Let’s play: Behavioral Game Theory

Reading time: 8 minutes

Picture this scenario: you’ve been locked in an interrogation room for hours, and the police finally layed out their cards on the table. They know you’re guilty and have your partner in crime in the other room. The police needs a confession, and the one to provide it can walk out freely, leaving the other to serve a long sentence in jail. If you both confess, you both go to jail, but for a shorter time. However, if neither does, both go to prision but receive an even shorter sentence. It is up to you to decide. What do you do? 

Would you confess or keep quiet?

If you’ve ever been formally introduced to game theory, you know that its answer is that both of you should run to the officers and tell them the truth. This is the economic prediction as it’s the rational thing to do. But would you do it? Most people’s answer is the economists’ favorite response to (almost) every question: it depends. Who is the other person? How much do you trust them? Is it your friend or your 3rd-floor neighbor? Is it your mother? And how long are those sentences? You may hold your ground facing 6 months, but what if you’re looking at 25 years? Are you even truly guilty? Are you willing to trade away your integrity for a shorter sentence?

The conventional game theory looks at the game elements (what are the actions and the payoffs?) for the answer. Behavioral game theory tries to look at all the other questions.

Game Theory vs Behavioral Game Theory

But let’s back away for a second: what even is game theory, and how exactly is behavioral game theory different?

Well, game theory’s main objective is to predict behavior through a systematic, mathematical approach. No need to close the article, this is only the “scary” version of the definition. Thankfully, we are not in a Microeconomics class, so we can use a much more pleasant definition: game theory analyses games. Of course, by “games”, we do not mean football or basketball (although that would be fun) but are instead referring to any interaction between people (the players), where their behavior (actions) determines what they get out of the game (their payoffs). Any economic, political, or social interaction can be rewritten as a game, and thus seen through the lens of game theory. The interrogation room situation we started with is a classic example. It is frequently used as an introduction to the subject. The idea is that each player will look at their possible strategies (if my partner confesses, I can confess/not confess…) and where those strategies will land them (if we both confess, we go to jail…), deciding then what the optimal course of action will be. It’s like playing chess – if, for example, your opponent moves the bishop to B7, and you take your knight to C4, you’re doomed; if instead you move your queen to D6, checkmate! The optimal course of action: queen to D6. 

Game Theory tries to find the optimal course of action

Game theory does a wonderful job predicting the outcome of such games, but the jump to real life can be tricky. Notice that the optimal course of action was left undefined. “Optimal” depends on what each person wants out of the game, on their preferences. The usual assumption is that players are self-interested to the extreme and completely rational, caring only about getting the best possible outcome for themselves, regardless of what happens to the other player.

This is exactly where behavioral game theory steps into the picture. It has a practical approach to the games, rather than theoretical. Game theory uses logic and mathematics to find out what a rational and self-interested player would do in a game, and then states what people will choose rationally in such a situation. Behavioral Game Theory takes the opposite path. It asks actual people to play the game and observes their behavior. Such experiments make it possible to see how different preferences affect human behavior (how things like altruism or fairness influence people’s decisions) and how that differs from the theoretical predictions. Why would this matter? Well, these preferences can be incorporated in the models, making them closer to the reality we know, and therefore allowing for better predictions of behavior.

Playing the Game

Ultimate Game

The Ultimatum game is an early example of behavioral game theory’s experiments. In this game, one player is given a certain amount of money (say, 10€) and asked to split it with the other player in whatever way they want. The second player then decides whether to accept the offer or to reject it, in which case neither player gets anything.

Conventional game theory’s prediction is that the first player should offer as little as possible (1 cent out of 10€) and pocket the rest, since the second one would have no reason to reject it – after all, 1 cent is better than nothing, right?

The Ultimatum Game consists of proposing a split that the other player accepts or not

Now, picture yourself playing the game. Do you accept such a low offer? Can you think of anyone who would? Do you think this is the right prediction? If not, congratulations! You are a wonderful forecaster of human behavior. In fact, when this experiment was first conducted, the average offer was equivalent to 3.5 €, and offers below 5€ were more likely to be rejected the further down they went. The experiment has been replicated over the years, with high and low amounts to be split, with consistent results.

The preference uncovered here is known as negative reciprocity – being willing to “pay a price” (give up some amount) to punish unfair or inappropriate behavior in others. Upon seeing what they considered as an unfair split (a much too low offer from the first player), most players decided they would rather gain nothing than allow the other person to, in their eyes, treat them unjustly.

Dictator Game

The dictator game is a slight modification of the Ultimatum game: here, the second player has no power to reject the offer. The first player (the dictator) proposes a split of the initial sum, and that is exactly what each one takes home, even if it means that the second player gets nothing at all. Of course, the theoretical prediction is exactly that – the “dictator” will choose to keep the entire 10€ to themselves and won’t offer anything to the second player.

