Tuesday, August 16, 2011

Cause and effect

I love economics, that does not go on to say or even hint that I understand economics or the complex and lengthy policies that FED/RBI comes up with every now and then. But I do find it absolutely interesting to see the cause and effect of seemingly unrelated things. How we react to changes around us. How a seemingly simple .01% hike in interest rates change our long term and short term goals. And more interestingly how the basics of economics apply to our everyday decisions.

There is this very famous principle of return on investment, you give an orange to a guy, he will eat it with a relish; give him two, he will love it more but give him three, he probably wont eat the third one so happily and the fourth one he will probably leave. Basically it says that you cant keep giving the same incentive/reward and expect more and more output from it. There is another one which I like, this one talks about the counter-intuitive greedy approach, where a group of people all competing for something try to get the best for themselves, but as a group they lose as they don't see that the equilibrium though slower than the optimal is best for everyone. Simple example, there is a narrow lane, all want to get to the other side, the best is that they form a queue and all can go smoothly if one of them decides to be greedy and jump the line, they will all get stuck in a jam that could take them much much longer than being in the equilibrium state where they take more time than the best(jumping the queue - 0 time).

Anyway, I was reminded of this because of a study I came across today, it basically talks about food price index and the riots around the world. Found it pretty interesting, knowing that a behaviour as abstract as rioting is related to something measurable and controllable as Food price index gives me hope that we can create a world with lesser riots and more peace.

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