Dear readers,

We hope you enjoyed our very first edition of The Marketplace, a publication aimed at providing interesting insights on a range of relevant and exciting issues. In this issue, we offer fresh perspectives on the all-too timely topic of mugging - as you find yourself buried in your stack of notes, gulping your fifth cup of coffee at three in the morning and questioning your sanity, fret not as we explain why your decision to mug is indeed rational in “The Truth about Mugging”.

Or perhaps you are relieved about the group project you have just completed, having escaped from the archetypical “free-riding slacker” in the team. Find out why this phenomenon exists and why you may be a “sucker” in “Life’s a Game”. Furthermore, if you are curious about knowing more about your “Self”, explore the intriguing concept of how game theory and the Nash equilibrium can explain the clashes between the Freudian concepts of the Id, Ego and Superego.

Lastly, while textbook models often focus on the role of fiscal and monetary policy in combating a recession, we examine the role of an important but often neglected component of economic policy - consumer confidence - in determining the booms and busts of an economy in “The Role of Consumer Confidence in an Economic Recession.”

As always, The Marketplace hopes to provide analysis and insights on issues close to your hearts. If you have any suggestions or comments on our articles, do email us at enspublications@gmail.com. As this semester draws to a close, we hope you have had a fulfilling experience amid the hustle and bustle of university life. As you gear up for finals, do take a break and enjoy our refreshing takes on daily life and analysis of interesting phenomenon, including the application of game theory to topics ranging from mugging to Freudian theories. Here’s wishing you all the best for finals from all of us at The Marketplace!

Cheers,

Wang Xinmin

Vice Chief Editor

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Chief Editor Jaslene Pang

Vice Chief Editor Wang Xinmin Design Team

Jonathan Gerard Seow Denis Tan

Contributors in This Edition Tan Chong Min

Grace Yaw Anupama Hegde

The Truth about Mugging -

Pg 3

Life’s a Game - Pg 7

The Role of Consumer

Confidence in an Economic

Recession - Pg 13

Writers: Anupama Hegde Choi Seoyeoung

Chong Zi Rui Denis Tan

Foo Yuk Sam Grace Yaw

He Zhuo Jing Jaslene Pang

Jonathan Seow Roy Khong

Tan Chong Min Tracy Xu

Wang Xinmin

The Truth about Mugging By TAN CHONG MIN

Have you ever wondered why people study so hard? From small things such as quizzes to nation-wide examinations, people often will put in the extra effort just to study, especially in Singapore. We notably have citizens scoring full scores for SATs, excelling in O levels and A levels, and even getting first-class honors overseas. These accomplishments cannot be replicated without some time and talent.

Grades as a means of signaling

Of course, there is the practical argument that studying is beneficial to survive in our modern-age knowledge-based society. This can be analyzed economically through the concept of asymmetric information. Employees themselves have a full idea of how well they can fare in their jobs, but employers do not know this. Hence, the grades and degree would serve as a signal to distinguish the quality employees from the average ones. The better the degree, the more effort the individual has put in, hence the more likely that individual will be able to contribute to the job. Studying itself then becomes a means to an end – a way to get a better life through a better job by distinguishing the individual from the rest. This explains why people view studying so seriously as though the notion of studying is a fabric so intrinsically woven into our lives.

Certainly, when employers look at resumes, they often look at the degree the potential employee holds as well as their relevant experiences in life and personal character. Having a good grade is a stepping stone to accomplishing big things in organizations as well as having the mental aptitude to take on greater challenges. Hence, studying, and more specifically, achieving good grades, has been the mental model for most students. This has driven worrisome parents to take this up as their personal agenda to ensure that their children score well. A look at the Forum section in local newspaper The Straits Times is indeed testament to how anxious parents can be in the “aftermath” of a Primary School Leaving Examination (PSLE) paper, complaining about how the tests are unfair for their child.

Studying may not be useful

As there are always both sides to a coin, there exists an antithesis to the usefulness of studying. As seen from a blog about formal education, “[His friends] say that knowing more makes them feel better about themselves. I can understand that... But for me the ‘feel good’ is only temporary. And eventually, the knowledge will be rotten somewhere in a corner of my brain.” Moreover, as quoted by Akchin (n.d.), “The more you learn, the more you forget. The more you forget, the less you know. So why study?” There are practical applications to

studying, but the usefulness of study content is questionable.