But when the experiment was conducted this was not what happened at all! In fact, around two thirds of people chose to offer the equivalent of 1€ to 5€, keeping the rest.

Those unlikely nice “dictators” were displaying what is known as an altruistic preference. Someone with altruistic preferences is more content with an outcome if the well-being of others increases. That means they play not only with their own outcomes in mind, but also that of others involved in the game, and prefer situations where other people are also benefitted. This behavior can be found in everyday interactions too: when people donate to charities or help someone in need, they are manifesting altruistic preferences.

Altruistic behavior is found in everyday interactions

Gift Exchange Game

Now, for a break from ultimatums and offers, let’s look at the gift-exchange game. This is simply a game made to mimic the interaction between an employer and an employee. First, the “employer” offers the “employee” some amount of money (a “wage”). Then, the employee must perform a task to earn it. Now, what the task is in particular is not so important (it can be anything at all, as long as it is not completely effortless), what is really at stake is how much effort the “employee” puts into completing it.

Game theory’s prediction here is that being offered any amount at all the “employee” would work as little as possible (self-interested as they are). But do you think that happens? Chances are, you’ve had to do some job in your life, and put some amount of effort into it. Do you always do the least possible required? As it turns out, most people didn’t. They responded to more generous “wages” by working harder. They were, in fact, displaying negative reciprocity’s nicer counterpart: positive reciprocity, the willingness to reward generous actions. People presenting this preference respond positively to actions that benefit them: they go an extra mile when they feel that someone has acted in their best interest.

People often choose to work harder if they feel they were offered a generous wage

Notice that neither of these experiments challenge the validity of standard game theory. Its systematic and logic process is still sound – games do have optimal courses of action. Its cornerstone assumptions are the ones that fail: behavioral game theory shows that people in general are not merely self-interested, so what is “optimal” varies according to their preferences.  

Behavioral game theory is a great example of what the branch of behavioral economics can do for the economic science. It is not a replacement of traditional game theory, but a way to expand on and improve it: behavior models can arise from practice, not from theory. After all, there’s no better way to figure out someone’s behavior than to observe it.


Sources: American Economic Association, BehavioralEconomics.com, Blackwell Handbook of Judgment and Decision Making, Behavioural Economics: Introduction to Behavioral Game Theory and Game Experiments.

Constança Almeida

Mariana Gomes

Leonor Cunha

The death of Roe v. Wade and what it means for abortion in the United States

Reading time: 6 minutes

The decision is not official yet but according to an unprecedented leak of the Supreme Court of the United States, the 1973 decision on the Roe v. Wade judicial case that gave the right to women in America to have an abortion is about to be overturned. The overturn of the decision on this landmark case does not mean women will lose the right to have an abortion everywhere; it instead means that the Federal States will be free to set their abortion laws. However, it is estimated that half the women of reproductive-age live in US states that will further restrict or outright ban abortions if the Roe v. Wade decision is overturned. 

Figure 1: Pro-life protesters in front of the Supreme Court Building in Washington DC.
Picture from New York Times.

Before we dive into the consequences of what the end of the Roe v. Wade decision will mean for the United States, let us quickly look at the history of abortion in America and explain what exactly was the Roe v. Wade decision.

History of abortion in the United States

For much of American history, states did not regulate abortion before something called “fetal quickening”, the point in the pregnancy where the movement of the fetus can be detected in the womb. Well into the 19th century, abortions were widely practiced in the United States. Before the American Civil later in the second half of the 19th century, nearly 100% of women’s reproductive healthcare was done by women (midwives). This meant popular ethics regarding abortion and common law was grounded in the female experience of their own bodies.

The creation of the American Medical Association (AMA) in 1847 started the push to outlaw abortion. The AMA argued that abortion was immoral and that “quickening” was irrelevant because, after fertilization, a new human life would take place if no one interrupted its development. Many also argued that abortions lead to a declining birthrate of white protestant women, meaning it had to be outlawed to prevent the “browning” of America. The AMA was eventually successful, and by 1880, every US state had introduced criminal abortion laws.

Despite the criminalization of abortion, women continued to have them. It is estimated that there were up to 1.2 million abortions each year after 1880. Practitioners did their work behind closed doors or in private homes. The procedure became unsafe, and it was responsible for one-fifth of all recorded maternal deaths in 1930.

Attitudes towards abortion began to shift in the 1960s as people started to push for the liberalization of reproductive laws. In 1970, Hawaii, New York, Alaska, and Washington State were the first states to legalize abortion. However, the biggest shock came in January 1973 when the Supreme Court announced its landmark decision in Roe v. Wade, in which it decided that the restrictive states’ regulations on abortion were unconstitutional.

