Module 5 Balancing Liberty the Pursuit of Well Being RMI 2302 Exam 2 Study Guide Balancing Liberty and the Pursuit of Well Being The free market fails to protect consumer interests Government must find ways to protect us from ourselves If world dominated by rational behavior the government could focus on externalities more and less on consumers Government balances competing goals Maximization Begins with Measurement Jeremy Bentham o Urged politicians to design polices that maximized people s happiness increasing pleasures reducing pains o No good ways to measure people s hedonic well being Daniel Kahneman o Because of the scientific measurement of well being has advanced he is trying to bring policy making back to Bentham o Supported by Ed Diener and Martin Seligman Proposed development of national measure of well being similar to GDP measures Barry Schwartz o Wrote that happiness research has shown us that we know this is some significant subset of people likely to be made better off through heavier taxation and these people reside at the top end of the wealth distribution o Also supports Kahneman Societal Happiness o Poses great threat to libertarians Replaces individualized version of well being with what seems to be a top down approach Opens door to government intrusions Bentham s Prot g John Stuart Mill o Home schooled by James Mill his father and Bentham o Childhood under extreme control daily schedules no friends no poetry or arts o Believed happiness is not found by seeking ordinary pleasure but by striving for loftier goals Happy Pigs John Stuart Mill believes the goal of moral and political action should be to maximize happiness tried to make utilarianism compatible with a broader view of human nature than Bentham o It is better to be a human being dissatisfied than a pig satisfied RMI 2302 Exam 2 Study Guide Nobel laureate Amartya Sen o Sen recognized the problem that If people can achieve moment to moment happiness in horrible circumstances what does that say about Bentham s world Responded that poverty doesn t make people nearly as miserable as one would think it out to Happy Slave Problem If one has been a slave since birth and has known no other life should we accept his slavery because he is happy o Not a strict libertarian o Believed Liberty should guide policy decisions o Thought we needed to promote capabilities we need to maximize what people are capable of doing o Advocate for government intervention in health care and education and in redistributing wealth to try to equalize opportunities No Simple Answers Policy Decisions there needs to be a balance between a number of competing objectives when making policy decisions happiness freedom health education etc Kahneman s ideas ignore the things people care about in life beyond moment to moment good mood implies there is nothing wrong with a world full of happy slaves Maximizing What We Measure Economists measure income distribution unemployment GDP infant mortality crime air quality What We Are Left With Models of how individuals organizations make decisions Don t have a very good model of how governments make decisions o Focuses on externalities public goods fairness competition regulation o Many decisions recently look more political than social BAD o Political gains outweighs social gains Political models often incorporate heavy discounting Module 6 Results of Decision Making Risk Reward Individuals o Measure using expected utility o How much reward is necessary to induce you to take risk how much are you willing to pay to avoid risk o Utility function is the square root function RMI 2302 Exam 2 Study Guide Organizations o Measure using expected value o No natural risk aversion o Opportunity cost or cost of capital commensurate with riskiness of firm o Most project future cash flows from investments opportunities o CAPM Only reward systemic risk not diversifiable risk Government Society o Difficult to measure reward o Frequently Government is the only entity able to take on risk Bias Subjective view probability Alters decision making Problem when it ends up being significantly different from the model Donald Rumsfeld o Known knowns things we know o Known unknowns things we know we don t know o Unknown unknowns things we don t know we don t know Types of Bias o Age biases o Cultural biases o Experience Biases o Gender biases o Media Biases Incentives Things that motivate individuals to perform an action individual organizational societal Types of Incentives o Financial most incentives o Moral do the right thing o Natural curiosity fear anger pain joy o Coercive negative reinforcement o Personal vs Social Economics basically study of incentive systems Overview of Risk for Individuals Categories of risk property liability life health financial Categorized for risk management techniques Loss exposure Any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs o Three elements to a loss exposure Module 7 Overview of Risk Individuals RMI 2302 Exam 2 Study Guide Asset exposed to loss Cause of loss Financial consequence of the loss Property Asset exposed to loss o Real property land buildings crops etc o Personal Property furniture jewelry art cars etc Cause of Loss Fire theft windstorm accidents Financial Consequences reduction in property value increased expenses lost income Liability Asset exposed to loss money other financial assets o General special punitive damages Cause of Loss claim lawsuit tort contract statutory negligence Financial Consequences Defense costs monetary damages Specific Types of Liability o Property Owners automobiles employer employee parents and children animals Life Premature Death Asset exposed to loss Your life Cause of loss Premature death illness accident stupidity Premature Death When you die with financial obligations Life Long Life Asset Exposed to loss Savings retirement wealth Cause of Loss Outliving assets expenses income for too long Health Asset Exposed to loss health livelihood Cause of Loss Poor care poor genes injury bad luck Financial Consequences Ability to earn income may decrease of cease while living expenses continue or increase Financial Asset Exposed to loss wealth Cause of loss disability unemployment Financial Consequences Back to work if retired can t retire Module 7 Smart Pills RMI 2302 Exam 2 Study Guide What are smart pills Stimulant drugs Ritalin Adderall developed to manage ADHD o Schedule II drugs by DEA
View Full Document
Unlocking...