Studying as an economy

An important question to ask ourselves is, is studying really worth it? This essay shall treat studying as an economy, with grades as output and time as input. To simplify matters, we shall presume that if the time is not spent in studying, it is spent in non-studying activities, termed collectively as leisure.

Since everyone has a finite time, the proportion of time spent in studying is tstudying, and proportion the time spent in leisure is (1 – tstudying). Hence, the total utility that one can get is based on the total utility of studying plus the total utility of leisure. Written mathematically, it is represented as

Utotal (tstudying , 1-tstudying) = P(tstudying) + Q(1 – tstudying),

where U represents the utility function which takes in the proportion of time spent on studying and leisure respectively as an input and equates this as a sum of P(tstudying), the utility gained from studying and Q(1 – tstudying), the utility gained from leisure. The utility gained from studying is the amount of satisfaction gained from the process of studying itself as well as the expected satisfaction value of the job that the individual can get with the expected grade earned.

Hence, we can see that there is a distinct tradeoff of studying versus doing other activities like leisure. This can be viewed in terms of opportunity cost, which is the cost of the next best alternative. In this case, the opportunity cost of studying is leisure and the opportunity cost of leisure is studying time. This can be seen, for example, in whether one wants to spend an afternoon to watch a Harry Potter movie with friends or spend that time doing homework. If one goes out with friends, one would lose valuable time to study and hence his grades would be affected. If one

chooses to study, one would lose valuable time with friends and loses the satisfaction of spending time with friends. As with all tradeoffs, the rational individual will select the combination of the two goods (studying and leisure), which will maximize utility as denoted by the utility function.

Maximum utility approach

Expressing the utility function versus the time spent in studying, we can draw a graph denoting the marginal cost and the marginal benefit of studying. This is expressed in Fig. 1 below:

Figure 1: Utility function versus time spent in studying

The vertical axis denotes the utility function. With every marginal hour spent in studying, there is a gain in utility gained through studying through better grades, and this is represented by the marginal benefit of studying. But there will also be a loss in utility gained through leisure and this is represented by the marginal cost of studying. This is assuming that the marginal benefit is a downward sloping one – with more time spent in studying there is a less than proportionate gain in utility. This is somewhat true as it is very easy to get a B for assignments such as lab reports, but one would have to spend proportionately more time in order to get an A, hence the gain in utility would be greatly reduced with each hour in studying as the greater the amount of effort put in, the smaller the returns. There is also the chance that an individual might lose focus after long hours of studying, thereby decreasing his efficiency and hence the utility gained.

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This graph also assumes that the marginal cost is an upward sloping one – with more time spent in leisure there is a more than proportionate gain in utility. Again, this is true as there are unlimited human wants. If we can increase the amount of time to fulfill these wants, we would achieve a gain in utility. The more time spent enables one to do more things since each want has a time span. For instance, you cannot play Defense of the Ancients in just 20 minutes as more time is required to get a feel of the game. Similarly, leisure activities such as mountain climbing require months of training and hence would require more time. Having more time would then increase the utility gained from leisure as it opens up more options. A rational individual will choose his studying hours such that the marginal benefit is equal to the marginal cost so as to maximize his utility (shown by marginal benefit = marginal cost = 3.5 units of utility at 5 hours of studying in Fig. 1). Hence, the amount of time people spend studying is entirely dependent on how important they perceive studying as compared to leisure. People will mug more only if they feel that their maximum utility would be obtained through more time spent on studying. Of course, spending more time studying does not give a similar utility to different individuals as some individuals are more talented than others. Some geniuses can spend 1/10 of an average person’s time to grasp concepts, hence his gain in utility is less with every hour of studying as there is minimal improvement in the grades. Overall, students do feel that studying is still important, so they will spend a significant proportion of their time studying to maximize their utility. This is a crude way of explaining why people study and they feel that it is definitely worth it since it maximizes total utility.