Figure 2: Protest for the legalization of abortion before Roe v. Wade.
Picture from Time Magazine.

Roe v. Wade explained

The Roe v. Wade Supreme Court case started when a young Texan woman named “Jane Roe” (her real name was Norma McCorvey)  wanted to have an abortion in 1969. At the time, abortion was illegal in Texas except to save the woman’s life. Since Jane Roe was not a risk, she tried unsuccessfully to get an illegal abortion and was approached by two attorneys that wanted to challenge anti-abortion laws. On the other side was the district attorney of Dallas, Henry Wade,  who enforced the Texas abortion law and was later sued by Roe. The case eventually went all the way up to the Supreme Court, and on January the 22nd of 1973, the court struck down the Texas’ law. The court ruled that a woman’s right to privacy in the 14th amendment superseded a state’s right to ban abortion. Abortion was now legal everywhere in the United States.

Figure 3: Norma McCorvey, also known as Jane Roe.
Picture from New Yorker.

What happened after 1973?

In 1973, the majority of the population supported the legalization of abortion; however, the Supreme Court Decision fueled a movement against abortion within the more religious and conservative electorate. While initially anti-abortion Americans were evenly divided between the two main parties, the Democrats and the Republicans, over the years, the Republican party adopted the overturning of the Roe v. Wade decision as one of its biggest political platforms. Their plan was simple, the party had to nominate enough conservative judges to the Supreme Court until there was a majority to overturn the 1973’s decision. Although it was simple, the plan was not easy to accomplish; Judges on the Supreme Court serve for life, and replacements have to be nominated by the President and approved by the Senate. However, between 2016 and 2020, the Republicans managed to nominate three conservative judges to the Supreme Court (out of a total of nine), which added to the three conservative judges already on the court. Although it is not yet officially known, it is expected that at least five of these six conservative judges have decided to overturn Roe v. Wade on their decision in the current case on abortion “Dobbs v Jackson Women’s Health Organization”.

The consequences of overruling Roe v. Wade

If the rumors are true and the Supreme Court decision is indeed overruled, it is expected that over half the states will prohibit all or virtually all abortions. Twelve states have “trigger laws” that have been designed to automatically ban abortion in the event Roe v. Wade is overruled. The likelihood of Congress passing federal laws to protect abortion access is very low since it would the support of ten Republican Senators to pass. Wealthier women will be able to travel to states where abortion is legal but poor women and teenagers will likely face the choice between an unsafe abortion or an unwanted child. The New York Times estimates that 34 million women of reproductive age live in states at risk of losing access to abortion.

Figure 4: Picture from Fortune

Conclusion

It is impossible to predict the social and political consequences the overruling of the 1973 landmark decision will have on America. According to recent polls, a large majority of the US population does not support overturning Roe v. Wade, and with the midterms around the corner, the Republican party is expected to face some backlash from voters for its role in ending the nationwide right of abortion. However, it is unlikely that the backlash will be large enough for Democrats to gain ten Senate seats from the Republicans needed to establish a Federal law on abortion. So if Roe v. Wade is indeed overruled, the landscape of abortion rights in America will change for decades to come.

Figure 5: Large shift in the polls after the leak from the Supreme Court came out.
Picture from PBS News Hour.

Sources: PBS Newshour, New York Times, Times, Fortune, Washington Post, Healthline, CNN, The Guardian, The New Yorker

André Rodrigues

Maria Mendes Silva

João Sande e Castro

Natalie Enzelmüller

Can the Euro survive its own diversity?

Reading time: 7 minutes

In general, there are many pros and cons to the creation of a monetary union. The creation of a single currency among many countries allows for the lowering of cross-country transaction costs, increases certainty for investment while, because of this, stimulating trade and job creation. On the other hand, it means that the union’s monetary authority has the responsibility of implementing a “one size fits all” monetary policy, which may create problems if the members of the monetary union have very different economies or if the shocks which monetary policy is meant to address occur asymmetrically across countries.

The creation of the Euro

An Economic and Monetary Union has been an objective of the European Union from as early on as the late ’60s/early 70s, with the first steps towards the coordination of the member states´ monetary policies having been taken with the launch of the EMS (European Monetary System) in 1979. However, it wasn´t until a decade later that the idea of a single currency union really started to take shape, upon the presentation in the “Delors Report” of a three-stage plan to be applied in the ’90s to prepare the union for what would come to be known as the euro area, ultimately culminating in the creation of a single currency and the European Central Bank.

