Relativity In Money

[Injin]

As some of us have realised, economics is the study of human beings trading with each other in the real world, as well as the conceptual world that we all live in but do not share.

That is, the actions that we undertake are primarily derived from our thoughts, feelings, impulses, emotions and memories - which are not bound by much if any physical laws but are also at one and the same time completely bound by those laws when we actually try to express them.

This means that we can have things like bubbles - as our imaginations run away with us about possibilities which lead to busts - where our imaginations meet cold, hard reality and our expectations crash and burn. There are many reasons why our thoughts might not match reality - from imperfect knowledge to being flat out lied to and it's beyond what I want to postulate here in any event so I will leave this topic for now. (I know, I know......)

What I want to discuss here is the relativity of money.

Each and every individuals wants, needs etc are different, so they trade and interact with the real world, but against what?

What do individuals measure their desires against?

What is the point upon which values are measured against?

[Stars]

What is the point upon which values are measured against?

Human atomic stuff

Discomfort vs pleasure - ease vs unease

People will trade if the emotional equation works out as a gain for them - and so we have a trade and a price which are both objects in the shared world

I may be missing the point of the question entirely, because i have talked to many socialists who seem entirely unhappy with this answer. i myself can't see why it is totally complete as an answer nor can i understand the need for something objective to measure value itself by; a valuation is an internal dialog that compares possible futures.

Edited May 23, 2009 by Stars

[Injin]

Human atomic stuff

Discomfort vs pleasure - ease vs unease

People will trade if the emotional equation works out as a gain for them - and so we have a trade and a price which are both objects in the shared world

I may be missing the point of the question entirely, because i have talked to many socialists who seem entirely unhappy with this answer. i myself can't see why it is totally complete as an answer nor can i understand the need for something objective to measure value itself by; a valuation is an internal dialog that compares possible futures.

I agree.

What I am looking for is the point which those decisions are made from internally.

[Frank Hovis]

I would say that we all have baseline requirements.

We then build upon those requirements by raising our expectations of what we deserve.

In doing that we attach a value multiple to the higher expectation. The way that this multiple is arrived at can distort one requirement far above another.

When those value multiples start entering a positive feedback cycle you get a boom, when a negative cycle you get a bust.

It becomes even more exaggerated when you allow debt as instead of offsetting current requirements (scaling some down in preference to others) you are forgoing future benefits for something you want now.

Hence the people on this board correctly complaining about property porn. It led to massive overstatement of the importance of housing and so made the value multiple of (say) owning rather than renting totally out of kilter.

Or am I, as with may of Injin's posts, missing the meta point?

[Injin]

I would say that we all have baseline requirements.

We then build upon those requirements by raising our expectations of what we deserve.

In doing that we attach a value multiple to the higher expectation. The way that this multiple is arrived at can distort one requirement far above another.

When those value multiples start entering a positive feedback cycle you get a boom, when a negative cycle you get a bust.

It becomes even more exaggerated when you allow debt as instead of offsetting current requirements (scaling some down in preference to others) you are forgoing future benefits for something you want now.

Hence the people on this board correctly complaining about property porn. It led to massive overstatement of the importance of housing and so made the value multiple of (say) owning rather than renting totally out of kilter.

Or am I, as with may of Injin's posts, missing the meta point?

No no, that's good stuff and given me plenty to think about.

Thanks.

[Frank Hovis]

No no, that's good stuff and given me plenty to think about.

Thanks.

<surprised>

No problem!

[Stars]

I agree.

What I am looking for is the point which those decisions are made from internally.

The basis for the internal preferences?

Evolution is my best answer - certain preferences tend to survive to reproduce, others don't.

AS for the mechanics of preference, i don't think that's something we have worked out yet.

[Injin]

The basis for the internal preferences?

Evolution is my best answer - certain preferences tend to survive to reproduce, others don't.

yes, our values when expressed can lead us massively astray.

AS for the mechanics of preference, i don't think that's something we have worked out yet.

Hence the tread!

P)rimitive I know, but this board has a multiplicity of genius.

[Mr Nice]

I'm not sure that all preference is an internal mechanism.

many people do many things just because that's the way they were raised, or it's what their peers do etc.

it may even be a majority of what people do.

another big chunk of preference is pleasure/satisfaction like has been mentioned.

[Game_Over]

The value of anything to a person, beyond the essentials for survival, depends on that persons view of their own self worth IMO.

Therefore the value of money is ultimately relative to each persons internal self worth

[Guest Steve Cook]

As some of us have realised, economics is the study of human beings trading with each other in the real world, as well as the conceptual world that we all live in but do not share.

