Why Enough is Never Enough

A short tale on leg space, social status and the irony of human nature

Pressing up against the window trying to create some space between himself and the man sitting next to him, Joe Aspiring kept wondering how great it would be getting around by taxi. The redundant meeting he had just left only served to increase his frustration. Never ending travels by bus were one of his less desired pastimes. One more year of internship and my status will change, he kept encouraging himself.

The luxury of taxis on the company’s expense did cheer him up, for a while. It was a refreshing change sitting back on black leather, enjoying the leg space. Looking at the windows of the adjacent bus he took some pleasure in the fact he had moved up in life.

The never-ending meetings frustrated him. I wish I could have worked on the international client, he had pondered. I could use a change of scenery. How did those guys get on the international team at the first place? Probably strings were pulled on their behalf. Spending every other week abroad must be fantastic.

The taxi that drove him to the airport was taken for granted. “Could you please turn down that music?” he angrily turned to the driver. These drivers are a menace, he thought. Next time I’ll insist on a proper ride. His senior team leader, traveling with him, had told him they’d probably only meet only at the baggage area at Heathrow since he was flying business.

The check in was a nightmare, as always. Endless lines and tiresome airport security personnel took their toll on him. Stepping slowly down the aisle he lovingly caressed the wide spaced sofas of business class. Perhaps one day, he thought. Inching further he had hoped and prayed. It took an eternity to get to his seat, waiting behind what seemed like a horde of people insisting on bending the laws of physiques by squeezing huge trolleys to tiny overhead spaces. Slowly raising his eyes he exhaled deeply, 42J was right between a 10 year old and an elderly woman. He cramped himself between his fellow passengers, legs, again, tightly squeezed against the seat in front of him. Someone should look into the relationship between leg space and social status, he thought. There must be a deeper reason than economy. Perhaps a constant reminder of your worth, he had bitterly thought.

He could stand the flights no longer. His surprising upgrade to business class was nice but left a bitter taste. He felt awkward among veteran business class travelers. An accidental upgrade is just that, he thought. Look at all these people; they must be wealthy and successful, groomed by their companies. When I’ve earned the privilege of routine business class I’ll know I’ve made it in life.

When his assistant handed him his e-ticket for his upcoming conference in Rome he was disappointed to see his miles weren’t enough for a first class upgrade. Those young executives with their constant laptop tapping and blackberry staring are impossible to travel with. Sitting in the lounge he eyed the door to first class’ part of the lounge. I wonder what kind of food they serve their. It has to be better than this bagel, and the wine is terrible, what happened to the service here?

First class was his dream coming true. Such comfort, such service, I could get used to this, but who are all these Nuevo rich surrounding me?

Related Posts:

• The Dangers of Excess Frugality – Budgeting and Balanced Living
• How I Bought My Son $150 Worth of Cardboard Boxes (Or Free Box With Each Toy!)
• Challenging Happiness – Exploring the Irony of Human Nature
• Is Rationalization the Key to Happiness?

The Dangers of Excess Frugality – Budgeting and Balanced Living

"Virtue, then, is a state of character concerned with choice, lying in a mean… Now it is a mean between two vices, that which depends on excess and that which depends on defect; and again it is a mean because the vices respectively fall short of or exceed what is right in both passions and actions, while virtue both finds and chooses that which is intermediate." Aristotle, Nicomachean Ethics.

A Zen Garden

The dangers of excess frugality – The slippery slope of budgeting

The first steps in budgeting are usually a real eye opener. For the first time income and expanse are laid bare before our eyes more often than not resulting in surprise and disbelief as to the proportion of expense relative to income, the volume of different expenses and usually the inadequacy of income.

A little later on the potential hits. As with any new endeavor a significant portion of the benefit can be taken advantage on early on. Potential savings and sources of money leaks are easily identified and several quick and significant measures can be taken to materially improve the family's financials.

Newly discovered personal finance enthusiasm usually leads, then, to further interest and reading which in turn leads to discovering the power of finance and compound interest. The affects of saving early are empowering and goals are set to allocate a more significant portion of the budget to saving.

