Introduction
This essay aims to explore how the variety of seminars, tutorials, challenges and experiences have influenced my understanding of key disciplines including the studies of Economics, Business and Management, Finance and Government Intervention, Game Theory, Artificial Intelligence and more.
The Complex Study of Economics
What exactly is the study of economics? One might wonder that economics is the study of the movement of money in the economy, but a more discerning individual will realise that there is so much more hidden in the complexities of the subject. Economics, simply put, is the academic study of behaviour of economic agents which include (but not limited to) governments, firms, and consumers. Delving into the intricacies of microeconomics, we discussed the concepts of opportunity cost through the product possibility frontier, supply and demand, elasticities and related concepts. While familiar concepts such as supply, demand, and elasticity were revisited, they served as a foundation for more advanced discussions.
Since economics is related to the study of behaviour, rational decision making is involved for the sake of maximising one’s personal satisfaction. However, this rationality is limited by the available information of an agent. As humans, we may fall short of logical and optimal methods of making decisions because of impatience to maximise gains. This is known as apophenia, where people have the tendency to perceive meaningful connections between unrelated things. Relating to the concepts within microeconomics, people can choose to act immediately or withhold this action to a later date. These choices give rise to different types of discounting, where the apparent utility or satisfaction gained varies with duration. Decisions can be influenced by cognitive biases, which may lead to the overvaluation or undervaluation of immediate versus future outcomes. In the context of intertemporal choice, people may irrationally interpret future outcomes, similar to the biases observed in apophenia.
The interplay occurring between economics and psychology is thus evident, as economic behaviour is not shaped by theoretical understandings of maximising utility, but by emotional or cognitive biases. This highlights the importance of behavioural economics compared to classical economics in mapping the decisions which shape our society today.
This leads me to a question: “What is the point of studying classical economics when it doesn’t reflect the observations in real world scenarios?” Mr Akinlabi, a leading financial consultant and one of our valued economics tutors, addressed this question effectively by making use of an analogy.
Consider the concept of a firm in a perfect competitive market structure. This is realistically impossible, as there are no markets which operate with perfect information and homogeneous products. Even though it may not seem like it is worth mentioning, perfect competition provides an unrealistic ideal which can be a basis of comparison for real world situations. A perfectly competitive market is socially desirable, as all firms make normal profits and are Pareto efficient. Contrary to this, a more realistic monopolistic competitive market falls short of the ideal of allocative efficiency, especially since firms produce at the profit-maximisation quantity.
The analogy of comparing perfect competition and monopolistic competition can be applied to compare the relationship between classical and behavioural economics. In classical economics, the assumption is that economic agents act purely rationally to maximise their personal utility with perfect information and optimal decision making strategies. Classical economics operates with many assumptions to create a framework for assumption, where rationality and self-satisfaction drive strategy and decision making.
Behavioural economics represents a more realistic, and in turn more complex approach to comprehending human behaviour. Instead of assuming perfect information and optimal decision making, behavioural economics acknowledges the intricacies associated with human psychology. More often than not, human decision-making is influenced by cognitive biases, emotions, imperfect information and status quo. It would be logically fallacious to discount the significance of these factors in shaping our thoughts and choices, and it could have the potential to wildly miscalculate the outcome of a given situation. Just as monopolistic competition accounts for the imperfect, yet competitive nature of real-world markets, behavioral economics accounts for the imperfections in human decision-making that shape economic outcomes.
Analysing the relationship between these two theories of economics, classical economics is a theoretical ideal. It is the model which simplifies real-world processes while providing a valuable framework for understanding how markets and individuals should behave under perfect conditions. On the other hand, behavioural economics functions more as the applicable and nuanced economic theory. It embraces the imperfections and complexities associated with decision-making in the real world, offering better insights into actual consumer behaviour and market reactions. This in turn provides a deeper understanding of how economic decisions unfold in practice.
The study of economics was something I had always considered to be manageable within the realm of my syllabus. But once the shackles of academic syllabi and mandatory testing were liberated, the elegance of the academic discipline really shone through, The ability to step back and consider economics not just as a subject to study, but as a lens through which to view the complexities of relationships between agents in our society, was eye-opening.
The Interplay of Business and Management
I was initially enthralled by the opportunity to study business from the perspective of aspiring entrepreneurs. At the same time, I was reluctant to attend the seminars on management. I had a long standing view that the two disciplines were distinct: business encompassed the dynamic narratives of glorious success and devastating failure, while management appeared to be a more monotonous and uninspiring field. To my surprise, I soon recognised the critical role that management plays in the effective functioning of business operations.
Many people assume that leaders and managers fulfil the same roles. Managers and leaders both lead groups of people to achieve a common goal, have authority over their group and are accountable for their target performance metrics. I had assumed that this was the case, and used the terms interchangeably in the context of a business. Obviously, I was mistaken.