That is, the actions that we undertake are primarily derived from our thoughts, feelings, impulses, emotions and memories - which are not bound by much if any physical laws but are also at one and the same time completely bound by those laws when we actually try to express them.

This means that we can have things like bubbles - as our imaginations run away with us about possibilities which lead to busts - where our imaginations meet cold, hard reality and our expectations crash and burn. There are many reasons why our thoughts might not match reality - from imperfect knowledge to being flat out lied to and it's beyond what I want to postulate here in any event so I will leave this topic for now. (I know, I know......)

What I want to discuss here is the relativity of money.

Each and every individuals wants, needs etc are different, so they trade and interact with the real world, but against what?

What do individuals measure their desires against?

What is the point upon which values are measured against?

Individuals measure their desires against the the person or persons they perceive to be higher up the social hierarchy than themselves. The "social hierarchy" is defined by whatever the individual defines as a hierarchy. It could be based on intelligence, popularity, beauty, economic success, formal position in a defined rank structure, any/all of the above or any other of the infinitely myriad ways in which we humans rank ourselves against our fellow humans.

Advertisers base their selling strategies on the above factors. You don't get old, weak, sad, ugly, poor, unpopular, thick people selling detergent do you?

As the old adage goes, "Never read beauty magazines. They will only make you feel ugly".

Which leads us onto the reason why we base our desires on the above:

Basically, it comes down to imperfect knowledge.

In an ideal world we all have equal access to information. Thus we can all make rational trades based on this knowledge. However, in the real world, the information we have to hand is both imperfect and and unequal. Nevertheless, we have to make decisions in this context of inadequate information. consequently, the most straightforward strategy of decision making under such circumstances is to base our decisions on what we think others have decided. In this regard we have two choices. either we follow what we think the majority are doing. Or, we follow what we think the (perceived) more successful people are doing. More likely, our decisions are based on an optimum combination of the above two factors.

So, in summary....

We base many of our trading decisions on our desires. We base many of our desires on our perception of what the majority/most successful of our peers are doing. We do this because we are in possession of incomplete/inadequate information.

Hence "herd" mentality. Hence "bubble" markets.

Edited May 23, 2009 by Steve Cook

[SNACR]

People project on to physical objects like cars and houses resolutions to their psychological and emotional issues. They mistakenly perceive that lifestyle as being happy and problem free.

If they've got low self-esteem or interpersonal relationship issues they think they can resolve them by giving their lives a makeover to the perceived happy life.

They can only do this if the barrier is low. ie cheap debt = solves problems by buying new car. If buying new car/bigger house was a long disciplined process of carefully saving they'd set about actually resolving their issues as it'd be the path of least resistance.

Hannibal Lecter had it about right. People covet what they see everyday. That's how you end up with the lottery winner going down to the Vauxhall Dealer and buying a Vectra with every option on the list.

Wealth is completely relative, if no-one else wants something it's not worth anything. That's what the moronic minimum wage cheerleaders don'r understand. Either everyone gets paid the same or you have the exact same cross-section just as poor, relatively, as they were before.

[SNACR]

Individuals measure their desires against the the person or persons they perceive to be higher up the social hierarchy than themselves. The "social hierarchy" is defined by whatever the individual defines as a hierarchy. It could be based on intelligence, popularity, beauty, economic success, formal position in a defined rank structure, any/all of the above or any other of the infinitely myriad ways in which we humans rank ourselves against our fellow humans.

Advertisers base their selling strategies on the above factors. You don't get old, weak, sad, ugly, poor, unpopular, thick people selling detergent do you?

As the old adage goes.....

Never read beauty magazines. They will only make you feel ugly.

Shane Ritchie?

[Guest Steve Cook]

Shane Ritchie?

Fair point....

I Have added a copy of my post here as I have added significantly to it following your reply...

Individuals measure their desires against the the person or persons they perceive to be higher up the social hierarchy than themselves. The "social hierarchy" is defined by whatever the individual defines as a hierarchy. It could be based on intelligence, popularity, beauty, economic success, formal position in a defined rank structure, any/all of the above or any other of the infinitely myriad ways in which we humans rank ourselves against our fellow humans.

Advertisers base their selling strategies on the above factors. You don't get old, weak, sad, ugly, poor, unpopular, thick people selling detergent do you?

As the old adage goes, "Never read beauty magazines. They will only make you feel ugly".

Which leads us onto the reason why we base our desires on the above:

Basically, it comes down to imperfect knowledge.