The idea of a common currency first and foremost appeared as an important symbol of political and social integration in Europe, tied with the notion that an increased integration of the European member states would reduce the risk of war and crisis on the continent. Then, on an economic viewpoint, a common monetary policy centered around price stability was viewed as an important propulsor of economic stability. Likewise, those who supported the creation of the euro believed it would allow for an increase in market integration, consequently reducing transportation costs and improving market efficiency and price transparency.

In 1991, the Maastricht Treaty effectively cemented the transformation of the European Community into a full Economic and Monetary Union, laying down the rules for qualification for membership of the Monetary Union. Indeed, a set of macroeconomic criteria that member states had to respect to be able to participate in the EMU and adopt what would be the new common currency (the euro) was defined. These became commonly known as the four convergence criteria, focusing on price stability, public finances, exchange-rate stability, and long-term interest rates. In terms of price stability, a member state´s inflation rate (measured by the HCPI) should not exceed more than 1.5% of the best three performing member states. As for public finances, to ensure that they are sustainable, government deficit should not surpass 3% of the GDP and public debt should be below 60% of the GDP (although some accommodation here was made at the time of the start of the Union, as many member states did not fulfil these specific public finance requirements). Moreover, regarding long-term interest rates, to guarantee the durability of the convergence, they must not be more than 2 percentage points above that of the three member states with the lowest interest rates. Finally, when it comes to ensuring exchange-rate stability, applicants to the common union should have been participating in the ERM II (Exchange Rate Mechanism) for at least two years prior to the adoption of the common currency without severely devaluing against the euro.

The need for this set of requirements to be put in place prior to the entrance into the monetary union came as a necessary part of subjecting such a wide range of countries – still very much asymmetrical in some regards – to a single monetary policy but allowing them to keep their national fiscal policies. Indeed, some countries with better performing public finances and benefiting from low interest rates (such as Germany) expressed their concerns of how being associated with other not as well performing countries could negatively impact their economy, hence their pressure for a system of rules to be establish so as to guarantee as much as possible convergence among the member states. This type of concern is also reflected in the way much of EU´s monetary policy is designed, particularly in their rigidity and zealous focus on price stability, as is greatly patented in the way the European Central Bank was created in 1998 very much influenced by the German model, mirroring their Bundesbank.

Ultimately, the euro was officially launched on January 1st, 1999, with the exchange rates of the participating currencies being irrevocably fixed, replacing its precursor (the “ecu”, a transitory currency composed of a basket of European currencies to serve as a basis for fixing the exchange rates of the member states) at 1:1 value. In this initial phase the euro only served in the form of cashless payments, having been put effectively in circulation in 2002.

Figure 1 – Euro Statue in Frankfurt.

The beginning of the Monetary Union and the Financial Crisis

The process of increasing openness of financial markets alongside the adoption of the Euro’s convergence criteria by countries wishing to join the monetary union meant that during the 1990s there was a convergence of interest rates across countries, with some countries like Portugal, Greece and Italy enjoying interest rates much lower than before.

During the early 2000’s, thanks in part to the abundant credit and to the advances in economic openness, some countries (such as Portugal, Greece, and Italy) began accumulating large current account deficits. These may simply be the sign of a healthy economy, if they are being used to finance future growth so that, later, the current account deficit can be matched by a current account surplus. However, if this is not the case, then current account deficits will accumulate, increasing a country’s external debt until, at some point, external credit stops being granted. While they were accumulating large stocks of external debt, some of these countries were also amassing very significant amounts of public debt.

In 2008, as the financial crisis began, and its contagion spread across financial markets there was a global flight to safety. Because of this, Portugal, Spain, Greece, Italy, and Ireland, which, to differing extents, fell into the trends described above, began facing international credit crunches and the yields on their sovereign bonds began increasing, with Portugal and Greece being the most affected. This sovereign debt crisis then led to troubles in the banking sectors of these countries which can then worsen the sovereign debt crisis, creating the “Doom Loop”.

The Greek banking and debt crisis was challenging and, in 2012, the possibility of a default was looming. Certain actions, like currency devaluation to decrease current account deficits or drastic increases in liquidity to Greek banks to avoid the banking system from grinding to a halt, were not available to Greece, since monetary policy was delegated to the ECB. Because of the deteriorating situation and due to the possibility of Greece exiting the Euro, the ECB decided to do “whatever it takes” to save the Euro and announced a program for purchasing debt of the distressed countries on the secondary markets, reassuring markets and bringing down the debt spreads, and, potentially, saving the Euro.

Who to favor?

The ECB mandate has one and clear focus, price stability. To ensure so, the central bank applies all the tools that it has available. However, the effects from such tools impact multiple variables which have important macro-economic consequences for Eurozone countries, such as FX rates or credit spreads. This, coupled with an asymmetric impact on the moves of these variables for different countries creates a huge dilemma for the policy makers behind ECB’s decisions: Who to favor?