This realisation was most apparent during Challenge Day, where the significance of management within the entrepreneurial context was clearly demonstrated. The combination of severe time constraints, live investour questioning, and high expectations created a uniquely demanding environment. The challenge required us to work efficiently under pressure, with a group of diverse individuals, given only three hours for intense research and planning, and tasked with convincing two skeptical mock investors. It was in this setting that I truly appreciated the role of management in business.
Initially, our team faced considerable confusion. We struggled to reach a consensus on a reasonable problem to solve, and could not systematically decide on an allocation of roles. However, once we had our initial footing, we adopted a more structured approach in tackling each specialised challenge. This was when effective management started to shine: we were able to delegate tasks based on the individual strengths of our members, which greatly improved our efficiency with the framework of “divide-and-conquer”. It was enlightening to witness how management practices contributed to the success of our business idea in such a limited timeframe. I would go so far to say that the level of coordination we achieved as a team was nothing short of remarkable.
Effective management is not just about overseeing the day-to-day operations of a firm, but it involves everything from strategic decision-making, resource allocation, and ensuring that all components of the organisation are working cohesively toward a common goal. A good manager is someone who is goal-oriented, embraces the stability which comes with structure, and quickly resolves problems without hindering the original goal. Furthermore, management ability provides the organisational structure necessary to harness the diverse skills and talents within a team. The delegation of tasks according to individual strengths, as we experienced during Challenge Day, demonstrates how management practices are essential for optimising efficiency and achieving benchmarks.
The Billion-Dollar Question
In the world of entrepreneurship, a graveyard stretches as far as the eye can see. Its headstones bear the names of those with unfulfilled dreams and countless ideas that never took flight. These are the forgotten ventures, failed businesses, and the innovations that never made it past the drawing board. Yet, amidst this sea of lost potential, there are also victors: those who dared to take their ideas from the realm of possibility into reality. The true nature of entrepreneurship lies in the tension between risk and reward, failure and triumph, uncertainty and confidence.
For aspiring innovators and business founders, the billion-dollar question remains: What differentiates a successful business from one that never takes flight?
The answer, as elusive as it seems, does not just lie in the idea itself, but in the execution and ability to navigate the complex landscape of market needs, customer behaviour and strategic needs. While innovation is still crucial to a business, the Problem-Solution-Market Framework often determines whether an idea is actually marketable and viable. A successful entrepreneur does not just create a product or service, they identify the urgency of their problem, design significantly better solutions, and ensure that there is an addressable market.
This framework is so effective since it forces entrepreneurs to validate their idea at every stage. Too many ideas fail before they neglect these three crucial areas, like solving a problem which does not resonate with consumers or offering a solution which is not scalable.
Even after clearing this hurdle of corroboration, startups will still fail. The oversaturated and hypercompetitive markets will eventually kill off the weak, highlighting the importance of addressing common pitfalls that many entrepreneurs face.
One of the most common challenges faced by startups is that they create a feature rather than a fully-fledged product. Even though it may seem to solve a problem, it does not provide the differentiating factor to create a strong market position. This leads nicely to the next trap for entrepreneurs, the establishment of barriers to entry. Especially in the context of a blue ocean (that is, a firm being a trailblazer in an untouched market), without a figurative moat to defend against invaders, firms with superiour resources and connections will triumph over a mere startup.
In this day and age, capitalisation of social media as an effective marketing tool has been more important than ever. In some cases, however, the hype surrounding a particular brand or product could do more detriment than good, especially when the hype is revealed to be a sham. Such was the case with Theranos, which was slated to be a 21st-century medical breakthrough before the walls came tumbling down. Originally designed to revolutionise blood testing through a simple prick of a finger, they were publicly humiliated when their lab of scientists going through the motions of regular blood testing was exposed.
Overall, the initial spark of innovation should not be seen as the main determinant for success in a business. Founders need to set the direction and navigate through market dynamics, highlighting specific tastes and preferences of the consumers to turn their idea into reality. Adapting to current needs and learning from failures is just as significant in ascertaining the success in entrepreneurship as the business idea. This means that the most successful businesses are those that can evolve, refine their offerings and pivot when necessary, all with the goal of continuously aligning with the needs of the consumers.
The Vulnerability of our Economy
I had always imagined finance as nothing more than a stable career for a lucrative source of income. Finance has been understood as being the backbone which supports the global economy, where the failure of which has led to devastating to the economy. Such has been the case in the various bursting of “bubbles”: the Great Depression in 1929, the Asian Financial Crisis of 1997, the Global Financial Crisis of 2008. Obviously, this leads to a drop in the standard of living, rising unemployment and widespread uncertainty.
In order to protect the vulnerable groups in our societies, we must be aware of the question: How can these instances of financial death and ruin be avoided?
The cascading effect observed in financial crises is often the result of the buildup of excessive risk, resulting in a specific trigger to cause a meltdown of the economy. The economist Hyman Minsky, in his paper of The Financial Instability Hypothesis, theorises that “stability is destabilising”. It suggests that periods of prolonged economic prosperity naturally breed instability, making financial crises endemic to capitalism rather than accidental.