In an ideal world we all have equal access to information. Thus we can all make rational trades based on this knowledge. However, in the real world, the information we have to hand is both imperfect and and unequal. Nevertheless, we have to make decisions in this context of inadequate information. consequently, the most straightforward strategy of decision making under such circumstances is to base our decisions on what we think others have decided. In this regard we have two choices. either we follow what we think the majority are doing. Or, we follow what we think the (perceived) more successful people are doing. More likely, our decisions are based on an optimum combination of the above two factors.

So, in summary....

We base many of our trading decisions on our desires. We base many of our desires on our perception of what the majority/most successful of our peers are doing. We do this because we are in possession of incomplete/inadequate information.

Hence "herd" mentality. Hence "bubble" markets.

[Guest Steve Cook]

Individuals measure their desires against the the person or persons they perceive to be higher up the social hierarchy than themselves. The "social hierarchy" is defined by whatever the individual defines as a hierarchy. It could be based on intelligence, popularity, beauty, economic success, formal position in a defined rank structure, any/all of the above or any other of the infinitely myriad ways in which we humans rank ourselves against our fellow humans.

Advertisers base their selling strategies on the above factors. You don't get old, weak, sad, ugly, poor, unpopular, thick people selling detergent do you?

As the old adage goes, "Never read beauty magazines. They will only make you feel ugly".

Which leads us onto the reason why we base our desires on the above:

Basically, it comes down to imperfect knowledge.

In an ideal world we all have equal access to information. Thus we can all make rational trades based on this knowledge. However, in the real world, the information we have to hand is both imperfect and and unequal. Nevertheless, we have to make decisions in this context of inadequate information. consequently, the most straightforward strategy of decision making under such circumstances is to base our decisions on what we think others have decided. In this regard we have two choices. either we follow what we think the majority are doing. Or, we follow what we think the (perceived) more successful people are doing. More likely, our decisions are based on an optimum combination of the above two factors.

So, in summary....

We base many of our trading decisions on our desires. We base many of our desires on our perception of what the majority/most successful of our peers are doing. We do this because we are in possession of incomplete/inadequate information.

Hence "herd" mentality. Hence "bubble" markets.

I should also add.....

Hence "overshoot" on both the upside and downside of a bubble market

[SNACR]

Fair point....

I Have added a copy of my post here as I have added significantly to it following your reply...

The odd thing is people did have access to the information that everyone else's homes had gone up in value. Somehow they deluded themselves into thinking that it was only *their* home that had gone up in value ergo they were wealthier. The only way you could be wealthier from rising house prices would be if everyone else's in the street had stayed the same. It wasn't a very subtle point to miss that they hadn't.

What's also interesting about the most recent bubble is the effect of the media and enhanced communications. I think with previous bubbles there would have been communities that would have been unexposed to it throughout.

People often say to me something like 'I read in the paper that such and such is big business, don't you think you ought to be getting into that?' I always reply to them back up a bit, where you've gone wrong with this perceived business secret is the 'I read in a paper' bit. People have a curious propensity for believing that the media is having an exclusive one to one dialogue with them, rather than the whole population. The crash seems to come when everyone shows their cards and they've all got the same.

The irony is that natural survival preservation instinct of safety in numbers leads people completely astray in wealth building and preservation, as for more wealth their position must be significantly different to everyone else's.

[Guest Steve Cook]

The odd thing is people did have access to the information that everyone else's homes had gone up in value. Somehow they deluded themselves into thinking that it was only *their* home that had gone up in value ergo they were wealthier. The only way you could be wealthier from rising house prices would be if everyone else's in the street had stayed the same. It wasn't a very subtle point to miss that they hadn't.

What's also interesting about the most recent bubble is the effect of the media and enhanced communications. I think with previous bubbles there would have been communities that would have been unexposed to it throughout.

People often say to me something like 'I read in the paper that such and such is big business, don't you think you ought to be getting into that?' I always reply to them back up a bit, where you've gone wrong with this perceived business secret is the 'I read in a paper' bit. People have a curious propensity for believing that the media is having an exclusive one to one dialogue with them, rather than the whole population. The crash seems to come when everyone shows their cards and they've all got the same.

The irony is that natural survival preservation instinct of safety in numbers leads people completely astray in wealth building and preservation, as for more wealth their position must be significantly different to everyone else's.

I guess my analysis of the above (in bold) would be that people saw other buying into a a given product (in this case, houses). they saw that such people were above to MEW on their houses and "afford" a lifestyle that they were currently unable to partake of. Had they been in possession of all of the relevant information (that increases in property value were only based on confidence and that property price crashes occur roughly every 18 years) they would have not necessarily bought in. However, even if they did have such knowledge to hand, it would still have been a rational thing for them to buy in just so long as they timed it right and sold at the top. In other words, even if you are a fully rational trader yourself and have all of the relevant underlying supply/demand information at your disposal, it still makes sense to ride the wave of a herd market. So, even the rational must act irrationally in a bubble market if they are to maximise their profit.