Does the question sound simple to you? Let’s think of today’s scenario for policy makers at the ECB. In Europe we are experiencing broad record inflation, way above the defined target for price stability, meanwhile credit spreads are already very high compared to historical values, mainly for peripherals countries, and the Euro FX is at some of its lowest levels, especially against the dollar. Should the central bank tighten financial conditions to fight inflation and strengthen the Euro but, at the same time, risking a default/crisis in peripherals countries? Or should it do the exact opposite?

What would you do, who do you favor?

Graph 1 – 10Y BTP-Bund Bond Spread [Italy – German], in bps.
Source: Borsa Italiana
Graph 2 – Euro area annual inflation rate, in %.
Source: Eurostat

Conclusion

The introduction of the euro brought many benefits for the countries involved but it is still a long way from its counterparty in the United States of America. These problems arise mainly due to the structural differences between all the economies in the Eurozone. The “one size fits all” is still one of the biggest challenges going forward with some steps already made into solving it.


Sources: European Commission

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia

Power up: Sustainable energy in Developing Economies

Reading time: 6 minutes

Sustainable Energy

With the global population growing and industrialization spreading in developing countries, humanity’s hunger for energy has reached unprecedented levels. Currently, energy is the largest source of greenhouse gas emissions from human activities, and developed countries are the main ones responsible for this crisis. The average person in these countries consumes 100 times more than the average person in some of the poorest countries. 

With increasing awareness about the environmental effects of burning fossil fuels, the call for a more sustainable base has never been louder. All around the world, developed countries are powering towards a low-carbon future by embracing solar, wind, geothermal and other renewable energy sources. However, developing and emerging countries still face challenges regarding this new transition.

Making a distinction between these two types of countries, developing countries rely primarily on agriculture, having a low income per capita. On the other hand, emerging countries have already witnessed economic growth due to the development of the industrial and technological sectors.

Sustainable Energy in Developing Countries

Energy access is not equally distributed around the globe. In fact, many developing countries, like Kenya or Ethiopia, are just starting their process of industrialization, and electricity is still not available to everyone, as approximately 13% of the global population still lacks access to this primary need. 

Energy poverty is not only a matter of sustainability, but also a major problem for human physical and mental health. It is estimated that, around the world, people spend a combined 200 million hours a day collecting water, a colossal waste of their valuable lifetime.

This crisis affects women disproportionately, making up nearly 75% of those affected by energy poverty. Women are the main consumers of electricity in households since social norms have (sadly) assigned them the responsibility of housing chores like cooking or washing, which require electricity, making them especially vulnerable to the effects of energy poverty.

Moreover, it affects health through different pathways. Exposure to cold temperatures due to the lack of energy is known to be associated with high blood pressure, heart attack and stroke risks, among other diseases. This impacts the day by day of every individual that lives under this circumstance, from the child that cannot have a properly cooked meal to the doctor that could not save a life due to the lack of electricity. 

Doctors struggle to give their patients proper care without reliable electricity access

Insufficient energy also jeopardizes agriculture and manufacturing, thus keeping the poorest countries trapped in a vicious circle between energy poverty, air pollution and inequality; and they cannot afford the energy that can drive them out of this cycle. So, what is stopping countries to ensure worldwide energy access in an affordable, reliable, and sustainable way?

Developing nations are quite different within themselves, but they face similar challenges when it comes to energy sustainability. Let’s unwrap the idea a little more. One of the biggest constraints to attaining the previous goal is geographical, as the population in need is primarily concentrated in rural regions with no grid energy, and its extension is frequently financially and logistically impossible. In truth, fossil fuels were at the heart of industrial revolution, providing huge economic benefits to Western countries. Burning fossil fuels enabled an era of explosive growth for selected countries leading to extensive advances in productivity, income, wealth and living standards. 

Energy grids don’t reach everyone

As developing countries now express the wish to industrialize and share those same benefits, they must find a way to do so sustainably. They cannot let themselves fall into the same fossil fuel dependency trap western economies did. Therefore, the future must be sustainable, and renewable energy should receive early attention in these high growth areas. Improving efficiency and reducing carbon dioxide is easier and less expensive to achieve at the time of the new construction for energy, rather than at later stages. So, it is indeed an initial investment worth making. Besides that, many of these initial costs are money that otherwise would have been spent on fossil fuel exploration, extraction and conversion to electricity. 

In the long-run, sustainable energy alleviates a country´s balance of payments. The initial investment could be high, however, renewables, like solar or wind, are the cheapest source of power. Also, most developing countries have abundant renewable energy resources, which decreases manufacturing costs. Thus, this gives developing countries a competitive advantage when compared to emerging economies. 