Frugality often follows. Each expenditure is carefully weighted and considered against the future alternative benefit which, when compounded over time, amounts to hefty sums. Considerations such as "This $1,000 vacation has an alternative cost of $1,800 in 10 years using a 6% interest rate" are not uncommon.

Retirement planning takes up more and more of one's time as a result. Thoughts of early retirement are fascinating with seemingly small sacrifices made on the way. Slowly but surely present time is replaced with imagery of retiring at 40.

Without noticing money becomes the object rather than the means. "I only need so and so much more and I'm settled". The present soon is sacrificed for the future.

Sacrificing the present for the future

The real danger of the slippery slope presented is sacrificing the present for the future. The American public as a whole is in no real danger of this happening and the future has already been sacrificing several times over on the altar of consumption. Still, many personal finance enthusiasts quickly find themselves torn apart when it comes to spending money.

Frugality, in its moderate form, is probably a good trait. However, any excess (or deficiency), as Aristotle had so eloquently put, lead us away from virtue. Virtue or sense, in this case as well as others, lies in the middle.

Excess frugality will usually results in forgetting our original goals altogether, abandoning them to the accumulation of wealth with no real purpose. The inheritance will surely benefit the next generation but our lives are ours to live, not to pass on (again, reasonably).

The problem with sacrificing the presence for the future is the unavoidable frustration. Any extreme behavior takes its toll on the person as well on the surroundings. Being happy in such circumstances isn't easy.

I should note I obviously do not suggest sacrificing the future for the present. I am only recommending a more balanced approach.

How to achieve Balance?

Balance will be represented, in this case, by the ratio of saving to consumption. In economics permanent income suggests a person wishes to average out his or her income over one's lifetime in such a way as to not consume to much in the present or, on the other hand, consume too little (by saving too much – There is such a thing).

The rule of thumb suggests middle class households should consume 75% of their income. The rest will serve as either an emergency fund for non-expected expanses and big planned expanses (which can be expected as I've elaborated on in Budgeting for unexpected expenses) or as long term savings (equally weighted).

If you're consuming less than 60% of your income or over 85% than an evaluation of income vs. expense is in order. Some circumstantial aspects obviously exist as dual income families with no kids would present higher levels of savings while others may present less available funds for savings.

Still, the rule of thumb serves as an indicator that something may be off. In higher income levels the ratio of saving out of income is obviously higher while in lower income levels saving money is something one can only dream of.

To some the idea of spending when you can save may sound careless. I argue the good mental health and happiness include the satisfaction of everyday needs. Stoic willpower may enable one to retire early but what of the years past? Usually the best years in life.

The illusion of having compounding interest working for you

There's a reason why the 30's are considered the consumption era in one's life. Investing in education, raising a family, buying a house and other significant financial obligations put a damper on any attempt to really save for the long run.

True enough, saving throughout 20's and 30's will result in compounding interest working for us but who of us has managed to save significantly without sacrificing our present? Amassing a considerable amount of money requires many concessions, maybe too many.

The illusion of saving early is frustrating since saving at such an age is extremely difficult. For one's good mental health savings should be balanced with consumption. The 40's and 50's are considered periods of wealth accumulation and will serve the purpose of amassing wealth as well (considering you are not intent on retiring at 40 – another illusion of you ask me).

A more balanced life and balanced goals will help achieve inner peace and acceptance that money is truly a means and not an end. This takes work and time. I suppose on cannot escape the slippery slope I've presented but understanding the need for balance early on will save considerable frustration and contribute to early happiness.

Related posts:

• Personal Finance Management: Budget vs. Net Worth
• Shortcuts to Early Retirement – Absurd Frugal Thinking or Common Financial Sense?
• Making Investment Decisions Together Helps Avoid Common Investment Mistakes
• How I Saved $2,000 by Being Creative and What Else Did I Discover
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• Outsourcing Our Chores - Do We Overvalue Our Spare Time?

On Causality and Correlation in Economics

Causality is perhaps the most fundamental element of empirical evidence available to economists. However, it is also the source of many misconceptions due to its elusive nature.

