Book Notes: In this Economy? How Money & Markets Really Work
Overview
This post contains my notes on the book In this Economy? How money & Markes Really Work.
You can find the book on Amazon
I’ll be adding my notes to this post as I read through the book. The notes will be organized by chapter and will include key concepts, code examples, and any additional insights I find useful.
Chapter 1: The Economic Kingdom
Chapter 1 introduces the concept of the “Economic Kingdom,” which is a framework for understanding how money and markets operate in our society.
The chapter discusses the following key concepts:
- Monetary Policy Castle: Manages the entire kingdom and is owned by the Federal Reserve. Generally in charge of inflation and the labor market.
- US Dollar Castle: Secret weapon of Monetary Policy Castle.
- The Commodity Castle: Basic goods used by everyone.
Contractionary monetary policy: things slow down, people don’t spend, people loose jobs Expansionary monetary policy: things speed up, people spend, people get jobs
Chapter 2: The Vibe Economy
Chapter 2 begins by explaining the relationship of households and businesses and the flow of resources.
Note: The book offers a diagram that illustrates the flow of money between households and businesses.
Households: Inputs: - Income - Buying Goods & Services Outputs: - Spending - Land, Labor, Capital
Businesses:
Inputs:
- Resources
- Revenue
Outputs:
- Selling Goods & Services
- Wages, Rent, Profit
Fuel Vibes:
Fuel: As gasoline prices rise, consumer sentiment tends to decrease.
Higher prices make us feel bad => if we feel bad, the economy feels bad
Oil Market influenced by: - how much oil is being produced
- how many people are consuming oil
Sentiment drives the economy:
- If people feel good, they spend more money
- If people feel bad, they spend less money
Sentiment is influenced by emotions. These emotions are summarized in varius theories:
- Prospect Theory
- Framing Effect
- Anchoring and Adjustment
- Endowment Effect
- Regret Theory
- Intertemporal Choice Theory
- Affective Forcasting
- Social Identity Theory
- Consumer Emotional Engagement
Reflexivity: The idea that the economy is influenced by people’s perceptions and beliefs about it, which can create a feedback loop.
- Initial Perception/Believe
- Market Action Based on Perception/Believe
- Refliexive Feedback Loop
- Bubble Bursts
Benefits of reflexivity to companies:
- attracts investments based on expectations of future growth
- gain critical edge in hiring top talent
What is sentiment?
Expectations Theory Reality
How we feel X How everyone else feels = Sentiment
Consumer Confidence Survey is an example of consumer sentiment measurement
Taxonomy
- Inflation: rise in prices that create a decrease in purchasing power.
- OPEC: Organization of the Petroleum Exporting Countries, a group of oil-producing countries that coordinate their oil production and pricing.
- Sentiment: the overall attitude or feeling of consumers and businesses towards the economy, which can influence spending and investment decisions.
- Prospect Theory: a behavioral economic theory that describes how people make decisions based on perceived gains and losses rather than absolute outcomes.
- Framing Effect: a cognitive bias where people react differently to the same information depending on how it is presented or framed.
- Anchoring and Adjustment: a cognitive bias where people rely too heavily on the first piece of information they receive (the “anchor”) when making decisions, and then make adjustments based on that anchor.
- Endowment Effect: a cognitive bias where people value something more highly simply because they own it, leading to a reluctance to sell or trade it.
- Regret Theory: a behavioral economic theory that suggests people anticipate regret when making decisions and may avoid choices that could lead to regret, even if those choices are rational.
- Intertemporal Choice Theory: a behavioral economic theory that examines how people make decisions about trade-offs between immediate and delayed rewards, often leading to preferences for immediate gratification over long-term benefits.
- Affective Forcasting: a cognitive bias where people predict their future emotional states based on current feelings, which can lead to inaccurate predictions about how they will feel in the future.
- Social Identity Theory: a psychological theory that explains how individuals derive their self-concept and identity from their group memberships, influencing their behavior and decision-making.
- Consumer Emotional Engagement: the emotional connection and involvement that consumers have with a brand or product, which can influence their purchasing decisions and loyalty.