Countries have a choice between investing in fossil or renewable energy

This idea is not just as theoretical and utopical as it may seem. Sustainable energy is already making an impact in the developing world, with many developing countries using renewable energy sources, an idea considered science fiction only a few years ago. In the last few years, these nations invested more in these technologies than developed countries, accounting for 63% of global investment in renewable energy (when viewed on per gross domestic product basis). However, it is important to refer that the economic distress caused by COVID-19 may jeopardise future investments.

Power Africa

Two out of three people in sub-Saharan Africa lack access to electricity, being one of the most serious barriers to long-term economic growth and development in this region. Launched in 2013 by President Obama, Power Africa program’s goal is to install at least 30 000 megawatts of cleaner and sustainable energy by 2030, as well as 60 million new households and businesses. It is meaningful to select and prioritise efforts. Policymakers must continue to develop effective policies to secure a successful transition to sustainable renewable energy systems within the framework of sustainable development

Sustainable Energy in Emerging Countries

The main problem regarding sustainable energy in emerging economies lies in the transition from fossil fuels to renewable energy sources for electricity generation. Part of the industrialization of emerging economies, like China or India, involved already non-sustainable energy, using fossil fuels, so there are already sunk costs when investing in sustainable energy. Countries such as Costa Rica and Brazil use renewable energy as their primary source of energy, accounting for 90% of Costa Rica’s and 85% of Brazil’s energy production.

Solar Energy International (SEI) opened its first International Solar Training Center in Costa Rica in 2018

In the last decade only, China has grown to become a renewable superpower, dwarfing all developed countries in terms of renewables. China is also making efforts to become an important environmental partner for African countries, providing financial and technical assistance to developing countries. Recently, it also announced two new Chinese funds totalling US$ 5.1 billion to help developing countries tackle climate change and development problems

War Impact

The current Russia-Ukraine war is having an impact on how the world sees fossil fuel dependence. Many voices in Europe are now, more than ever, questioning the continent’s heavy dependence on Russian oil and gas for energy. The threat of official sanctions on Russian fuel is strengthening the argument for a shift towards endogenous, sustainable energy sources. Some countries turning to clean energy may just be what is needed to weaken the crude business for the transition towards sustainable sources to be recognized as inevitable. 

Many question Europe’s dependence on Russian oil and gas

However, there is a danger that countries will not use this event as a chance to make deep, structural changes to their energy systems, but as an opportunity for quick profits. A European ban on Russian imports will leave large quantities of oil ready for the taking, which could be an incentive for other countries to do just that. India, for example, has already begun to heavily import Russian crude. If prices rise, they stand to gain a reasonable profit from refining Russian oil and selling it onwards, for example, to Europe.


Sources: Open Edition Journals, Our World Data, Science Direct, OCDE, Enel, Inspire Clean Energy, The Economic Times.

Constança Almeida

Mariana Gomes

Leonor Cunha

Are we getting too old?

Reading time: 8 minutes

Did you know that Millennials make up about 27% of the world’s population? Maybe you didn’t but this information comes from a science that we all know and yet often don’t give its due value: Demography. 

Demography is, by definition, the study of statistics such as births, deaths, income, or the incidence of disease, which illustrate the structure of populations. The individuals that study these factors are called demographers. 

In fact, this science led to curious conclusions, like the one at the beginning, but this science is much more and more complex than that. As we will show to you later in this article, demography has a very close link to the economy, as it is with the data collected and treated that, for example, financial, banking, or even insurance institutions establish their rates and conditions.

There are many factors that demography considers, but the most important ones are population size, population density, age structure, fecundity, mortality and sex ratio. All these factors affect the economy: for instance if population size decreases the working-age population will also decrease, which reduces labor input and leads to a slowdown in economic growth, resulting in the end in a decreasing growth rate of GDP per capita.  

Different Countries, different demographics

During the last 20 years, the global demographic landscape has suffered several changes in terms of population, age structure and wealth. Nevertheless, these changes are not linear across the globe, so there are various countries with very different demographic trends due to other variables such as culture and climate.

Demographics in developed countries

Developed countries, such as the United States, Japan, and European Union member countries are generally characterized by their high level of industrialization and high income per capita.   Their population structure is estimated to have already peaked and so, the total population is expected to gradually begin to decline due to low birth rates and rising average age. In fact, it is estimated that in the most developed countries the population over 65 years old will reach 25% of the total population by 2040. In relation to Europe, the projected average age is 47 years, although it is estimated that the people in Greece, Italy and Spain will age faster. Japan and South Korea will reach average ages of 48 and 44, respectively. In these circumstances, a slowdown in productivity is expected, as well as an increase in the GDP share earmarked for pensions and medical care for the elderly.

During the next 20 years, a strong trend of immigration to developed countries is estimated due to their stability, quality of life and economic incentives despite not being able to change the overall structural direction.

