…but that might just be because a lot of Italian women are so thin and gorgeous that I am big in comparison. But seriously…in true “economists do it with models” fashion, I did an interview with Italian fashion magazine Grazia. The good news is that I was super impressed by the journalist that I spoke to and thought that she asked very insightful and interesting questions (see below). Also, I really liked that she pointed out that her readers were curious women who like to learn stuff, which is great since that is a large part of my target audience. The bad news is that the article is in Italian and I have no idea what it says: (click for pdf’s):
Hopefully the article isn’t a tirade on how the journalist doesn’t like my outfit or something…though that would actually be pretty funny. I tried to be as thoughtful as I could with the questions I was asked, so I figured I would give you my email responses to the questions:
Do you really have “fun” with economics?
Yes! At its core, economics is about understanding human behavior, which I find absolutely fascinating. I’m the type of person who really enjoys people watching, and economics is essentially people watching with better data. Economists do more than just calculate unemployment and inflation- they study what makes people spend and save money, what makes people work harder and invest in education, and even how and when people choose to start families and have children.
Why should a girl get interested in economics?
I think a better question is “Why shouldn’t a girl get interested in economics?” I’m surprised that more women don’t take an interest in economics- after all, let’s face it, women do most of the shopping, and they are central to household decision-making on matters that involve money, so it stands to reason that they would want to know how the markets for the goods and services that they purchase actually work. Personally, I like understanding why my Prada shoes cost $600 and what effect purchasing knockoff designer items would have on the market. Furthermore, knowing a bit of economics is necessary in order to understand the consequences of government policy, and everyone, regardless of gender, can benefit from being smart voters and not having to take what politicians say at face value.
“Economists do it with models”: that’s funny! But economic models today are under attack because they didn’t see the Great Recession coming: how do you explain it?
To be fair, some economists did publicly predict the financial crisis, but they didn’t get the attention that, in retrospect, they probably deserved. Others likely suspected a problem but didn’t say anything for fear of either sounding absurd or having their statements becoming a self-fulfilling prophecy. (If you heard a bunch of economists predicting financial doom, wouldn’t you pull your money out of the stock market, not buy a new house, etc.? Well, if enough people listen to the doom-predicting economists, there will be a recession regardless of whether there was an intrinsic reason for one.) Still other economists had misplaced their crystal balls- there is a big difference between understanding how market forces work and being able to predict the future. For instance, even when it’s clear that we are in the midst of a real estate bubble, it’s much less clear when that bubble is going to burst, and those who pull out well before things go awry do miss out on some of the profit on the way up. Even if everyone knows that the market will eventually go sour, there are still going to be a lot of people who press their luck and see how long they can ride the upward trend, and this activity allows the upward trend to persist. Those explanations aside, the models used by economists and, more importantly, bankers and risk managers suffered from two main problems. First, they assumed that the future would continue to look like the past in terms of risk and volatility, despite the fact that banks were issuing riskier loans (read, mortgages) and new financial derivatives that were not well understood as well as being more highly leveraged than ever before. Second, the models failed to account for the degree of interconnection between different financial markets and transactions- who would have thought that people defaulting on underwater mortgages would have brought down the entire system?
“Stimulus package” is another expression that can be funny. But will it work? I mean, all the taxpayers’ money used to bailout companies and incentive the economy in the world, can it work?
Maybe- there is a lot of disagreement among economists on this issue. Economies are funny in that their health is at least in part determined by how much confidence people have in them. If people think that an economy is improving, they are more likely to buy stocks, spend money, start businesses, hire people, etc., and these activities in turn make the economy improve. An economic stimulus can be helpful if it serves to jump start this virtuous cycle, but predicting the effect of a stimulus in any particular scenario is as much of a question of psychology as it is one of economics. If I were to advise on this issue, I would at least say that if a government is going to try to spend its way out of a recession, it should be smart in choosing projects that have clear social benefits (repairing an old bridge, for example) rather than just spending money for the sake of spending money (like paying one set of people to dig a hole and another set to fill it back in). Then at least if the stimulus doesn’t “work,” people still have useful things to show for their tax dollars. I read a statistic that the pornography industry saw a big jump in sales after the 2008 tax rebate checks went out in the U.S.- if you judge by the outcome, the American public decided that the porn industry was a high priority in terms of support and stimulus (ha), though I am instead guessing that people didn’t think about or understand the effects of their spending habits on the economy..
Let’s talk about incentives to live a happier life: how could we make ourselves stick to a diet?
Things like diets are hard because there’s a big difference between long-term desires (to fit into those skinny jeans) and what we want in the short term (that chocolate cupcake). That’s why people tend to say “I promise to start that diet tomorrow” and then break the promise when tomorrow rolls around. (Economists call these sets of circumstances “time-inconsistent” preferences due to the fact that the you of today and the you of tomorrow are at odds in terms of what you want.) To counteract this problem, economists suggest what are known as “commitment devices.” Simply put, commitment devices are actions that people take to align their short-term and long-term incentives. In the case of diets, people might agree ahead of time to pay money to an objective outside party if they don’t meet their weight-loss goals. In fact, two Yale professors have even started a company http://www.stickk.com) that implements commitment devices such as these. Think about it- you’re less likely to have that piece of cheesecake if it not only goes straight to your hips but also costs you a lot of money!