Game theory approach

Another interesting way to approach the issue of studying is through game theory. Let us theorize that studying is in fact a game, one where the outcome is grades, and the input is the amount of time spent studying. The players are everyone in the school trying to compete with each other for good results

since the results are in the form of a bell curve. For simplicity, let there only be two players in the game, you and a random student. The outcome of the game can then be expressed in the form of a payoff matrix as shown in Table 1 below:

Table 1 – Payoff Matrix of studying

As can be seen from Table 1, if both parties study hard together, assuming everyone’s studying ability is the same, you both get the good results. If one party studies hard and the other does not, the person who studies hard will get good results and the person who does not study hard will get bad results. The most interesting thing is when both people do not study hard, they both get good results because everyone would get the same bad result which would be pushed up through the bell curve to become a good result. Think about it – if everyone fails an exam and gets a score of 0, then 0 will be the score for the top percentile of a cohort and everyone with the score of 0 will get an A.

Let us analyze this payoff matrix using the concept of a dominant strategy. A dominant strategy is a strategy where a player is doing the best he can to maximize the utility of his outcome given the actions of his opponents. Hence, we find out that your dominant strategy is to study as studying guarantees good results regardless of what your opponent (a random person) might do.

Nash equilibrium

Now, the Nash equilibrium can be obtained for this payoff matrix. The Nash equilibrium is a set of strategies such that each player is

A Random Person

Study hard Do not study hard

Study hard

Good results, Good results

Very Good results, Bad results

You

Do not study hard

Bad results, Very Good results

Good results, Good results

doing the best he can, given the actions of his opponents. In other words, any change in strategy by any party would result in a less-than-desirable outcome from the equilibrium state, hence the whole system remains in equilibrium. In this case, {Study hard, Study hard} is a Nash equilibrium as there is no incentive for either party to deviate from the outcome, in accordance to the dominant strategy. This is despite the fact that if both do not study hard and choose the {Do not study hard, Do not study hard} case, both would also get the same grades but have greater total utility due to the increased leisure time.

Prisoner’s Dilemma

This is a classic example of the Prisoner’s Dilemma. Although the more desirable outcome is to {Do not study hard, Do not other player will commit to this choice (you

cannot make every student sign an agreement to get a 0 for the test, and you cannot enforce it) as by not cooperating and studying hard, one can get a better score than the rest and hence successfully leads the rest in grades. In fact, to collectively collude against the lecturer is difficult as it takes just one person to spoil the whole agreement. If one person scores a 1 and the rest score 0, the person who

scores 1 will get the A grade and the rest will get less than desirable grades. Hence, due to the large amount of uncertainty to cooperate, students will tend to choose to study hard and be ahead of the rest and win at others’ expense. This explains why everyone studies so hard as that is the way to distinguish oneself from the rest.

Studying as a part of life

Overall, studying is part and parcel of life. It gives satisfaction in terms of the process as well as the expected return of the educational qualification, and can be quantified in economic terms. Studying can also be viewed as a game whereby the dominant choice for success is to study. With this in mind, the next time you study you know that you are not only trying to nourish your mind, but also a warrior fighting a hard battle with your peers, trying to get maximize your utility and trying to get that elusive A.

Taken from: http://www.phdcomics.com/comics/archive.php?comicid=1286

Life’s a Game By GRACE YAW Even if you have no prior knowledge of Economics, the mere elucidation of the term, “Game Theory” should ring a bell (if not several), due to its common ability to conceptualize and succinctly capture the nature of strategic decision making. The basic principles of game theory are as follows:

1) A set of “players” is involved in the game - from micro-level individual(s), to macro-level companies and even to countries.

2) A set of actions/strategies is available to the players; of which examples would include the increasing of prices, the beginning of a nuclear arms race or a planned chess move.

3) Lastly, there are specific payoffs for each particular combination of strategies.

In Economics, this model has been used to analyze a myriad of economic phenomena such as the modus operandi of the decision-making oligopolistic producer, the exact functioning of auctions and even the behaviour of bargaining customers. Game theory is also frequently used together with the idea of Nash equilibrium, which was postulated by John Nash. The Nash equilibrium is one in which each player is doing the best he can, given the actions of another player. Using the Nash equilibrium, anyone can predict the potential actions of each player, and thus, the direction and eventual result of the game itself.

