Behavioural Finance - Essay Example

? Behavioural Finance The world has for a long time been in need of a change in the way things are done, the people recognise that the social, political and economic conditions in the universe are not in line with the needs of the society. Technological advancements have been the constantly changing since 1900’s with people being able to communicate and transact on a global scale and the middle class rising faster than ever before. However, despite these advancements, the disparity gap between the wealthy and the financially deprived people has been rising, both in nation-to-nation comparison and within the countries (Leunig, 2011, 16). Adverse and extreme climatic conditions have increased in frequency and severity and adapting to these changes has now become a reality (Stiglitz, 2010, 19). Due to the rising population, the demand for natural resources has risen which has led to overexploitation of natural resources and degradation of the environment, food and oil prices have skyrocketed and debt crisis in most countries has reached an alarming levels. The new paradigm was discussed when Bhutan invited delegates for a high level meeting to discuss on happiness and wellbeing and to pursue the elaboration of methods that I the best way possible the significance of quest for happiness and wellbeing in progress with a view to directing their public policies. The new economic concept is based on 4 economic pillars, which include wellbeing and happiness, environmental continuity, competent sharing of property and equitable sharing of wealth. In the quest for a new economic paradigm, 15 recommendations were identified which would lead to fulfilment of the new economic paradigm (Sy, 2012, 74) This literature review will aim to answer the following questions Happiness and well-being 1. How is happiness related to well being? 2. What are the dimensions to happiness 3. What does happiness entail? Can it be measured? Efficient allocation of resource 4. Why is GDP not an efficient measure of economic well being? 5. Is it necessary to introduce a measure for happiness such as ‘gross national happiness’? Ecological sustainability 6. How is the ecology linked to the well being of an individual? 7. What is footprint accounting in natural resource management? Fair distribution 8. How can fair distribution of resources be achieved? 9. What factors are to be considered in ensuring fair distribution? 10. How is inequality a challenge in fair distribution? Inclusion criteria Inclusion of the material for literature was based on relevance to the research questions and its relevance to the research topic Exclusion criteria Any material that was deemed irrelevant to the research topic was discarded; the relevance of the material to the research topic was determined by reviews of its title and abstract Relevance of research questions to the topic The view has been taken that a progression through the research questions will provide an in depth overview of the research topic. The research questions have been designed to capture all views of the new economic paradigm and the different aspects of the new economic paradigm that scholar have identified. Despite the limited literature that is available in this area, the research questions have helped to conduct an exhaustive literature review. Table of contents Abstract 2 Table of contents 5 Introduction 6 Happiness and Well-being 7 Efficient allocation of resources 9 Ecological sustainability 11 Fair distribution 12 Analysis of the literature 13 Conclusion 14 References 15 Introduction The world has for a long time yearned for a change, the people recognise that the social, political and economic conditions in the universe are not at par with the needs of the society. Ancient economists such as Adam Smith in his ‘wealth of nations’ argued that competition would be used to distribute good and services in the world as individuals were taken as rational beings. However, it has been discovered that human beings are not rational beings and that markets, which were previously thought to contain the ecosystem, are a subset of the ecosystem, this has been worsened by the inability of the common measurements such as GDP to measure some aspects of the economy. Technological advancements have been the order of the day since 1900’s with people being able to communicate and transact on a global scale and the middle class rising faster than ever before. However, despite these advancements, the variation gap between the wealthy and the underprivileged has been rising, both in nation-to-nation comparison and within the countries. Adverse and extreme climatic conditions have increased in frequency and severity and adapting to these changes has now become a reality. Due to the rising population, the demand for natural resources has risen which has led to overexploitation of natural resources and degradation of the environment, food and oil prices have skyrocketed and debt crisis in most countries has reached an alarming levels. This paper will deal with the new economic paradigm and all the perspectives that are associated with it. These trends shows that the world has no option but to act; however, there are more benefits that come with change than just avoiding the negative effects that may result due to failure to change. Change and innovation through testing and advancement of new models are key determinants in human advancement, for instance, the global financial and European debt crisis does not only require people to imagine of a better world, but rather, to act and create that