There are some things we take for granted. The relationship between cause and effect is so deeply rooted in us we sometimes forget they are merely a result of a clever induction made through observation on the repetitive nature of the two.

Causality is a fundamental corner stone to any empirical science. In economics causality is the basis for models and theories observed ranging from basic supply and demand curves to the most sophisticated economic models around.

The social science of Economics is more formal than other social sciences in the sense it includes theoretical models which are not directly dependent on correlations but rather on assumptions of maximization of utility at their basis. Nevertheless, at the end, utility maximization and its behavioral associations are bound to end include causality as a central assumptions of the coherency of nature.

More intricate relationships between various economic indicators such as interest rates, inflation, expectations, government spending, private consumption and many others are based on observations on different correlations between these parameters over time.

The problem of induction

David Hume is a famous Scottish philosopher known for its strict empiricism (A theory in philosophy which asserts all knowledge arises from experience rather than innate ideas and reason). The following may clear up this issue of the sources of knowledge a bit more.

David Hume, being the strict empiricist that he was, pointed out the problem with the logical problem embedded within the inductions we make based on experience. To put it simply, any attempt at proving our inductions to be correct will ultimately be based on induction itself and therefore cannot be constituted a logical reasoning. The argument would look something like:

• Every time I've dropped an object it fell to the ground
  
  
• Hidden statement: Nature is coherent/consistent or "that which has been is that which will be".
  
  
• Therefore, when dropped, all objects fall to the ground.

To justify my hidden statement I must turn to the same statement assuming that if nature has been consistent so far it will continue to be.

In Hume's eyes there is no logical justification to assume the sun will rise tomorrow simply because it had done so in the past.

Needless to say induction is crucial to science and the problem of induction presented by Hume has received great attention from philosophers ever since. Karl Popper, a famous philosopher of science (among others) suggested a clever way out of this problem by stating science will advance through efforts of disproving existing theories thus strengthening the correct ones and correcting the false ones. For example, the argument that all swans are white is correct until a black swan will be spotted.

Causality and Correlation

David Hume also took a swing at Causality or Causation following his treatment of induction. Hume stays committed to his reasoning all the way to the skeptic conclusion which is unavoidable according to which causality as a concept has no meaning as we cannot conceive the connection between cause and effect in any means available to us (I will explain shortly).

"…It appears that, in single instances of the operation of bodies, we never can, by our utmost scrutiny, discover anything but one event following another, without being able to comprehend any force or power by which the cause operates, or any connection between it and its supposed effect… All events seem entirely loose and separate. One event follows another; but we never can observe any tie between them. They seemed conjoined, but never connected. And as we can have no idea of anything which never appeared to our outward sense or inward sentiment, the necessary conclusion seems to be that we have no idea of connections or force at all, and that these words are absolutely without meaning, when employed either in philosophical reasoning or common life".

Trying to explain cause and effect in terms of experience is bound to lead us to Hume's reasoning. The connection between cause and effect can be described as either proximity in time, proximity in space, an obligatory connection or any combination of these. Still there will always be examples of events which answer to all these criteria and are not cause and effect. Hume gives us the example of the rooster that believes he bring out the sun with his cry every morning.

In order to lead our lives we all assume causality exists and will hopefully continue to govern our structured world. Many false theories however, are the result of assuming causality where only correlation exists. In economics and other social sciences the risk of erring in this way are very significant.

From the explanation above and the rooster example the difference between correlation and causality should be clear by now. The fact two phenomenon display certain similarities in their behavior, either in time, space or a connection does not mean they are, indeed, cause and effect. They may be simply correlated.

Correlation

Correlation is an important statistical figure which indicates the strength and direction of a relationship between two phenomenon or variables. For example, the price of wheat and bread are correlated. Putting the philosophical discussion aside, we believe these prices are correlated because the price of wheat serves as a cause for the price of bread. However, the prices of bread may be correlated with the daily yield on the Iranian government bond. There is no justification to assume causality here.

No less dangerous is assuming, perhaps, that the prices of bread influence the price of wheat. Getting the direction of the correlation wrong is a very easy mistake. Especially when we are researching variables we don't know much about.

