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Health care insurance, an evergrowing expense

Last Monday was the deadline day for health insurers to announce their insurance rates for the upcoming year. On average, the increase in insurance rate is almost 6%. This is for the basic insurances, if you want to have more freedom of healthcare choice, the rates go up a little more than the 6%. In the annual budget the cabinet predicted how much the premiums for health insurance would increase, which would result in an increase of 10.33 euros per month. This would be a total of almost 124 euros a year.  Therefore, the actual increase is lower than the predicted increase. In this article, I will discuss the main factors that cause the health insurance premium to rise.

…A look at Rationalism & Behavioural economics

(Part I)

Rationalism is the concept of innate ideas, reason, and deduction. Rationalism is characterized by the philosophical term “a priori”, which uses logic and reason to come to a conclusion before experience. One common assumption that economists make when making models is that people are predictable and rational. However, in the real world, people can be impulsive and short-sighted when making decisions. The study field that analyses humans’ rationalism is called behavioral economics. More generally, the branch focuses on the philosophical, social and emotional factors when making decisions as discussed by Adam Smith in “The theory of moral sentiments” in 1759. Although rationalism (or the absence of it) makes it harder to predict human behavior for economists, behavioral economics has gained popularity over the past few decades and it has been applied in fields such as public policy, political science, marketing, and finance.

On the other hand, irrational human behavior does not negate classical economics but it adds an extra layer of complexity. In most cases, people are rational. For instance, when the price of a product falls, people tend to buy more of that product, holding the law of demand true. Yet, the bounded rationality which includes: limits on information, time and abilities, prevents people from seeking out the best possible outcome. When the price of a good is low, consumers might not necessarily buy more. In fact, they might buy less of the good if they think that the low price possibly suggests the poor quality of the product. In such a circumstance, the law of demand does not hold true anymore which raises questions in classical economics.

As mentioned before, one of the problems with classical economics is that it assumes that consumers have perfect information when making choices. This means that they can quickly access information about prices and quality, which is not often the case in reality. Prices play a crucial role in decision making as they can change consumers’ perception. In order to prove that, a study in California analyzed the neurological response of an audience when tasting a variety of red wines. The participants were given fake prices and their neurological response was examined to determine the level of enjoyment. Surprisingly, the results showed that the audience seemed to enjoy the wine more when they believed the price was higher. This observation remained valid even when the participants were given identical wines but told that one of the two wines is higher-priced. Therefore, the conclusion that can be drawn from this experiment is:

“Contrary to the basic assumption of economics, marketing actions can successfully affect experienced pleasantness by manipulating non-intrinsic attributes of goods.”

Therefore, behavioral economics seeks to understand when and why people behave differently than what economic models would suggest. This is proven by one of the most popular experiments in behavioral economics called Ultimatum game. Briefly explained, the two players of this game decide how to share a specific sum of money. The first player is given all the money and further asked to suggest a method of sharing the money to the second player. If the deal is accepted by the second player, the players share the money as decided. However, if the second player does not agree with the deal, nobody gets any money. Unsurprisingly, the less equal offers are often rejected by the second player which contradicts the classical economic theory. The most rational decision the second player can make is to accept any offer since any sum of money is better than no money. This contradiction can be explained by the fact that human behavior is not only motivated by gain, but also by other aspects such as fairness and justice. The “Ultimatum game” shows that:

“If people were entirely rational they would consistently make the same decision given identical options, but sometimes people’s preferences are dependent on how the options are presented. This type of cognitive bias is called the framing effect.”

 

Bibliography:

Plus, T. G. (2018, February 21). Retrieved November 07, 2018, from https://www.youtube.com/watch?v=8bMztDEOMi8

Spaniel, W. (2009, October 03). Retrieved November 07, 2018, from https://www.youtube.com/watch?v=xpkxLKV_3d0

 