Are you intimidated by the theory? You are possibly thinking (at this moment) that such a lofty, award-winning idea is far above the life of a mere student.

You could not be further from the truth.

There are two examples commonly faced by students (like you, and me), which surprisingly enough, can be analyzed using the abovementioned concepts.

Still skeptical?

Let us construct the first game, and its corresponding payoff matrix.

In the course of one’s academic career (or lifespan, depending on how you perceive it), all of us have indefinitely come across this phenomena found in several group projects or classroom situations- that of the “slacker who took a relatively free ride”.

Perhaps, even you were once a slacker yourself.

Tsk.

However, did you know that such behaviour could be analyzed by the very same concept mentioned above?

Within the confines of this article, let us assume that you are in a project of a random subject A and your group unfortunately contains a slacker. This is thus, the Game.

Let us also assume that you have come across the typical Singaporean “slacker”, an unmotivated, uncaring individual who does not prioritize grades, but cares about them very slightly nonetheless. Unfortunately, this slacker prioritizes leisure and attaches a lower value to work than leisure, thus incurring a higher opportunity cost for work than for leisure.

Now let us go a step further- coercion through the possible threat from a teacher is not applicable, as all of us University students are considered adults and thus responsible for our group conflicts. (Mature adults handle their own issues, right?) He is the first player, henceforth deemed the slacker.

To simplify the payoff matrix, let us also assume that you and the rest of your disgruntled group mates share the same collective aim- to do a good project, and receive a (hopefully) high grade, ceteris paribus. All of you have identical tastes and preferences with regards to your project and are willing to come to a consensus under a leader. Thus, all of you collectively make up the second player(s), termed “the workers”.

Both players can choose to do their work on schedule or at the last minute. Lastly, let us also assume, in accordance with a quote by Albert Einstein:

"Genius is one per cent talent and 99 per cent percent hard work..."

that work done earlier would allow the student to reap greater benefits, or correspondingly better grades, than the student who left it off until the very last minute. (After all, hard work supposedly pays off.)

With the above information, we are now able to construct the payoff matrix- figure 1.a.

Figure 1.a

Let us consider the following scenarios:

As shown in the payoff-matrix, the workers are happy if they both submit their work early and thus, deserve the grade. The slacker, on the other hand, would suffer an initial loss of leisure. Considering that the slacker prioritizes leisure due to his tastes and preferences, the good grades received might not be able to offset the sunk cost of lost leisure. (1,0)

Conversely, if the workers submit their work early, with the slacker doing a last minute job, the workers get good grades while feeling a tinge of unhappiness (which dampens their mood slightly) that the slacker did not really deserve anything. The slacker is happy as he perceives that he got a free ride. (0,1)

Work early Work last minute

Work early (1, 0) (0, 1)

Work last minute (-1,-1 ) (-1, 1)

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If the workers give up their diligent attitudes due to demoralization by expected low grades due to the presence of the slacker while the slacker suddenly changes his mind and decides to work early, the workers would be unhappy as they would subsequently realize that speculation of low grades did in fact lead to them. The reformed slacker is also unhappy, as although he did his work on time, the group did not get good grades. (-1,-1)

Similarly, if the workers give up their diligent attitudes (due to the abovementioned reason), and if the slacker continues pursuing leisure- the workers would be unhappy still, for there would always remain the possibility that they could have achieved better grades if they had pooled their social or psychological resources together to persuade the slacker to work, rather than giving up. The slacker, on the other hand, is relatively happy, since he was able to pursue leisure and was not expecting much of the paper (-1,1).

As such, the dominant strategy of the workers is to work early (which is their best option, regardless of what the slacker chooses), with the dominant strategy of the slacker being that of doing last minute work (which is his best option, regardless of what the workers do).

The Nash equilibrium is thus at (work early, last minute work), which explains the phenomena of the “free rider”. It also illustrates the mentality possibly perpetuated by hard working Singaporean students- where a hardworking student may forgo a level of happiness for that of indignation if grades are not proportionate to the work distribution. It also exemplifies a unique phenomena found in Singapore- that the majority of self-proclaimed slackers do not really experience what Economists deem as a “free ride”. Contrary to what may appear on the surface, the typical university slacker would still capitulate under group pressure and thus pay for his grades through work, even if the work done is of poorer quality or done at the last minute. As the free rider is an individual who gets the benefit (grades) from a good (the project) without paying for it (doing any form of work), the typical university slacker is thus not a real free rider.

