE with a master's in 2015 and the University of Warwick with a Bachelor of Laws.

02/11/22 Crimson Education External Admissions to the Top Business and Economics Programs in Universities Worldwide

09/11/22 Jasim Yousaf Year 12 Investing in the Stock Market

Crimson Education helps hundreds of students gain admission to Ivy League, Oxbridge, and more of the world’s best universities.

Speaking of the Basics of Investing in the Stock Market and will share tips and tricks for newer investors; there was also a live demonstration on placing trades

16/11/22 Yun Soo Park and Aryan Mehta

External Q&A about University Experience and Internships UK FOCUSED

Yun Soo is a student at UCL studying Economics and holds an offer to join PwC as a consultant this incoming year. Aryan is a student at LSE studying PPE and holds an internship offer at HSBC.

Yash Bhansali External Q&A about University Experience and Internships US FOCUSED

Yash is an incoming investment banking analyst Goldman Sachs IBD and has previously worked in Equity Capital Markets at H.C Wainwright & Co, as well at KPMG. Outside of YUDI, Yash sits on the Student Advisory Board of TSAI City and is the Head of Financial Research for Professor Jefferey Sonnenfeld and the CELI.

07/12/22 Asad ur Rehman External The Economic Value of Brands

In his most recent role, Asad was the Board Member at Unilever MENA, Turkey, and Russia, and managed their Media & Digital Marketing Transformation. Asad will unpack some of the basic concepts of “economics of brand building” and share snippets of his experience building large scale global brands.

and many more to come…

THANK YOU

HEADS OF DKS (EUN SOO, JASIM, DANYAAL)