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The value of beliefs

By Antonio Wolf
web posted September 21, 2020

Three months ago my father got me simultaneously the best and worst present I have ever received. My dad revealed to me that he had a stock account (that I had wanted for a while) set up for me that contained five thousand dollars for me to spend as I saw fit. Well, at first I bought some Apple here, and some Microsoft there. But soon, I got tired of only investing in blue chip stocks, so I chose to start diversifying my portfolio. Well, one of my first stocks I bought to diversify my portfolio was Expirium World Holdings. I bought ten shares of this company for about thirty dollars each. Well, after a week or so, I noticed I was up a decent amount on this stock, so I started buying at the margin. I bought a little more each time the stock went up, and soon I was sitting on fifty shares of this company. The magnitude of this didn’t quite hit me until I checked my account and I was up two hundred dollars on Expirium stock! I was elated, I couldn’t believe my luck. However, this excitement turned to dread when the very next day I was down 40 dollars on that same stock. Well, rather than get rid of some of the shares, or do more research into the stock and figure out how the stock trend goes, I started intentionally not checking my account. I avoided looking at Expirium World Holdings because I couldn’t stand the thought of having lost money on it. So, while I am overall grateful to my dad for getting me the account, it’s also caused a ton of stress that I could certainly do without!

Well, interestingly enough, the fear of what my stock might look like that propelled me to not even check my account was actually documented in a 2016 article called “Mindful Economics: The Production, Consumption, and Value of Beliefs” by Roland Bénabou and Jean Tirole. In this essay they discuss how a person’s desire to follow his or her personal biases and avoid anxiety, can cause that person to intentionally make poor decisions. These beliefs, whether they are religious or secular, largely affect a human being’s choice in what to buy and who to buy from. I absolutely agree with this article and more specifically this point made in the article. This power of personal beliefs is incredibly important to economics because it ties directly into the three fundamental economic questions. I wouldn’t be so keen to agree with this if I hadn’t personally experienced this phenomenon, but trust me, it is real, and as you will see through this essay it is very important.

So the first question, what should be produced? Well a person’s belief barrier is directly tied into this question. For instance, let us say you are in a small town and you sell cameras. Now, you have two different models of cameras, the “X 27” and the “Y 72”. People in this town have been buying those two models of cameras for years. Recently, you invented a new, better camera called the “XY 9”. But you know that this small town has a large family who makes up 70 percent of the population, and they refuse to buy from anything that has been invented in the last 2 years. Because of this, you choose to not make this camera, even though it is better and would be a better option for your customers. While this is a much-simplified example, the principle is sound. Personal beliefs can and will get in the way of people making smarter decisions, and many companies know this. If you were the owner of that camera store, while it would be better if you could sell your new model, your knowledge of the model and people’s personal beliefs will prevent you from trying to sell that model as it would be pointless. In this way, personal beliefs do affect what should be produced.

The second question is a bit more interesting when pertaining to this article, the question is: How should goods and services be produced? Now I’m sure you have heard of free trade and fair-trade practices. In a free trade market there is a lot more worker abuse and child labor, while in a fair trade market there are usually minimum wage laws and child labor laws. While this was not as big of a problem in the past, recently there have been many movements to stop buying from companies that produce their goods through child labor or companies that abuse their employees. In fact, many products now have a label stamped on them saying whether they were made using fair or free trade practices, just to make sure that their customers know what they are supporting. This is very interesting because what it can mean is that companies can actually make more money not abusing their employees or using child labor, because while it is more expensive to do that, more people will buy from them if they don’t use unethical practices.

Finally, the third question: For whom should goods and services be produced? This is possibly the most important way that the beliefs of the customer affect the question. I think that the best way to look at this is a real-world example that showcases just how harmful personal beliefs can be, and how much they affect these questions.  Which sector should we use to examine this question? How about we look at it through the eyes of the health sector. Now everyone can agree that goods and services in the health sector should be produced for those that are unhealthy, and those that need medical attention. However, this causes a major problem when people have belief systems that prevent them from using medical resources to the best of their ability. Jehovah’s Witness is a perfect example of this. Now faith in a religion is a great thing, and as a devout Catholic I truly do understand this. Unfortunately, one of Jehovah’s Witnesses beliefs is that they cannot receive blood transfusions. What this means is that even though some of them are sick, or in need, the goods produced for them will not be used by them. What this means is that no one will produce certain medical supplies for someone that follows this religion. This is just one example of how personal beliefs affect choices in people’s everyday lives, and how that overall affects these three fundamental questions of the economy. ESR

Antonio Wolf is a high school student studying macroeconomics and this is his first contribution to Enter Stage Right. © 2020 Antonio Wolf

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