Rudi Giuliani's fight against crime

A good example of the problems with assuming causality and using correlation is that of the significant decrease in crime in New York in the 1990's. The crime rate in New York had dropped significantly seemingly due to Mayor Giuliani's strict zero tolerance policy and the "broken window" thesis.

Researches today argue as to the real cause behind the decrease in crime rates in 1990's NY. Apparently some researches today claim Giuliani's success had merely been coincidental and that crime rates all over the country were dropping due to the economic growth in the 1990's and the decrease in the relative share of certain age-groups in the population. Several cities across the US have shown even more dramatic decrease in crime rates whit out Giuliani's fight against crime.

In their fascinating book Freakonomics (which is a must for any economics enthusiast) Steven Levitt and Stephen Dubner are presenting a very unconventional approach to economics and have presented a theory correlating legalization of abortions in America with the famous decrease in crime presented above. According to Levitt and Dubner the legalization of abortions has led to fewer unwanted births and to a decrease of the number of youths in the population exactly in the 1990's which in turn led to less crime and Giuliani's credit for the fight.
Although I agree with Giuliani's "broken window" thesis there is no real way to know what the cause behind the effect was.

This example serves to show how difficult and confusing it can be to prove causality between two variables and to incorporate that into any successful theory.

Conclusion

As always, all theories, especially when it comes to the social sciences need to be taken with a grain, or a whole bag, of salt. Adopting a skeptic attitude towards surprising findings will quickly sharpen your instincts and ability to tell reasonable from fantasy.

Understanding the problems with induction and causality and also the difference between correlation and causality is, perhaps, one of the most important aspects in leading a rational life. It will also help you quickly turn the page on that recent study which shows the amazing relationship between children who ate peanut butter sandwiches and their success in business later in life.

Related posts:

• Challenging Happiness – Exploring the Irony of Human Nature
• Capitalism with Social Equality: A Powerful Though Experiment Demonstrates Our Moral Obligations
• The Little Savings That Could
• On the Psychological Effects of Ownership and Overpricing
• Outsourcing Our Chores - Do We Overvalue Our Spare Time?

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Challenging Happiness – Exploring the Irony of Human Nature

The irony of human nature - anxiety for those that have everything and depression for those that have nothing

The human state of mind has been cleverly characterized by someone to be either anxiety or depression. It seems that either you have attained what you desire and you are constantly afraid of losing it or you haven't and therefore you are depressed.

I've read this rather bleak outlook on life yesterday along with another I'd like to share.
It seems that many successful individuals, who are and had "lived their dream", are frustrated and unhappy, even more, perhaps more than the rest of us, common folk, if I may generalize. There is no shortage of examples of successful people who were not able to cope with success and had cracked under it.

Still, I'd like to avoid the course of cliché or the common argument true happiness exists only in the more "noble" things in life like reason, religion, art, love or anything else that comes to mind.
Rather I'd like to question the idea of happiness in itself and hopefully draw some conclusions in the end.

Is there happiness to be had?

Philosophers of language enjoy dissecting words and meanings and happiness is defiantly one of the most interesting concepts we have.

To put is in very simple terms – Is there happiness to be had at all? Couldn't happiness be just a concept embedded in our language misleading us all?

The question of meaning is deep and challenging. Concepts such as happiness, along with truth, god, soul, mind and others are under constant scrutiny. The idea in itself is simple and powerful – The fact a word exists does not deduce any sort of meaning what so ever.

I think we can all agree, empirically speaking, that happiness is not an enduring state of mind but rather comprised of moments. We sometimes feel happiness surging through us but that may well be the effect of our body chemistry. This notion of experienced utility has been discussed and researched by Noble Laureate Daniel Kahneman which argued happiness is the subjective feeling in each moment defined, in turn, as the minimum range of time a person is self-aware of his or her feeling. Readers of The Personal Financier know I'm very fond of his work on psychology and economics.

Hollywood has probably contributed to the western notion of happiness more than any other influence by putting happiness into terms of family, love, success, money, power, freedom etc.
In fact, the state of happiness in individuals, or the capability to be happy, as we relate to it, is considered to be more than 50% genetic in its source. This simply means not all of us were cut out to be happy.