world. The need for a new economic paradigm was boosted when the 193 member states of UN general assembly adopted a consensus resolution 65/309 on happiness: towards a holistic approach to development, this resolution characterised happiness as fundamental human goal and a universal aspiration. The prime minister of Bhutan, who was the host of the meeting that was deliberating on the new economic paradigm argued that the world needed economies that serve and nurture the wellbeing of all living persons, which is because of living in harmony with nature, with the community and the people around us, and with our inner selves. He went ahead to say that the world needs an economy that will serve humanity and not the one that enslaves itself, in addition the economy must also avoid the imminent reversal in civilization while thriving under the natural resources found on the planet and ensuring sustainable, equitable and meaningful use of natural resources. Happiness and Well-being The new paradigm discussion identified the following points in relation to happiness and well-being; first is that the issue of happiness requires a holistic approach from many perspectives. In addition, happiness has at least three meanings: happiness as a mood; happiness as satisfaction with one’s life and happiness as a thriving and satisfying life that has an impact on humanity. These classes of happiness can be calculated and boosted by public policy and universal targets such as the Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs), however, Gross National Product (GNP) alone does not promote contentment. Life evaluation depends on many things, these include satisfaction of basic needs; employment and earnings; muscle of one’s social support system; trustworthiness of government; access to health care including for mental disorders; having unselfish and empathetic values. Community support and good mental wellbeing are more vital than earnings. The new economic paradigm also argues that happiness is not only a state of mind and a trait, but also a skill; happiness is an art of living and can be taught, cultured and passed on. The benefits to that accrue to a happy society include higher productivity, faster recovery from illness and lower mortality rates, more peace and more sympathy. Governments can do much to promote happiness by achieving the Millennium Development Goals (MDGs) and meeting all essential needs; measuring happiness; promoting dynamic labour market policies; promoting mental wellbeing; promoting compassion, unselfishness, and integrity; avoiding hyper-commercialism (e.g. through limits on advertising). In addition, they can also promote happiness by avoiding fraud; creating institutions such as the Bhutan’s Gross National Happiness Commission, new measurement system, as part of Sustainable Development Goals, is needed to match and correct the national accounts. This structure should measure happiness in its three dimensions; study the determinants of happiness to support it, and embrace all-inclusive green accounting. The epistemic society encompassing of statisticians, economists, philosophers, teachers and other professionals should work together to ensure that they make this world a happy place to live in for all the people and for the future generation. Happiness in the new economic paradigm comes with wisdom, altruistic love and inner strength since in reality individuals do not live in exclusion of each other, rather, happiness is collective as a result of altruism and genuine concern for other people (Etzioni, 2010, 38). Happiness will result when individuals have a sense of interconnectedness and global responsibility, this means that individuals will do everything with their powers to make the workplace and the communities in which they live in a better place. In the context of new economic paradigm, there are five psychological aspects of well being according to Professor Martin Seligman, founder and director of positive psychology centre at the University of Pennsylvania. These aspects include positive emotion including happiness, engagement, good relationships, meaning and purpose of life, and achievement and accomplishment. Adopting these aspects of well being would lead to improved health, increased productivity and peace in the world. Just like other macroeconomic parameters such as gross national product among others, that can be measured, there should be introduced a measurement standard for measuring happiness such as gross national happiness (Leunig, 2011, 6). This index, should be targeted at evaluating the levels of giving and receiving various gifts such as social time, goods and services and labour among others. Gross national happiness standards envision an individual’s basic good nature such as of kindness, compassion, generosity among others. Emotions are also included in the measurement of gross national happiness since they are an important component of happiness and in addition spiritual activities, decreasing wandering of mind, meditations and prayerful meditations. In measurement of happiness, five factors can be considered; family and friends, good health, material sufficiency, freedom and a trusting environment, however, in order for these factors to be efficient in measuring happiness, the collective identity of individuals must be extended from the present to the future, in addition it should also move from the family and country level to a global level. The guiding principle among policy makers in the new economic paradigm should be to create as much happiness in the world as possible while at the same