about 7 years on 2009-12-25

DIMINISHING MARGINAL UTILITY... WHAT DOES THE NEXT GENERATION THINK?


last night i watched several robert shiller lectures on financial markets on the yale open courses website (sorry big h, y actually has more meat open to the public)...  one thing that struck me was his early reminder that almost all finance strips back to the basic economic theory of diminishing marginal utility, namely that the value of an incremental dollar of wealth falls the wealthier you are and ultimately tends towards zero.  the curve is supposed to look something like this:

thinking about it this morning, i can see why this general curve makes sense and is correct on the ultimate macro level, but i don't think it very accurately models my personal utility, or that of many 2008/09 young and educated americans.  i think that my wealth/utility curve looks like one of the following variants - while i can make arguments for each, i don't know myself well enough to make the specific call from the below options:

what does this mean?  what does it matter?  because if people are not incentivized by the generally accepted marginal utility curve the structure of finance and the economy must change to some degree.  i am tempted to launch into a discussion of hedge fund blowups, or why the internet and exceedingly cheap access to information and communication is the driving force behind the change -- but even i see these tangents as a stretch.  for now i will just propose that we live in a time of staggering change - (fact of the week:  it is estimated that 4 exabytes of unique information will be generated this year... == more than previous 5,000 years http://bit.ly/14vin)

utility curves on a micro/human level are shifting in the 'developed' world -- and it is worth examining the changes and considering the impact. 


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