Happiness and worldly possessions

The notion material achievements do no lead to happiness, as demonstrated, with some humor, in the anxiety-depression paradigm is very deeply rooted in human civilization.

The bible, philosophers and modern day cliché coachers have all discussed the inability of worldly possessions to make us happy. While the latter maybe selling something the former have genuinely tried to demonstrate the way to a happier existence.

Contemporary theories reinforce earlier views according to which money, as the essence of worldly possessions has a much lower contribution to happiness that is usually attributed.

The reason, as modern psychologists have demonstrated in empirical experiments, is not that money isn't important. Money plays a significant role, but only up to a certain minimum point. After the point basic needs have been fulfilled it's how much money one has in comparison with others that matters most. People have demonstrated destructive behavior in experiments where one was willing to lose 25% of his or her capital to "destroy" 50% of another's.

Career is very much the same. We measure ourselves on the social scale. How can one be happy when there's always someone younger and ahead?

Frustration – The irony of the human psyche

Our frustration ironically increases when we achieve our dreams and goals. Suddenly the gap in expectations explodes in our faces and we are overwhelmed by the emptiness of the peak.

More often than not our expectations are much grander than reality. Imagine your last vacation, for example, to a beautiful destination. Did its beauty surpass your expectations? It does sometimes, but usually reality has its surprises in store for us.

The irony of human nature and our psyche is apparent. We were programmed, either by God or evolution (take your pick) to constantly seek out new challenges and new goals. We are quickly accustomed to any situation that is, at the moment, our current situation and we always believe happiness is right around the corner.

By constantly striving we (arguably) better ourselves but fail, again and again, to find peace of mind and the sought after happiness.

Conclusions

Well, it seems that if you are lucky genetics has already assured you 50% chance at happiness. The rest of us may have to work a bit harder.

My personal belief is that being aware of our psychological "deficiencies" is one of the better ways to tackle the issue of happiness. By acknowledging the elusive nature of happiness, the need to constantly set and conquer new goals and by learning to appreciate the more humble states of calmness, tranquility and long-term satisfaction we may find peace of mind and general well being.

My personal tendency is to agree with the philosophic arguments according to which reason is the source of long-term well being (I avoid using happiness). The little exercise I suggest here is exactly that. Gaining awareness and employing reason into understanding the elusive nature of happiness and our human limitations.

Related Posts:

• Behavioral Finance in Everyday Life – The Lottery as a Case Study
• Is Rationalization the Key to Happiness?
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• Coming To Terms with Never Getting Rich – A Look at the Pre-Requirements

Image by: Sean Oneill

Capitalism with Social Equality: A Powerful Though Experiment Demonstrates Our Moral Obligations

An interesting thought experiment by American philosopher John Rawls demonstrates the morality of a more socialistic version of Capitalism

I've been writing here, at The Personal Financier, for over a year and a half now. My skepticism regarding Capitalism as the best economic system, or lesser evil, should be quite familiar to my regular readers. Still, when at times I offer a more socialistic approach in my posts the comments are not late to follow.

It seems our solid conviction in the morality of Capitalism is deeply rooted in us. While pure Capitalism or the more extreme free market variations might have taken a blow recently, our indisputable belief in unadulterated Capitalism remains unscathed, not without just cause.

Capitalism has proved to be a shining beacon in the darkness of earlier economic approaches and has allowed men and women to fully express their potential. Still, we cannot ignore the destructive side-effects our economic system has on social equality (or inequality) and the erosion of the middle class which is the foundation to any solid economy.

There is no need to elaborate on the destructive force of more extreme versions of capitalism as we are witnessing, first hand, the results of greed which "pure" or unregulated capitalism leads to. Obviously the human factor is to blame and not the system, but shouldn't systems be designed to contain our human flaws?

The intuitive appeal of a more socialistic approach

Imagine a disabled person, say blind or handicapped in some fashion. Would you agree that it is society's moral obligation to support such a person? I'm sure that by support the majority would agree that basic sustenance such as a decent roof over one's head, clothes, food and decent medical care are all very reasonable considering the financial capabilities of our western governments.