time minimising suffering for both present and future generations. Efficient allocation of resources GDP, as it is currently measured, has several challenges that make it unable to measure the progressiveness of a country. Some of the challenges include;, first GDP does fails to take note of the different perceptions that individuals have regarding wealth in a society, for instance while some individuals may regard wealth in monetary terms, other may view wealth in the size of a family that an individual has. In addition, GDP is an average number, which does not show the different levels of income for the population of a country, this is in contrast to a true commitment to the well being of the society, which should take into consideration people from all social classes in the society including middle class and the poorest individuals. Secondly, if used in the new economic paradigm, GDP does not measure sustainability, that is, it only measures the wealth of the current generation without putting into consideration that of the future. A good measure of a country’s wealth is that which takes into account all the facets of growth presently and in the future, for instance, currently GDP does not take into account the unsustainable aspects of growth especially in regard to environmental degradation and global warming. The current levels of growth are not sustainable since they do not take into account depletion of natural capital resources, in addition they also do not take into account social values. In the new paradigm, these aspects of sustainability and social values will have to be included. Another failure of the current GDP measurements is that it does not take in to account wellbeing of individuals although it can be measured scientifically to show differences among different individuals. In addition technical issues with measurement of certain parameters such as leisure since as GDP rises, individuals have lesser time for leisure, this trade off is not accounted for, therefore making GDP unsuitable to be used to measure progressiveness in the new economic paradigm. In the current global economy, individual and family wellbeing is very reliant on adequate employment and decent work, social capital and connectivity and an overarching economic framework that emphasises on development, therefore, measuring these critical factors will ensure a transformative development process, therefore policy makers should focus on diverse areas that determine the success of an economy. The need for a new economic paradigm is also supported by the paradox of affluence which states that having a lot of material possessions does not automatically result in greater satisfaction levels. This idea is supported by countries like Bhutan and Costa Rica which despite their comparably small levels of income, they have managed to achieve sizeable levels of satisfaction for their citizens. The old way of doing things has been proven not to be successful in helping to further the development agenda; actually, any further use of the old way of doing things could worsen the situation further. Ecological sustainability In the new economic paradigm, ecology is linked to well being of an individual through the World Health Organisation (WHO) definition of health, which includes more than absence of a disease. The definition was expanded to include planetary health, which relies on well being of different generations, and health of global ecosystems (Sy, 2012, 73). Ecological support systems are required for sustainable well being and happiness of human beings, this therefore requires restructuring of the global economic system due to the impact that human activities have had on the ecological systems. In the current economic setting, countries are using their natural resources without keeping a close attention on how much they have used and how much is left; this has the effect that at one point, these ecological resources will be depleted without the countries having planned for it leading to economic crisis. The new economic paradigm should adopt the ecological footprint accounting that provides a gauge for the natural resources at the disposal of the nations of the world. This footprint accounting allows individuals and countries to compare the amount of biological ecosystems that they have used and the size that is available; comprehensive footprint accounting, for instance, can show the structural challenges that a country faces and which may be causing the problems that they are experiencing currently. In addition, this type of accounting can show countries the opportunities that are available to overcome these challenges Fair distribution In the new economic paradigm, fair distribution of resources it at the core of ensuring well being of individuals, this can be achieved by making sure that all the policies that are to be put in place are all inclusive. This is in the wake of the current global crisis where more than 75 per cent of the total population in the world does not have access to social security and more than 1.4 billion people live on less than 1.25 dollars a day. In order to ensure fair distribution in the new paradigm, several factors must be considered. One of the factors is ethical leadership; by this, we mean leadership that is concerned with creating a more inclusive and balanced society, a leadership that is ready to protect human rights and the rights of marginalised groups. Another factor to consider in ensuring fair distribution is to ensure that every person has access to basic goods and services such as medicine and education among