Many women go shopping when they feel depressed, spending a lot of money to feel better. Is that a good strategy?
Probably not. While shopping is definitely fun in the moment, there are a number of reasons why it doesn’t work particularly well as a form of therapy. First, people often experience buyer’s remorse after shopping for the sake of shopping, and this just adds guilt on top of depression, especially if they’re depressed about money in the first place! Also, there is a lot of evidence that better toys don’t improve people’s long-term level of happiness, since people tend to get used to having them around. Basically, you can think of yourself as on a happiness treadmill, and the shiny new things you buy ultimately just keep you in the same place because they become normal after a while. That said, if you must absolutely buy something to try to make yourself feel better, I suggest paying for a new fun experience rather than something tangible, since memories last forever.
Discounts and savings: how do you calculate if it’s worthwhile spending a lot of time chasing discounts?
People are funny about this- for example, people are (wrongly) much more willing to go out of their way to save $10 on a $25 calculator than to save $10 on a $2,000 computer, even though they are saving the same amount in both cases. I think it’s because people are used to thinking about discounts in percentage terms, and 40% off sounds way more impressive than 0.5% off. People also tend to get overly excited about things that are free, even though they aren’t really free when you consider things like the amount of time it takes to wait in line for the item. In general, searching out discounts is a form of work, so people should consider whether the potential discounts are paying them adequately for their time. In other words, if you wouldn’t take a job that pays only $6 per hour, you shouldn’t spend an hour of your time seeking out a $6 discount unless you really get a thrill from bargain hunting.
If prostitution is the oldest profession in the world, what does that tell us about sex & money?
It tells us that sex and money have always made the world go around? I find that to be pretty true even today. Money typically leads to power, and sex (or the lack thereof) can stop wars- just ask Leymah Gbowee, who organized a sex strike that helped to end war in Liberia. You could even argue that money and sex are two sides of the same exchange, both formally and informally, since money can get you laid and sex can get you a rich husband (or wife)!
Love & Money: how important is to discuss money issues with your boyfriend/fiancé/husband?
It’s very important. While social scientists haven’t reached a definitive conclusion regarding how much money issues contribute to divorce specifically, it’s clear that disagreements over money are very common in relationships and cause a lot of stress. It can be very difficult to maintain a household with a partner who doesn’t share your values regarding how much money to spend and save, what items to splurge on, and so on. I don’t think it’s a deal breaker to have a partner who doesn’t share all of your views on money, but if that is the case then it’s especially important to have open conversations on the topic and explicitly decide how joint finances and decisions are going to be handled. Communication is especially important in partnerships where one person expects to go back to school or otherwise be supported by the other, either temporarily or permanently, and it’s much easier to have these conversations before conflict arises than it is once financial “mistakes” have been made. I think that one of the upsides of studying economics is that it has desensitized me to the supposed social taboo of talking about money.
By the way, do you have a boyfriend? Is he an economist?
Hehe, I wish I could say that my boyfriend is a model! I won’t comment directly on my current personal life, but I will say that I generally seek out friends and partners who are outside of my field. I like to be around people that I can learn new things from, and that’s generally easier with people who are different from myself. I tend to gravitate towards creative types and people who do things that I would really like to be able to do but can’t. Charisma doesn’t hurt either.
Is it true that women are better, wiser investors than men? Can you elaborate?
In general, women are more careful investors, meaning that they are more risk-averse. Women also exhibit less overconfidence than men when it comes to their ability to pick stocks and such, so they are more likely to put their money into index funds or other more passive forms of investment than they are to try to actively trade their portfolios. This doesn’t necessarily mean that women are better or worse on average, but it does mean that they are less likely to lose a large portion of their investments. The downside is that women are also less likely to make the risky bets that have a large potential upside. In the context of planning for retirement and such, being somewhat cautious is probably not a bad thing! The important point to keep in mind is that the basics of investing are not hard and they are something that all adults should be familiar with. It’s definitely possible to be savvy about saving for retirement or for a house or whatever without being a speculator or day trader, and it’s certainly not an activity that has to be left to the boys. (Hint: Pick an index fund with low fees and hold it for a long time. Alternatively, a lot of companies have funds designed specifically for particular retirement years, and these also typically have pretty low fees.)
Bottom line, how could women apply basic economic lessons to their own lives?
I think that your questions above lead to some good examples of these sorts of lessons, and I really could go on forever on this topic. The first lesson that I try to teach people is that of opportunity cost- i.e. that the true cost of something is what you have to give up to get it. Some of these costs may be explicit- for example, tuition payments for students are very clear costs because they involve a transfer of money from them (or their parents) to the school. However, there are also implicit costs that need to be considered- in the case of the student, the true cost of attending school is not only that of the checks written for tuition, room and board, and so on, but also the compensation that the student is giving up because he is choosing to study rather than do something that earns income. Understanding how to think about the true cost of various decisions can help people to make better choices.