To take this discussion one step further, to a more risky area, we have to consider the following arguments which I believe to be true:
1. Not all individuals are created equal.
2. Not all individuals, even if are created equal, have equal opportunity.

The socialistic point of view I wish to discuss is such that will, accordingly:
1. Assure the basic needs of all human beings
2. Strive to create equal opportunity

Obviously I can hear the comments in my head already. Why should the lazy and careless live off my taxes? It is a bit more complicated than that but to put it very clearly and basically:
I believe the state of affair where several "freeloaders" enjoy basic sustenance on "our" expense is preferable to a state of affairs where the unfortunate, of which some are lazy and others have had it bad, are taken care off.

Don't get me wrong, I'm not advocating extreme equality and I believe the relationship between ability, effort and personal gain should be rewarded to make any sort of progress. I would, however, like to make sure the less fortunate are living with minimal dignity.

Before this discussion gets more complicated I'd like to present John Rawls Veil of Ignorance which I believe is a very powerful and intuitive thought experiment that contributes to this discussion greatly.

John Rawls' Veil of Ignorance

John Rawls was a contemporary American philosopher and a leading figure in moral and political philosophy. Much like Jean-Jacques Rousseau and Thomas Hobbes Rawls set out to discuss the "state of nature" or the hypothetical human condition prior to the foundation of the state and the state.

While Thomas Hobbes's state of nature is a savage war of every man against every man Rawls uses a thought experiment to demonstrate his concept of the state of nature.

Rawls suggests that at the state of nature it is reasonable to assume the talented and strong would be able to coerce others (the weak). To overcome this "evolutionary" problem Rawls sets up the "original position" and asks us to put ourselves behind a veil of ignorance which deprives us of any information regarding ourselves and others placing us all in an equal, conscious starting point for the discussion in the social contract which we are all interested in.

Rawls argues that the representative parties in the original position would select two principles of justice (as a result of the veil of ignorance regarding their actual positions):

1. Each citizen is guaranteed a fully adequate scheme of basic liberties, which is compatible with the same scheme of liberties for all others;

Even the most egotistical would like to assure their basic rights, unknowing what their actual position is (talented and strong or weak).

2. Social and economic inequalities must satisfy two conditions:

• to the greatest benefit of the least advantaged (maximin rule);
• attached to positions and offices open to all. The reason that the least well off member gets benefited is that it is assumed that under the veil of ignorance, under original position, people will be risk averse. This implies that everyone is afraid of being part of the poor members of society, so the social contract is constructed to help the least well off members (Wikipedia)

And sympathy is what we need…

Rawls thought experiment is powerful. It forces the thinker to consider himself in someone else's shoes and evokes sympathy. And as the song goes: …sympathy is what we need my friends …
I'm anxious to read your great comments.

Related Posts:

• Would You Be Willing To Pay 60% Tax For a Higher Level of Social Equality?
• How Can they Possibly Afford That? Or Is Money in the Eye of the Beholder?
• No Salvation from Productivity Improvements: The Failed 35 Hour Work Week Experiment and Work-Life Balance Examined
• Valuation and Risk Measurement Models under Heavy Criticism – What Went Wrong?
• Coming To Terms with Never Getting Rich – A Look at the Pre-Requirements

Image by: mjecker

Free Market Proponents Call for Regulation on Speculative Oil Futures Trading: Define Irony

Analysts say speculative oil trading is to blame for gas prices at $4 a gallon. Congress considers regulation and legislation. What happened to market forces of supply and demand?

In the 2005 movie Syriana an oil company executive quotes Nobel Prize winning and renowned economist Milton Freedman: “Corruption is government intrusion into market efficiencies in the form of regulations”, he says. Freedman, one of the strongest proponents of the free-market, promoted the view of minimal government intervention in the markets as a means of creating political and social freedom.

We are born and raised according to the theoretical concepts of the free market and we are diligently taught the rules of the ‘vanishing hand’ and market forces at work. Our economic upbringing and formal academic education teaches us about market efficiencies and perfect competition only to face, later in our lives, a very harsh and different reality.