others, which will ensure that every individual lives with respect and in a dignified manner. Inequality as a challenge to fair distribution of resources in the new economic paradigm can be viewed from two perspectives. The fist one is the intra generational inequality, which involves people within one generation. In this perspective, inequality is viewed as how we distribute resources such as income, health resources, environmental benefits and other factors affecting the well-being across different groups such as urban and rural dwellers, poor and wealthy individuals among other groups. The other perspective of measuring inequality is the inter-generational inequality, which is connected to sustainability; this it to mean that our actions today might deny the future generations the chance to enjoy the resources that we enjoy currently. This dimension requires ways that will enable us to measure the reduction of risks since this might act as an incentive to the policy makers to put in place those policies that reward activities that reduce future risks and vulnerability and the expense of some present gains. Analysis of the literature The current global economic strategy that promotes growth while at the same time changing its character is inadequate to drive the global economic agenda forward, economists and governments agree that the current economic strategy is environmentally unsustainable in the long run. Most of the governments have not fully understood the extent of the current crisis and those that have usually fear the consequences that might come with implementing the required changes, this has the effect that no institution or government has adopted the scale of the change that is required to reverse the negative trend. The new economic paradigm will have to work with a one-world economy, which is organised in a multi level system, which takes into consideration social, political and ethical values into the economic system. The new economic paradigm will combine dynamic principles such as empowering people and conserving the environment with static principles such as equity and social justice to run the economic system, in addition, communities and households will be the building blocks contrary to the current economic system, which has firms and businesses as the main building blocks. The current measures of economic growth are not appropriate to measure human development as they are faced with very many challenges. For instance, a measure like GDP only measures the quantifiable aspects of the economy but it may not be able to measure the effects that some of the things it measures has on the environment. Say in the case of tobacco, GDP will show the need to increase production of tobacco but it will not show the effect of consuming that tobacco in terms of medical complications that individuals will have. For the new economic paradigm to work, several things must be put in place, these include but not limited to the following. The gross national happiness (GNH), which is one of measures that need to be introduced in the new economic paradigm should cover all sectors of the economy such as academia, private sector, public sector, government and civil societies. In particular, private businesses should be encouraged to participate in gross national happiness; this can be through presenting a strong case to the businesses on why they should be part of the GNH movement. Local governments, communities and NGO’s should pressurize the government to adopt policies that support the idea of gross national happiness. To ensure sustainability of this movement, youths must be included both at the planning level and as a target group. Human rights and empowerment of the marginalised groups should be part of the new economic paradigm to increase inclusiveness and reduce inequalities that result from inequity. Over reliance of the monetary system by countries has also contributed to the current state of economic affairs, therefore, with the new economic paradigm, an alternative that can replace the monetary system should be considered in addition to deviating from using monetary wealth to measure development of countries and individuals (Wollenschlager, 2011, 24; Ulgen, Tortajada, Meaulle & Stellian, 2013, 25). Conclusion The need to have a new economic concept has been driven by the failure of the current economic system. The new economic paradigm, is based on 4 pillars that include happiness and wellbeing, fair allocation of wealth and opportunities, environmental sustainability and efficient distribution of wealth. Implementation of these four pillars will require governments to adopt drastic changes in the way they conduct their activities, something which most of the governments are not willing to do due to the magnitude of changes or for fear of the expected results. References Etzioni, A. (2010). Moral Dimension: Toward a New Economics. SimonandSchuster. com. Leunig, T. (2011). Do We Need a New Economic Paradigm?. Modern Believing, 52(1), 3-10. Stiglitz, J. (2010). Needed: a new economic paradigm. Financial Times, 19. Sy, W. (2012). Endogenous crisis and the economic paradigm. real-world economics review, (59), 67-82. Ulgen, F., Tortajada, R., Meaulle, M., & Stellian, R. (Eds.). (2013). New contributions to monetary analysis: the foundations of an alternative economic paradigm (Vol. 79). Routledge. Wollenschlager, F. (2011). A new fundamental freedom beyond market integration: Union citizenship and its dynamics for shifting the economic paradigm of European integration. 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