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On February 18 2013 11:16 JonnyBNoHo wrote:Show nested quote +On February 18 2013 11:06 sam!zdat wrote:
how can entrepreneurs be fooled? I thought entrepreneurs were rational actors in an efficient market, who process all information perfectly and instantaneously? I don't think it is assumed that entrepreneurs have perfect information. Otherwise there wouldn't be a point to adjusting for risk.
Isn't that what the efficient markets hypothesis is? Of course entrepreneurs have all the information. It's right there in the efficient market!
And how do you adjust for risk? Risk is, by definition, that which you don't know about in order to adjust for. this idea that it is possible to "adjust for risk" is at the heart of the problem
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On February 18 2013 11:12 JonnyBNoHo wrote:
The story still doesn't work for the poor shopkeep though. Getting $1,000 in sales later on does little for his income. Assuming a generous 10% net profit margin the shopkeep would need to see a sales increase of $10,000 before he's made whole. That won't happen and so the shopkeep will need to cut some other expense to make up for it (either a business expense to raise up his income or cut into his personal consumption).
Relative to what?
Replacing a broken window is a fixed cost, not a variable one*. It's very possible that dipping into savings to replace such a window could easily pay for itself, depending on the interest rate on his savings.
There's absolutely no reason why the shopkeeper must dip into his personal consumption. It's all relative to what he can get money for.
*Well, in the long run, even his shop will turn into dust, so I guess it's variable. Not relevant.
Even taking the example at face value, replacing the broken window could be $10,000 more profitable than NOT replacing the window. Assume that the broken window lowers sales by 10% and the shopkeeper normally makes 50k a year. But why would you arbitrarily add numbers to a theoretical discussion? Makes no sense.
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i feel like my economy is a little sluggish, brb i'm going to do some heroic vandalism
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On February 18 2013 11:27 TerribleNoobling wrote:
i feel like my economy is a little sluggish, brb i'm going to do some heroic vandalism
I think you are taking this broken window analogy a little too seriously.
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hey man... just doing my part to stimulate the economy
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On February 18 2013 11:21 acker wrote:Show nested quote +On February 18 2013 11:12 JonnyBNoHo wrote:
The story still doesn't work for the poor shopkeep though. Getting $1,000 in sales later on does little for his income. Assuming a generous 10% net profit margin the shopkeep would need to see a sales increase of $10,000 before he's made whole. That won't happen and so the shopkeep will need to cut some other expense to make up for it (either a business expense to raise up his income or cut into his personal consumption). Relative to what? Replacing a broken window is a fixed cost, not a variable one*. It's very possible that dipping into savings to replace such a window could easily pay for itself, depending on the interest rate on his savings. There's absolutely no reason why the shopkeeper must dip into his personal consumption. It's all relative to what he can get money for. *Well, in the long run, even his shop will turn into dust, so I guess it's variable. Not relevant. Even taking the example at face value, replacing the broken window could be $10,000 more profitable than NOT replacing the window. Assume that the broken window lowers sales by 10% and the shopkeeper normally makes 50k a year. But why would you arbitrarily add numbers to a theoretical discussion? Makes no sense.
What I was trying to get across anyway is that the broken window acts as a spark that causes overall growth in spending which makes everyone richer. Manufacturing made so much money in WWII that when they decided to start spending, everyone else had more money which allowed roaring growth in the economy. If it wasn't for this "broken window" the companies never would of had enough demand for their manufactured goods and would never have made all the money that allowed them to then spend and reinvest that led to general economic growth and more people continuing to buy their manufactured goods. Albeit now people were buying cars not tanks.
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Yes, I know, the absolutist version of the broken window fallacy is dead as a doornail in economics. Everyone agrees that it broadly applies under most circumstances, though.
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^This does not, however, strike one as an absurdity? why do you have to waste things in order to get rich?
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On February 18 2013 11:41 sam!zdat wrote:
^This does not, however, strike one as an absurdity? why do you have to waste things in order to get rich?
I wouldn't call it wasting things. I am sure you have heard the phrase 'You've gotta spend money to make money".
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Why can't you just do the things, and not break the windows, though? Then you can give somebody a free window.
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On February 18 2013 11:45 sam!zdat wrote:
Why can't you just do the things, and not break the windows, though? Then you can give somebody a free window.
Because sometimes people are stingy bastards and won't spend their money unless something forces them too.
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On February 18 2013 11:45 sam!zdat wrote:
Why can't you just do the things, and not break the windows, though? Then you can give somebody a free window.
You can...in most cases (unless you're already fighting a war or natural disaster or something). There's no reason why you HAVE to break windows for fiscal or monetary policy to work. It's just the most extreme negative bad example of fiscal or monetary policy.
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After the revolution, free windows for everyone!
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2nd Worst City in CA8938 Posts
I've heard this 'broken window' thing a lot. Can someone explain to me what it is/its background?
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The broken window thing is just keynesianism
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On February 18 2013 11:48 sam!zdat wrote:
After the revolution, free windows for everyone!
You're probably going to give out Windows ME... Jerk!
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HAHAHAH oh aksfjh you slay me
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On February 18 2013 11:52 Souma wrote:
I've heard this 'broken window' thing a lot. Can someone explain to me what it is/its background?
http://en.wikipedia.org/wiki/Parable_of_the_broken_window
It's the idea that nonproductive economic activity (natural disasters, war, etc) can have overall net benefits.
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On February 18 2013 11:52 Souma wrote:
I've heard this 'broken window' thing a lot. Can someone explain to me what it is/its background?
It is a theory developed by Frederic Basiat to attack economists who say that if you break a window, you can create revenue by getting workers to fix the window.
But instead of having the window broken, the shopkeeper could have used the money that was used to fix the window to improve the shop and make business better.
That was a tl;dr, but it is a fallacy often used to stuff words into other people's mouths.
http://en.wikipedia.org/wiki/Broken_window_fallacy
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On February 18 2013 11:19 sam!zdat wrote:Show nested quote +On February 18 2013 11:16 JonnyBNoHo wrote:On February 18 2013 11:06 sam!zdat wrote:
how can entrepreneurs be fooled? I thought entrepreneurs were rational actors in an efficient market, who process all information perfectly and instantaneously? I don't think it is assumed that entrepreneurs have perfect information. Otherwise there wouldn't be a point to adjusting for risk. Isn't that what the efficient markets hypothesis is? Of course entrepreneurs have all the information. It's right there in the efficient market! And how do you adjust for risk? Risk is, by definition, that which you don't know about in order to adjust for. this idea that it is possible to "adjust for risk" is at the heart of the problem
I think an efficient market is supposed to price risk accurately given all available information (as information changes / is learned, so should the market). If the market doesn't have all the information than it is inefficient and entrepreneurs can exploit the inefficiency for extra profits (alpha).
Risk being the probability and extent to which you are wrong. To adjust for risk you estimate how volatile the business income will be (the more volatile, the more risky) and then use that estimate (beta) in CAPM (wiki link) to determine your risk adjusted discount rate that you then use to discount your estimated cash flows.
The idea is that while you can't know for certain if an investment will fail or succeed, you can say that some are more likely to fail than others. The ones that are more likely to fail will then have a higher hurdle to jump in order to be approved.
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EPT