Thus, Nash Equilibrium via Game theory can be used to explain this everyday ‘phenomena’.

Bet you did not see that one coming.

But, you mutter- what if you are one of the elite students who have never experienced the presence of The Slacker?

Don’t fret- your internal choices within what you perceive as your Self are also actually explainable by Game theory as well!

Let us thus construct the second game, and its corresponding payoff matrix.

According to Sigmund Freud, who founded psychoanalysis, the process whereby the Self emerges can be interpreted socio-scientifically. Our Self is made up of three parts which emerge as we develop as children.

Firstly, the ID - which is predominantly hedonistic, and characterized by demands for immediate gratification. According to Freud, the ID is responsible for perpetuating the self-image of the child, as soon as its demands are denied.

Secondly, there is the superego, which is the child’s personal conscience and a repository of cultural standards.

Thirdly, the ego is a psychological mechanism that in well balanced individuals, balances the conflicting needs of the pleasure-seeking ID and the restraining superego.

Here’s a second shocker:

Game Theory and the Nash Equilibrium can also be used to illustrate the psychological mechanism of the ego.

Let us see how the same constants above can be applied in this context.

The game is that of the psychological mechanism of the ego, where the conflicting needs of the pleasure-seeking id and the restraining superego are balanced subconsciously.

There are two players - the pleasure-seeking ID, and the restraining superego.

Last but not least, the set of actions available to both players is as follows-

The pleasure-seeking ID can choose to dominate (the self pursues pleasure), or submit (the self does not pursue pleasure) to the subconscious Self. Similarly, the restraining superego can choose to dominate (the self is morally restrained), or submit (the self is not morally restrained) to the subconscious Self.

Let us assume for simplicity, ceteris paribus, that the numerical figure is an indication of overall satisfaction achieved by the ID, or superego.

With the above information, we are now able to construct the payoff matrix- fig 1.b.

Fig 1.b.

Let us consider the following scenarios:

If the ID and the superego both dominate the subconscious self, the individual would simultaneously seek instant gratification (ID) and be morally restrained by the developed personal conscience (superego). As such, the individual would simply be deranged, due to the impossibility of both occurring at the same time. Thus, the subconscious self would be manifested in a possibly insane Self or individual-who is unable to decide between the pursuit of gratification or moral constraint. (-10, -10)

Conversely, if the ID dominates the subconscious self, with the superego submitting, the individual is one who seeks only instant gratification, with no moral restraints. Although hedonists would possibly disagree, the pursuit of instant gratification (in the subconscious self) would have negative implications on the Self.

A common example of instant gratification is gluttony. Assuming that the supply of food is constant, your incessant demands for gratification would be met with negative consequences such as a never-ending consumption of alcohol and food, unchecked by any moral restraints. As such, depending on your individual tastes and preferences (with regards to personal gratification), you would end up with diabetes, liver cancer, or lung cancer, among a myriad of other negative externalities (as you impose additional costs on your relatives and friends, etc). You would eventually die a painful and harrowing death. (-5, 0)

On the other hand, if the superego dominates the subconscious self, with the ID submitting, the resulting Self would be an individual bound completely by a personal conscience, with the individual behaving exactly as the cultural standards demand. The individual would not seek any form of instant gratification, which may also have negative implications on the Self (although Moralists might disagree). Imagine subconsciously suppressing your demands for that last piece of strawberry cheesecake, that hot shower after a long day at work, the eight hours of sleep needed. As such, the individual would be profoundly unhappy, due to the individual not deriving any sense of satisfaction whatsoever in his daily activities- a rather morbid life to have. (0,-5)

This thus leads us to the scenario where both the ID and superego submit. The submission of the ID and superego would also allow for the emergence of the ego, which is the mechanism balancing pleasure and restraint. As such, the satisfaction gained through balance is immeasurable and ad infinitum. This is actually similar to the demand and supply mechanism seen in Microeconomics, where the forces of demand and supply automatically adjust equilibrium output. Similarly, the ego is the psychological mechanism, which adjusts the equilibrium level of pleasure and restraint. This

Dominate Submit

Dominate (-10, -10) (-5, 0)

Submit (0,-5 ) (!, !)