Demographics in emerging countries (China, India)

In emerging countries, some Asian countries follow the same trend as European ones, although slower. That is, while European countries have already passed their populational peak, Asia will see its population increase exponentially until 2040 and then gradually decrease. Besides, it is expected that by 2027 India will be the country with the most population, surpassing China.

In terms of their human development evolution from demographic scenario, it is expected drastically improve given the increase in the proportion of working-age adults, greater female participation in the workforce and higher social stability in the most advanced age groups. However, the increase in development is thought to be faster than the increase in income, particularly in China, posing some challenges for governments.

Demographics in Underdeveloped Countries

The reality of developing countries is completely dichotomous from that of developed countries, not only at the economic level, as the former have a very limited level of industrialization and low per capita income, but mainly at the demographically. For example, countries like Sub-Saharan Africa have an infant mortality rate 18 times higher than the average of developed countries, whose infant mortality, on average, is less than 1%. Moreover, other differences strongly affect both birth and death rates, which are quite high, due to weak and limited health services, lack of access to information and contraceptive methods and few professional prospects, resulting in a short average life expectancy.

Developing countries are expected to increase their level of urbanization in the coming years, as their key development factor. In fact, according to the UN Report, the number of urban workers will increase from 1 billion to 2.5 billion in 2040, which suggests a huge boost in the development of these countries. However, the speed of urban growth is not enough to keep up with population growth – like in the case of Sub-Saharan Africa, whose population is expected to double by 2050, so these countries will probably overload their capacity to provide infrastructure and educational systems, necessary to enhance economic growth and human development.

Graph 1 – Historical and projected labor force change per region.

Impact of demography on interest rates, savings and investment

Demography, particularly in aspects such as population ageing, will have a determinant impact on interest rates, bringing attached serious consequences for household savings and investment. Therefore, it is fundamental to take into account how current demographic trends like increasing life expectancy and the decline in fertility rates (with the baby boom generation moving higher up in the demographic pyramid) will impact the savings and investment market.

First, it is crucial to understand how net savers and net borrowers are usually distributed in an economy across different age groups. In accordance with the life cycle model developed by Franco Modigliani, savings are expected to vary across a person´s lifetime in a U-shaped form, suggesting that younger people and the elderly are usually those that actively save the least, whereas the middle-aged are responsible for the biggest share of savings. This is related to the notion of consumption smoothing over a person´s life, making it intuitive that people are more prone to save when they have higher incomes to then use these resources for times in which their incomes are relatively lower (during retirement or in the early years of their careers when their wages are usually lower).

Related to the notion of population dynamics, we can start by exploring how life expectancy will influence the savings market. Considering the case of increasing life expectancy that has been more or less experienced all across the globe in recent years, keeping the retirement age constant, it would imply that people would have to spread out their accumulated resources over the course of their lives over a longer retirement period. This, in turn, will trigger two different scenarios: one in which people anticipate this and increase their savings rate to offset the impact – resulting in a lower interest rate – and another in which they do not adjust their savings accordingly, leading to lower resources in the long-run and a higher interest rate.

On another note, we can also look at the effect of birth rates on savings and investment. Taking into account a reduction in birth rates, we can distinguish two effects. On one hand, it results in lower population growth, consequently contributing towards a lower GDP growth and thus a decrease in demand for investment – pressure for a lower interest rate. On the other hand, it contributes towards a higher number of the elderly/middle aged relative to the young; with the elderly usually being associated with lower savings rate but higher accumulation of capital, this will make it so two contrasting forces will clash, with the lower savings rate contributing towards a higher interest rate but a higher volume of accumulated savings/capital having the opposite effect. As for the fact that the middle aged are also to occupy a much more preponderant role in the population composition, as the savers of the economy, they will contribute to a higher demand for financial securities, hence pushing interest rates downwards.

With so many forces at play, the overall impact of demographics on the investment/savings market is rather unclear, even though all seems to point out that the current downward pressure on interest rates that has been felt in the past decades/years in developed (and ageing…) economies is likely here to stay, probably being itself already a manifestation of the impact of demographic trends on this facet of the economy.

Graph 2 – Historical and projected population aged 15-64 and Household savings rate

Can productivity save the weak demographics in developed countries?

Increases in productivity can lessen the impact of such population shifts, and technological advances are the ideal source of productivity boosts. This, however, is a double-edged sword. On one hand, technological progress increases productivity, but at the same time, it can eliminate jobs, increasing unemployment.

Since the 2008 financial crisis, year-on-year productivity growth has slowed. Still, even though the rate of productivity growth has slowed, the absolute output per worker is now the highest it has ever been in real economic terms. This highlights the offset of productivity on demographics as there are fewer and fewer people in the workforce but a higher productivity per worker.