Gloating isn’t the best of qualities, yet I couldn’t avoid it when I read about a recent congressional panel regarding rising oil prices. Four senior analysts testified before congress claiming speculators are to blame for $4 a gallon gas prices.

The four senior analysts are: Michael Masters, who heads up Masters Capital Management, Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants.

All four analysts agreed limiting speculators’ participation in energy markets will lead to sharp drop in oil prices to the economically reasonable level of $65-$75 derived by supply and demand.

Apparently Congress is looking to revise legislation to do just that. There are several bills at work trying to limit or even remove speculation from energy markets.

More than 63% of oil futures owned by speculators

According to the Energy and Commerce Committee speculators now control overwhelming amounts of the oil futures market.

The economic function of a future contract is to enable any corporation to hedge its business and fix the price of oil in a future business deal, either paid for or sold. Imagine oil companies who wish to raise the level of certainty behind their revenues. They will offer future contracts to buy oil in certain prices in a future given time. Should a trucking company find those prices reasonable a deal is closed today with known prices for both enabling them to smoothen out uncertainties in future business.

The level of contracts owned by speculators rose from 37% of the contracts in 2007 to 63% in 2008 with the rest owned by oil refineries, trucking companies, wholesalers and other end users.

Imagine all that speculative money removed from the market. Suddenly an overwhelming over-supply is created and prices drop sharply.

The following are more charts presented before the committee. They are real eye openers:

The massive increase in speculative investments is evident from the charts. Another important observation is the level of relative growth in speculative investments:
More regarding economic theory, free markets and reason

Projecting the case of speculative investments on Milton Freedman’s entire economic philosophy is a huge over-simplification and I won’t be going that way. I only wish to illustrate the delicate balance that need be between the freedom of markets and government regulation.

Lack of proper regulation enables speculators to take advantage of market failures. Sadly it’s not a perfect world and there’s no real ‘vanishing hand’, perfect competition and market forces. There are opportunities and opportunists grabbing what is left open for grabbing.

There’s no doubt speculative activities contribute to market efficiency. The price of a lack of proper regulation and supervision can be very high.

Ayn Rand, the noted author and philosopher who wrote the infamous book “Atlas Shrugged” believed and promoted, wholeheartedly, the concept of freedom and objectivism. She is quoted for writing, much like Milton Freedman that “Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others”.

As an idea these words echo strongly. The problem is they are often correct the other way around. A Lack of government interference in the economy might give unearned benefit, extorted by force, to some men at the expense of others.
If we’ve sunk deep into philosophy than we may also recall Thomas Hobbes and Jean Jacques Rousseau’s words regarding the government:

“That a man be willing, when others are so too, as far forth as for peace and defense of himself he shall think it necessary, to lay down this right to all things; and be contented with so much liberty against other men, as he would allow other men against himself” (Thomas Hobbes)

“As soon as any man says of the affairs of the State "What does it matter to me?" the State may be given up for lost” (Jean Jacques Rousseau)

Related Posts :

• Is There an Oil Price Bubble Evolving?
• Higher Gas Prices: A Blessing in Disguise or America's Wakeup Call
• Spontaneous Observations on Commodity Prices - Will Prices Remain so High?

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The Little Savings That Could

The heap paradox as a powerful metaphor with surprising results.

Making the long and tedious process of saving small sums of money more rewarding and more tangible is a formidable effort. We all lose hope when we only manage to save 100$ each month, thinking desperately we will never get to see them amount to anything significant.

Sure enough, becoming wealthy is easier when you’re able to save significant sums of money on a timely basis. However, we shouldn’t neglect the smaller sums saved as they also have a key role is creating wealth.

I’ve recently re-read a very interesting paradox named the Sorites paradox (Greek for heap paradox). The paradox is attributed to Eubulides of Miletos who lived in 4th century BC and goes as follows: Consider a heap of sand of which grains are removed one at a turn. With each grain removed the heap gets microscopically smaller but is still a heap. However, is it still a heap should one grain remain? Or ten grains for that matter? When was it that the heap ceased being one?

The paradox can also be considered the other way around. One grain of sand is definitely not a heap, yet continuously adding individual grains will eventually result in a heap of sand. I assume you can already see where this is going.

