Are individuals more risk adverse when their wealths increase

There is a common belief that individuals become more risk adverse when their net wealths become greater. However, in the reality, we often see that many phenomenon show many wealthier people are more risk loved than ordinary people. For example, due to regulations, those highly risky investment projects only accept high net wealth individuals to participate, such as PE. Moreover, the investment in the emerging markets (except China) is conducted by wealthy investors and financial institutions. Investment in some emerging markets is very risky, as the economic performance in the emerging markets is highly volatile. In addition, wealthy investors are also willing to become angel investors or participate in venture capital. For example, the famous NBA former player, Kobe Bryant, opened his own venture capital fund, serving other retired wealthy basketball players.

If we consider that wealth helps us to gain our happiness (utility), some wealthy people may have already been wealthy enough to afford everything that ordinary people can imagine, so they would like to find something more interesting. After they leave themselves the wealth that is able to afford their luxurious lifestyle, the wealth remained is used as the wealth to create additional excitement. Gambling is a source of pleasure or excitement; similarly, risky investment could be seen as a type of gambling. However, risky investment does not mean the probabilities of winning and losing are totally dependent on the natural probabilities, it can depend on the careful measure of investors. This means when investors win their investment bets, they can feel a greater victory. 

To conclude, considering people like gambling, when people become wealthier, the wealth they are able to afford for gambling-liked investment becomes greater, this may cause when people's wealth reaches a certain level, their risk preferences become more and more preferring taking risk.

The danger of “Free Cash Flow” evaluation

Free cash flow is very important in terms of value investment, which is a very popular investment strategy endorsed by Warren Buffett. Free cash flow represents the cash held by a company after maintainence or other ordinary operation costs. It is a key figure to look at when making value investment, as it provides a measure about how much this company is able to provide more opportunities to benefit its shareholders. Amazon is a successful company and focuses more on its free cash flow rather than profitability. However, many people are confused with the term “free cash flow” and “cash flow”, “free cash flow” is not directly shown on companies’ balance sheets and “cash flow” is required to be included in public companies’ balance sheets. There is a traditional way to calculate free cash flow; however, some investors have also invented other ways to calculate free cash flows.

More cash held by a company is definitely a good thing for its shareholders; however, it doesn’t mean making profits is not important. If a company is at its fast growth trend, it is not a big deal to look at its profitability other than its free cash flow. However, a sudden stop for a company’s growth can be a disaster. Because this company does not make profits, is used to a large amount of free cash flow, this company could lose its growth potential. Although the cash held by this company is large, since the growth stops, the company has to try something different to generate growth, and this is a risky moment for the company when it moves to a new field, especially when the company is large. Of course, it can pay dividends to its shareholders by the free cash flow. However, while the shareholders receive extra dividends, the values of their share will depreciate dramatically, as the company completely loses its growth momentum.

Economic growth and stability

Many governments tend to smooth their economies’ growth trends by trying to lower the deviation in their economies. For example, rthe Chinese government now focuses more on stabilisation of the Chinese economy rather than the economic growth that the Chinese central government recently axes a local government’s spending on a construction building project and the regulators also push the financial sector to lower the leverage ratios. Other countries have also imposed similar policies to tackle the issue of violatility in their economies. The central banks have been playing very important roles in stabilising economies. Inflation is an important measure of the violatility in the economy. Central banks tend to control the inflation rates within a reasonable range by imposing effective monetary policies.

However, from history, black swan events are far more dangerous than observable violatility. For observable violatility, it is more likely for policy makers to impose effective policies to tackle the issue; however, for black swan events, it is impossible for policy makers to do anything before a black swan event takes place, as it is unobservable.

If we are able to find a link between the black swan events and the violatility, it will definitely help us to find an indirect possible solution to lower the likelihood of black swan events taking place in the economy. To find the relationship between black swan events and violatility can be done by observing the economic violatility when a swan event take places. However, it has several issues to make the finding less credible. Firstly, the sample size is not big enough. Secondly, it does not provide a clear direction of causality between the two variables. Thirdly, there has been enough theoretical work to support the model building.

To conclude, governments and policy makers tend to lower the violatility to smooth the economic growths; however, black swan events have been the worst source hurting our economies.

Job market and future economic performance

The economic performance and the labour market performance are interacted with each other. that employers make their hiring decisions based on their expectations about the future economic performance and their market future development, on the other hand, the labour market is also an important factor that could affect the economy. When more people are hired in the labour market, it could lead to an increase in the entire population income.

Therefore, employers have to analyze the factors that cause the economic growth. If they find that the economic growth is mainly driven by an increase in the employment rate, they may slow down their hiring speeds, as such expansion of production (an increase in hiring is a type of expansion of production) may lead to overproduction.