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balance would lead to the satisfaction achieved, as greater satisfaction is (possibly) achieved through balance, which is immeasurable. (!, !)

The dominant strategy of both players would be to submit, with the subsequent Nash Equilibrium found in (Submit, Submit), which is also the scenario where the ego is controlling the Self.

As such, game theory and Nash Equilibrium is related to the typical student- not only in a visible situation, but also within your subconscious self.

Are you freaked out yet?

Taken from: http://www.phdcomics.com/comics/archive.php?comicid=515

The Role of Consumer Confidence in an Economic Recession By ANUPAMA HEGDE Consumers are at the core of all economic activity. This point was endorsed by Author Bill Bonner, who said in a tongue-in-cheek manner that “the entire world economy rests on the consumer; if he ever stops spending money he doesn’t have on things he doesn’t need, we’re done for”. Consumption plays a pivotal role in the economy and consumers’ behaviour and actions are key to understanding how the economy of any country functions.

We cannot study consumer behaviour without talking about consumer confidence. If consumers are confident about the future, they will spend more at present. If consumers are optimistic about the economy, expenditure on goods and services will rise, leading to an increase in gross domestic product. On the other hand, consumers who feel shaky about their economic future will tend to cut back on current expenditure and save more to provide a cushion for the uncertain future.

However, consumer confidence is not as straightforward as it sounds. It stems from rational as well as irrational sources, and is based on hard facts as well as perceptions. Consumers may decide to increase their consumption expenditure based on personal factors such as an expectation of a raise in their salary, for example. Or they may cut back on spending based on a perception about the overall economy, such as the view that the economy is in a recessionary state. Their consumer sentiments may be dampened due to their uncertainty about the country’s economy, even if their own income has not been affected.

If consumer confidence is such an integral part of the economy, what role does it play during an economic recession? An economic recession is defined as two consecutive quarters of negative economic growth. It is the most dreaded yet inevitable phase of the business cycle and is characterized by a slowing or sometimes falling growth rate, high unemployment and decreased consumption. Keynesians believe that one way of reviving an economy in recession is to inject huge sums of money through fiscal stimulus and allow the multiplier effect to work its magic throughout the economy. Another way is to use monetary policy and decrease the cost of borrowing by lowering interest rates, thus fuelling consumption.

Before we look at ways of boosting an economy, it is first critical to analyze how an economic recession is caused in the first place. The role of consumer sentiment in influencing economic activity must not be underestimated. When consumers are confident, an ever-growing consumption ‘bubble’ is created, because soaring confidence leads to increased consumer spending. The authors of ‘Animal Spirits’ (a book that looks at the psychological forces that drive the economy) have summarized this phenomenon felicitously when they say, “In good times, people trust. They make decisions spontaneously.”

However, economies follow periodic cycles and a recession phase is just as inevitable as a boom. A reverse multiplier effect can occur, where consumers suddenly lose faith in the economy. As the authors of ‘Animal Spirits’ have said in their book, “When confidence disappears, the tide goes out. The nakedness of their (the consumers) decisions stands revealed.” The consumption bubble bursts and consumer spending falls drastically. The economy then descends into a downward spiral, as more and more consumers lose confidence and cut back on their spending. As mentioned earlier, one consumer’s spending is another consumer’s income. Less spending therefore means less income, which leads to even less spending. The reverse multiplier effect is thus in full swing. In fact, John Maynard Keynes, the legendary economist, believed that this phenomenon caused by falling consumer confidence was one of the major causes of the Great Depression of 1929.