The philosophical question is very interesting in itself and has to do with concepts that lack boundaries. However, the day to day application of this metaphor is even more powerful. A heap will eventually gather. We won’t necessarily get to see the moment it transforms from grains to a heap but we will get to see the heap at he end of the process.

Saving even the smallest amounts of money in a timely and consistent manner will eventually results in decent savings in the long term. The power of compounding interest mixed together with time and discipline will eventually work for you as well. You won’t notice the exact moment your monthly deposits became a worthy sum. But it will eventually become one.

Saving is a long term and tedious effort. Making it tangible and rewarding is very important for consistent success.

Image by Steffen M. Boelaars

Taking the Moments to Appreciate Life

I write a lot about investing, business and personal finance. So do many other personal finance blogs. However, we have to keep reminding ourselves money is just a means to an end and not an end in itself.

A recent experiment by the New York Post demonstrates what seems to be our innate inability to appreciate the present.

In the middle of D.C morning rush hour famed violinist Joshua Bell stood in a metro station and played six immortal classical pieces, such as J.S Bach’s "Chaconne” on his Stradivarius violin. He stood and played there for almost an hour with the violin case at his feet wearing ordinary everyday clothes. I believe you can guess the rest.

Almost 1,000 people passed him by, nearly unaffected by the marvelous musician playing before them.

Gene Weingarten discusses this experiment and its results in great detail in his article “Pearls before Breakfast” which I believe we should all read. What really troubled me is one begging question: Would I have stopped and listened?

I am every much a grey bureaucrat as many of the commuters in this D.C metro station. We all survive our daily routine by focusing on the tasks at hand and shutting out almost everything else.

Joshua Bell made 32.17$ for 43 minutes of what is described by Weingarten as heavenly music. No crowd gathered. Only one person out of 1,000 saw the quality in the music being played (while not recognizing the violinist).

Our defense mechanisms have their uses but they are costly. Constantly reminding ourselves what we live for is the only way to make sure we stay focused on what’s important.

Could You Tell If You Were Just A Brain In A Vat?

Movies like ‘Total Recall’, ‘Vanilla Sky’ and of course ‘The Matrix’ have already posed that question. In these movies a hero is trapped in a virtual reality so real he could not know the difference between being and being a brain wired to receive stimulations that create an identical alternative reality.

Being movies, they all ended happily for our prospected “brain in a vat” whether it is Kiano Reeves, Tom Cruise or Arnold Schwarzenegger. Schwarzenegger could tell it was no dream, Tom cruise chose to leave his lucid dream and Reeves, of course, took the blue pill.

But could one really know the difference between being and being a brain in vat? The concept of brain in a vat is a known philosophical thought experiment. In this experiment a brain sits in a lab, wired to a computer of sorts, and receives electrical pulses which stimulate the brains neurons to create a virtual reality full of feelings, smells, sights and sounds. The brain’s previous owner is oblivious to its current existence as a brain in vat as reality for him continues on as it has. Would you know you are now a brain in a vat living some scientist’s scenario of a life?

Regrettably the only answer to this question is no. This philosophical thought experiment is influenced by Descartes ‘Meditations on First Philosophy’ from which the famous “I think therefore I am” (Cogito Ergo Sum) quote is taken. Descartes is desperately seeking an anchor for his knowledge and beliefs. Descartes, before reaching his famous conclusion, deduces he can not rely on mathematical truths as some evil demon might have planted those inside him with a firm belief in their a-priory nature.

Another philosophical principle which plays here is Solipsism – Perhaps only I exist and all other are but an illusion. I can be sure of my existence but can I be sure of the others’? Solipsism, as the brain in a vat, has no good reply. One can not argue with the solipsist arguing you are just his imagination (and so are your replies).

Philosophers have tried to answer this thought experiment in unique ways. Hillary Putnam, a famous American philosopher, argued the brain in a vat could not have a thought about the vat it is in (His thought would only be of an image of a vat since this brain could not have the interactions required to picture the actual vat). This solution relies on theories of meaning and is quite unsatisfying.