Recently the stock markets (particularly the US and the UK) have achieved their historical peaks; however, many traders and fund managers have been very cautious about the current market situations. This is because the real economic growth has been lagged behind the financial market growth. People expect huge bubbles have been created in the financial market.  Bubbles are very likely to be created when the economy is only dependent of very limited economic drivers. When the key driver stops its growth, the economic growth will stop, and all the previous investment based on the expectation of the continuously growing driver will become useless and investors will suffer huge losses. This will create a fear in the market and stop the hot money flow in the economy. This leads to a financial crisis.

The globalised business cycle and the regional tax system

Nowadays, there have been many large multinational companies that are operating over the world. However, the business environment is different across different regions. One of the most important factors is the difference in the tax systems that different countries do not have same tax rates; therefore, despite the differences in the capital market and labour market prices, the tax rates could significantly determine how much profit they can receive from their revenues. Multinational companies are able to pay fewer taxes than small and medium companies in terms of proportions, especially in those countries with high corporate tax rates. This is because multinational companies have very professional tax sufficient teams that enable them to transfer profits to those countries with extremely low tax rates.

Therefore, apart from those companies which are founded and grow inside the countries, the governments are hardly collecting revenues from those foreign multinational companies. The current global tax environment is kindly exploiting small and medium companies and giving away huge benefits to those large companies. Such environment encourages those small and medium companies with huge potentials to keep growing to become mutlinational companies. On the other hand, the disagreement between countries will make the current global tax system unlikely to change over the coming year.

Therefore, it seems that the unglobalised taxi system is a drive to encourage companies to grow the become mutlinational companies and contribute to the globalisation.

Is an oligopoly market more desirable than a perfectly competitive market in the future?

I think that in the future an oligopoly market may be more desirable than a perfectly competitive market. This is because of the possible replacement of human labours by machinery and AIs. Many people are afraid that the rapid development of AI may replace labours' jobs, and the unemployment rate could increase dramatically. However, if the economy is dominated by oligopolistic companies, such worry could be mitigated or even disappear.

When an economy is dominated by oligopolistic companies, it means the companies in the economy are able to have some degree of market power, which means they are able to have more control of their revenues and profits. On the other hand, in a perfectly competitive market, companies are the same as consumers that they are all price takers; therefore, companies only have to choose between producing at the lowest possible costs or leaving the markets. Such difference means companies in an oligopolistic market and in a perfectly competitive market have different attitudes when making hiring decisions. Companies in a perfectly competitive market have to hire labours with the lowest costs; however, oligopolistic companies are able to become more flexible when making hiring decisions, so they do not have to hire the cheapest labours or replace labours by cheaper machines or AI. In addition, when an economy is dominated by oligopolistic companies, their employees are also their consumers; therefore, if they do not pay their workers well, their consumptions would become less capable to consume their products, thus reducing their profitabilities, so they would like to balance the labour costs and their consumers' consumption abilities.

Therefore, if an economy is dominated by oligopolistic companies, workers in the economy are likely to receive higher incomes and less likely to be replaced by machines and AIs, as they are also their employers' important consumers.

Why is Apple IOS more user friendly than Android?

The title may sound like a commercial electronic product article that compares the differences between Apple IOS and Android, but I would like to discuss the economic intuitions behind this issue. On the market, apart from Apple, the majority fo smartphones are using Android as their operation systems, some manufacturers have made some amendations to the operation systems as well. Overall, the experience of using IOS, the iPhone operating system is nicer than the experience of using Android, at least this is my personal experience and opinion.

Though IOS can be updated without any charges and seem free, while the consumers buy their iPhones, they also buy the operating system as well and the operation system cannot be replaced by other operating systems. As IOS has a higher price than Android (IOS has a hidden price and Android is free and open), IOS has to have a better quality in order to be competitive. In addition, there is an imperfect information in the market of Android, that the developer of Android does not know the manufacturers of the smartphones. When there is an information asymmetry, the market outcome cannot be as good as the market outcome without an information asymmetry. However, for IOS, there is no such issue that IOS’s developer is also the designer of iPhone, the developer knows the perfect information about the smartphone. From this point of view, the smartphone designed by Google is likely to be more compliant with Android than other smartphones. Thirdly, IOS targets a much more limited range of products than Android, this makes the design of IOS can be more specialised. More specialised products are more likely to meet the requirements of their target demanders (in this case, smartphones and tablets).

To conclude, IOS is better than Android because it has to have a better quality to counter its price disadvantage and perfect information about its target products and more specialised design make it possible to develop a more user friendly operating system. Therefore, if in the future, Apple is trying to use the same operation system on more platforms, it is likely to reduce the compliance of its operation system.