Everything you need to know about Monetary Policy Decisions

Last Thursday, the ECB published yet another monetary policy decision. Given that the ECB and its monetary policy are one of the cornerstones of our economy, it’s surprising how little attention there is – both in the media as in class -for the monetary policy decision and the press conference in which the policy is announced – in fact, the only mentioning of the monetary policy of the ECB was in June this year, when the ECB announce to quit – in a considerable amount of time – the quantitative easing.
So, for those interested in monetary policy: Here’s how to watch, listen and follow the press conferences of mr. Mario Draghi.
1. To QE or not QE? For those who are not familiar with QE, a very short introduction. Usually, the ECB conducts monetary policy via the interbanking lending market. However, due to the Global Financial Crisis, this lending market has dried up and can no longer be used to conduct monetary policy. Instead, the ECB introduced QE: Buying of assets (for instance, bonds), as to provide liquidity to the market and being able to steer interest rates.
2. It’s the delta that counts. The larger part of text of the monetary policy decision remains the same. This, by the way, also goes for other text. As for the ECB, don’t pay attention to phrases like ‘continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’. These will always pop up in press conferences. Actually, the whole press conference can be summarized in just a few numbers and dates: What are going to be the key interest rates (that is, the interest rates the ECB uses for the interbanking lending market), and, in the case of QE, the size of monthly purchases and the moment of . The latter determines when the balance of the ECB will start to shrink again. Remind yourself that (for instance) state bonds will be repaid at a certain moment. If not reinvested, this will lead to a shrinking of the balance of the ECB.
3. Take into account market expectations to understand what’s happening at financial markets. Suppose, for instance, that the market expects Draghi to announce that the ECB will stop QE directly, while Draghi actually announces that QE will remain for at least three months. In the absence of market expectation, markets could react with rising interest rates, but as they were expecting a tightening of monetary policy anyway, the interest rate can decrease.
And remember, every six weeks, the ECB will give an update.

Draghi

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Abolition dividend tax, reconsidered

The abolition of the dividend tax in the Netherlands has been the topic of discussion in the house of representatives for the last couple of months. A big player in the decision was Unilever, who would possibly move their headquarters to the Netherlands if the dividend tax was abolished. This was one of the main reasons to abolish the tax. When Unilever announced that they weren’t so sure about moving their headquarters to the Netherlands anymore, the house of representatives took another look at the abolition  of the tax.  This time, they came to the conclusion that the abolition did not yield enough economic benefits that outweighed the possible costs of the abolition.

Source:  stock.adobe

Economic news in CEE: a unique paradox in Europe [informative 3-minute read]

The Romanian economy has grown significantly; by 27% in the past decade. According to an analysis by Coface Romania, this growth has entitled Romania as Central and Eastern Europe’s (CEE) growth champion in September 2018.

Despite the economic lift, most companies in Romania are currently confronted with a higher risk of bankruptcy now, compared to 10 years ago.

Discussie Duurzaamheid of Mededinging

Discussie: Duurzaamheid of Mededinging? [Longread]

Micro-economie – Dit artikel gaat over de netelige kwestie of de economische ideeën van duurzaamheid en mededinging op gespannen voet met elkaar staan. Voor dit artikel heb ik een interview afgenomen met prof. E.E.C. van Damme, hoogleraar economie aan Tilburg University, om insights te krijgen over deze twee concepten. De aanleiding van dit stuk is een artikel van Van Damme (2017) genaamd ‘Goede marktwerking en overige publieke belangen’ in het economisch tijdschrift Markt en Mededinging (M&M) en zal dan ook de leidraad vormen.

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Future of Fossil Fuels From Thin Air

Fighting  for the environment can be done in multiple ways. Reducing the cost or accessibility of renewables is one way – energy sell-back, subsidies, and new technologies. More recently, EU decided to tackle 10 biggest single-use plastics within their jurisdiction, hoping to “deliver tangible results [..] before the elections in May 2019”. Those methods concentrate on avoiding future build-up of pollution.

However there is another aspect that needs to be focused on: repairing the damages already caused. It’s uplifting hearing about another country running solely on renewables for X days in a row, or the fact that biggest ocean pollutants are being phased out of our lifestyles but reduction of the build-up is also important . New ocean cleaning initiatives, carbon sucking towers, reforestation are all methods to combat the pre-existing depreciation of our planet. In all of this, a peer reviewed article from Carbon Engineering from a week ago gave another promising opportunity in carbon elimination through Direct Air Capture (DAC)*.