Tying this to our idea of behavioural economics, during stable times, both investors and borrowers tend to underestimate the risks they face, assuming that the market will continue to perform well indefinitely. This often leads to increased leverage: individuals and companies start to take on more debt while financial institutions offer riskier loans.
According to Minsky, this is not a possibility, but a necessary consequence which comes with stability. This highlights the cyclical nature of our economy, as suggested by the French economist Clément Juglar, where our economy goes through cycles of expansion and recession. After a financial crisis, the economy goes through a period of prolonged recession. With time, however, the economy will recover and achieve a period of stability.
Building up to the 2008 Financial Crisis, the housing market in the US during the early 2000s was going strong: financial institutions were providing loans and easy credit to meet the growing demand for real estate investments. However, the assumption of continual stability led to lenders offering high-risk loans to subprime borrowers who were less likely to repay, building onto increasing leverage. Banks bundled subprime mortgages into mortgage-backed securities (MBS) and collateralised debt obligations (CDO), which improved diversification of one’s portfolio. This was sold to investors, which had the effect of spreading the risk globally and hiding the actual exposure to high leverage of the investments. Eventually, US housing prices reached a peak and began to fall, leading to an increase in mortgage defaults, particularly in subprime areas. As housing prices plummeted, the values of these MBS and CDOs, causing significant losses for investors. Banks, wanting to cut further losses, refused to share with other banks and institutions, leading to a global freeze in credit. The crisis triggered the Great Recession, leading to a global economic downturn, with economies shrinking, rising unemployment, and widespread business closures.
The 2008 Financial Crisis gave valuable lessons about the flaws entrenched in our financial systems, ideas about mounting risk and leverage, and the vulnerabilities due to interconnections in our broader economies. The reforms made after this crisis also highlighted valuable insights about regulation and government intervention. The lower requirements which financial institutions had to conform to was one of the guardrails which allowed complacency for risk to pile up. In response to the crisis, the US government implemented multiple reforms to manage and improve the financial system based on these failures. Despite this, there are still ongoing debates on the role and level of government intervention in the economy, and whether these regulations actually prevent this seemingly inevitable economic cycle.
True Rationality in Game Theory
Classical economics defines rationality as the maximisation of one’s utility. Based on this definition, it would be reasonable to assume that an agent acting in a rational manner is an objective matter. This mirrors the ethical theory of moral absolutism, where it brings the idea that there are eternal and universally accepted moral principles which means that the concept of right and wrong is objective.
But under certain circumstances, like under the situation of imperfect information, or with alternative goals which inadvertently reflect one’s personal satisfaction in the long run, different types of decisions can be made. Incorporating the principle of information asymmetry, the rationality of an economic agent can be analysed. Consider the case of adverse selection in the used car market: Sellers of used cars usually have more information about their cars, especially problems with their cars, than potential buyers. A rational consumer would not be aware of these issues in the used car, and could make a suboptimal decision which does not maximise personal utility.
Here comes the dilemma: in the context which is provided, is the consumer acting rationally? To act rationally, the view mirroring moral absolutism would suggest that there is an objective choice to optimise one’s personal satisfaction. But in this case, a view mirroring moral relativism would more closely explain reality. Given the available information, a rational consumer’s decision would be suboptimal but still rational.
This rather self-formed debate really challenged my view in comparing the difference between theoretical models and real-world situations in economics. Rationality depends on the context of situations, which has to be evaluated on a deeper level before making a conclusive decision on how logical a specific decision could be. This can directly be applied to the ideas of Game Theory, which start with relatively simple games with perfect information to more complex games with asymmetric information.
Shockingly, this is merely the tip of the iceberg for the understanding of Game Theory. Game theory is the mathematical study of strategic interactions between rational decision-makers, analysing situations where outcomes depend on the choices of multiple “players”, which can apply to a multitude of real-world interactions between agents.
The game “Prisoner’s Dilemma” exemplifies the core principles of game theory. The rules of this Two players make decisions simultaneously without knowing the other’s choice. Each player has two possible actions: Confess or Not Confess. The respective outcomes and payoffs to each player depend on the combination of choices made between the two players in the game. If mutual cooperation occurs (i.e. both players agree to confess), this yields the highest payoff to both players. If mutual defection occurs (i.e. both players scheme against one another and decide to not confess), yields a low payoff (or high cost) to both players. If one defects while the other cooperates, the defectour receives the highest payoff while the cooperatour receives the lowest payoff. The structure creates an incentive to defect regardless of the other player’s move, because of the concept of Nash equilibrium. Rational self-interest suggests that in order to maximise the situation the current player is in, the player should defect, even though mutual cooperation would give a better collective outcome.
This highlights the core concept within Game Theory: strategy. Given that the players in the same game as you are rational, they will also strategise to make the largest payoff possible. The additional complexity brought on by this necessitates the confirmation of Nash equilibria. Nash equilibria refers to the state which is the best response given the response of other players. In a Nash equilibrium state, no player can benefit by changing their strategy alone, meaning that each player’s strategy is the best response to others’ strategies.