As Indian journalist Vivek Bali has said in an article in the Economic Times, ”Sentiment is generally based on the perception of reality and can very often influence reality as well.” Consumers are constantly receiving negative economic signals during a recession. Unemployment is rising, credit markets are freezing up and all sources of media are abounding with pessimistic stories and articles. Consumers are reluctant to spend, thus causing the recession to deepen even further. A vicious cycle is thus created. There is no doubt that this vicious cycle can be turned into a virtuous one through government intervention. The media too can, according to Vivek Bali, “publish success models that can give others confidence”. Tax cuts, lower lending rates and positive economic signals will fuel consumption, and increased consumption is the key to reviving a flagging economy. However, consumer confidence stems largely from irrational perceptions and fears, which means that many consumers may not afraid to increase their spending even though lending rates are lower. The authors of ‘Animal Spirits’ believe that consumer confidence goes beyond the rational and that consumers do not act rationally, but according to what they trust to be true. Increased consumer confidence can indeed influence the business cycle and drive the economy out of the recession phase, but first we must understand that this confidence is not always based on realistic perceptions of the economy.

As I live in India, I thought it would be interesting to explore consumer confidence in India during the 2007-2008 Global Financial Crisis. India is one of the most rapidly growing economies in the world and many economists and world leaders believe that it has the potential to become an economic super power in the future. The Indian consumer has evolved over the years and is now spending more than ever before. Therefore, the tracking of Indian consumer confidence is very important for policy makers, market analysts and both foreign as well as Indian entrepreneurs.

India’s consumer confidence is measured monthly by an index called the CNBC TV-18 Boston Analytics Consumer Confidence Index. This index is similar to consumer confidence indices all over the world. Confidence is ascertained by asking the respondents a set of questions about their current knowledge and future expectations regarding job prospects, their income, spending behaviour and the state of the economy. Additionally, Indian consumer confidence is also regularly measured by a global index called the Nielsen economic current scorecard. As late as the second half of 2008, India was the highest ranked country in the world in terms of consumer confidence. At that time, India’s consumer confidence was 114, an impressive 30 points higher than the global average of 84. However, since then, countries all over the world have been plunged into an economic recession. Although India’s business cycle has not bottomed out, it is still experiencing a slowdown in economic activity. GDP growth rates have inevitably fallen, as has consumer confidence. The Boston Analytics Index has reported consumer confidence in India to be 74 as of May 2009.

However, even though consumer confidence and GDP growth rate in India have recently been on a downward trend, Indians are inherently optimistic. As stated in an April 2009 Nielsen Company report on Indian consumer insight, “As a culture, Indians by default tend to be optimistic – as a popular adage goes, ‘Whatever is happening, that is for the good!’” This positive Indian attitude and inbuilt confidence about the economy may thus have contributed to helping India’s GDP growth rate remain higher than that of most other countries. As mentioned earlier, the Indian economy is in better health than most of its global counterparts and is only experiencing a slowdown and not a full blown recession. Consumer confidence that is higher than that in other global economies could be one of the factors that has positively influenced Indian economic activity. However, it is equally probable that consumer confidence in India is higher than the global average because of the good state of the economy.

Thus, consumer confidence is a much more important variable than we thought! Fiscal and monetary policy can help pull an economy out of recession, but these actions will be moot if consumer confidence is very low. Consumer confidence, fiscal and monetary policies, such as interest rate adjustments and tax policies, actually have a cyclical relationship. Such policies will not work very well if consumer confidence is low, but consumer confidence will not be high in the first place if the government or central bank is not implementing the right policy. Thus, consumer confidence and economic policy are mutually reinforcing entities.

Taken from: http://www.phdcomics.com/comics/archive.php?comicid=1077

Credits:

The Truth about Mugging

http://phonecardscollector.blogspot.com/2008/03/why-do-people-study.html

http://www.english-

test.net/forum/ftopic45967.html

http://tech.mit.edu/archives/VOL_0

97/TECH_V097_S0584_P003.pdf

Life’s a Game

http://people.msoe.edu/~meissned/pictures/demotivation/photos/photo_14.html

http://www.waiter-training.com/newsletter_archive/nl03.html

http://my.opera.com/siamar/albums

/showpic.dml?album=835666&picture=11409528

The Role of Consumer

Confidence in an Economic

Recession

http://people.msoe.edu/~meissned/pictures/demotivation/photos/photo_14.html

http://www.waiter-training.com/newsletter_archive/nl03.html

http://my.opera.com/siamar/albums/showpic.dml?album=835666&picture=11409528

Many thanks to Mr Chan Kok Hoe for contributing the idea of using Game theory to explain Freudian ideas pertaining to the ID, the superego, and the ego!

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