I don't think it is a coincidence that property bubbles occur over the time frequency that they do. 18 years is roughly the time it takes for a new generation to enter the housing market having had no direct experience of the previous crash.

[Stars]

I guess my analysis of the above (in bold) would be that people saw other buying into a a given product (in this case, houses). they saw that such people were above to MEW on their houses and "afford" a lifestyle that they were currently unable to partake of. Had they been in possession of all of the relevant information (that increases in property value were only based on confidence and that property price crashes occur roughly every 18 years) they would have not necessarily bought in. However, even if they did have such knowledge to hand, it would still have been a rational thing for them to buy in just so long as they timed it right and sold at the top. In other words, even if you are a fully rational trader yourself and have all of the relevant underlying supply/demand information at your disposal, it still makes sense to ride the wave of a herd market. So, even the rational must act irrationally in a bubble market if they are to maximise their profit.

Bingo

Which is why the phenomena is so poisonous and destructive

Everyone having a chat with their psychiatrist is not enough, because the advantages of conforming are real and so are the disadvantages of not conforming.

[Guest Steve Cook]

Bingo

Which is why the phenomena is so poisonous and destructive

Everyone having a chat with their psychiatrist is not enough, because the advantages of conforming are real and so are the disadvantages of not conforming.

Yes.

The irony of the above is that the very traits we prize most highly are the self same traits that lead to bubble markets.

In other words, in order for such bubbles not to occur, we would have to not be what we are......

a deeply social species

Edited May 24, 2009 by Steve Cook

[Stars]

Yes.

The irony of the above is that the very social traits we prize most highly are the self same traits that lead to bubble markets.

In other words, in order for such bubbles not to occur, we would have to not be what we are...a deeply social species

I'm afraid I disagree, it's not our social nature that causes this bubble, but an unjust imbalance in the way the underlying property has been defined - it is a system problem, rather than a people problem. Real estate bubbles inflict costs on people who are 'bystanders' and so everyone is left in a prisoner's dilemma of either being a victim or a perpetrator. In truth it is impossible to refuse to be involved in the real estate market because there is absolutely nowhere else to go - and this geometrical fact is at the root of the peculiar and distinctly abusive nature of the real estate market.

[Injin]

I do agree that our values can be expressed badly if we start with faulty premises, are lied to or mistake a trend for reality.

But is that really an objective point that our values are relative to?

I am not sure, which is why I am asking for a bit of help.

[SNACR]

I'm afraid I disagree, it's not our social nature that causes this bubble, but an unjust imbalance in the way the underlying property has been defined - it is a system problem, rather than a people problem. Real estate bubbles inflict costs on people who are 'bystanders' and so everyone is left in a prisoner's dilemma of either being a victim or a perpetrator. In truth it is impossible to refuse to be involved in the real estate market because there is absolutely nowhere else to go - and this geometrical fact is at the root of the peculiar and distinctly abusive nature of the real estate market.

I would go as far as to say all markets.

If a competitor retailer, up the road, buoyed with cheap private equity debt has a business model you know is unsustainable you still have no choice but to compete else all your customers disappear. Sure, eventually they'll go bust but, their capacity to take on debt might far out last your own debt-free cash resources. If the result is you're forced out of business and the adminstrator's report shows you had very little debt, have you won?

I'm very reluctant to conclude regulation but, you have got to somehow prevent people doing stupid things and ruining it for everyone else.

Perhaps, making a 10% mortgage deposit mandatory would be a good start.

[SNACR]

I do agree that our values can be expressed badly if we start with faulty premises, are lied to or mistake a trend for reality.

But is that really an objective point that our values are relative to?

I am not sure, which is why I am asking for a bit of help.

I don't think you'll divine any underlying gold standard to it if that's what you're after. The sands are always shifting - the closest thing will be what those around you have,

[D.C.]

I do agree that our values can be expressed badly if we start with faulty premises, are lied to or mistake a trend for reality.

But is that really an objective point that our values are relative to?

I am not sure, which is why I am asking for a bit of help.

You can't ignore that everyday for years the primetime television viewing has been chock full of 'living the dream' easy money, foolproof, scheme of buying houses to do up and sell on.

You are assuming that people make rational choices when you talk about perfect information, they don't.

[Injin]

I don't think you'll divine any underlying gold standard to it if that's what you're after. The sands are always shifting - the closest thing will be what those around you have,

I am not searching with an already defined end point in mind.

If the sands are always shifting, I would ask - relative to what?