Conclusion

Demographics do not determine the fate of economic growth, but they are certainly a key determinant for an economy’s growth potential. An ageing population coupled with a declining birth rate in the developed world points to a decline in future economic growth.


Sources: Office of the Director of National Intelligence – Global Trends, Harvard Business Review, Caixa Bank Research, Warwick, Fraser Institute.

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia

Will Sweden and Finland be joining NATO?

Reading time: 6 minutes

As a consequence of the war in Ukraine, Sweden and Finland have been considering changing their geo-political position towards NATO, as Russia´s invasion has abruptly changed the security balance in Europe. For many years, both Finland and Sweden have maintained a neutral stand in world politics. What might be the cause for this position? Why may it be changing now? And what could be the implications of both countries joining NATO?

Sweden and Finland’s neutrality statute

Both Sweden and Finland’s geopolitical neutrality strategy is largely explained by their long historical relationship with Russia. In Sweden’s case, from the 12th century until the 19th, the country fought several wars with Russia. During the Napoleonic Wars, Sweden lost significant territories and Russia gave the country support against the French invaders. All these events led to a Russian superiority over Sweden, which resulted in the emergence of Swedish neutrality in the 19th century, as a means to ensure independence. Therefore, after the Napoleonic Wars, King Karl XIV Johan altered the foreign policy position of Sweden from one of military engagement to a policy of neutrality – Policy of 1812 – that exists to this day. As a result, more than a hundred years later, during the Cold War, Sweden chose to stay neutral, and, despite having joined the EU in 1995, it has significantly reduced its military capabilities, continuing to remain a non-aligned state.

Similarly, Finland also has a long historical relationship with Russia. However, unlike Sweden, and similar to Ukraine, Finland shares a 1287km border with Russia, which makes Finnish much more vulnerable to Russian aggression. From the early 19th century until 1917, the year of the Bolshevik Revolution, Finland was ruled by Russia, before gaining its independence. Even so, years later, during the Second World War, Finland had to fight again for its sovereignty against the Soviet Union, losing 10 percent of its territory to Moscow. This repression along the centuries, reinforced by the Soviet invasion during WWII, resulted in Finland adopting a neutral foreign policy in 1955, a consequence of the treaty signed with Moscow in 1948, where it assured not to join either NATO or the Warsaw Pact, to ensure Finnish sovereignty. Since then, Finland has remained a neutral state, even after the Cold War, whilst developing strong relationships both with the West and Russia.

How has the War in Ukraine impacted this neutrality statute?

Before the Russian invasion of Ukraine, both the Swedish and Finnish public opinion had long been in favour of their country’s neutrality. This is because, until that moment, it had ensured peace and independence.

However, after Russia’s Ukraine assault, public opinion in both countries has rapidly changed in favour of joining NATO, since the independence ensured by neutrality was no longer that certain.

A recent poll from the 20th of April has shown that a majority of Swedes (57%) wanted to join NATO, while 21% were against it. A more drastic result was obtained, in March, from a survey that found that 60% of Finnish people supported Finland joining NATO. This shows a massive and rapid shift in Finland’s public opinion, as a previous similar study from 2021 showed that only 34% supported the membership.

EVA survey on Finnish people’s opinion on NATO membership
Demoskop opinion poll on Swedish people: “Should Sweden join NATO?”

In Finland’s case, there is already the support of 96 out of the 200 lawmakers for the country to join NATO, whilst only 14 are against it. Furthermore, the Finish Prime Minister, Sanna Marin, commented on the conflict by saying that “Russia is not the neighbour we thought it was”, while also clarifying that the decision regarding NATO membership would only be made in the spring. Two weeks later, the Finish Government unveiled a security-policy report that stated that the mutual defence clause of NATO would be very beneficial to Finland’s security.

Regarding policy makers’ point of view, in early March the Swedish Prime Minister, Magdalena Andersson, rejected calls for Sweden to join NATO by telling reporters that “If Sweden were to choose to send in an application to join NATO in the current situation, it would further destabilize this area of Europe and increase tensions”. However, the Prime Minister has in the meantime reversed her position by stating that she does not rule out NATO membership “in any way”. The Social Democrats, the ruling party, who have consistently rejected calls to join NATO, arguing that military non-alignment has served the country well, have also stated that, due to Russia’s invasion of Ukraine, will review their international security policy. On the other hand, the main opposition party – Moderate Party – has announced more clearly its position regarding Sweden’s neutrality, by making NATO membership one of its 5 pledges for the 2022 upcoming elections.

 
Swedish Prime Minister Magdalena Andersson (on the left) welcoming Finnish Prime Minister Sanna Marin (on the right) prior to a meeting on whether to seek NATO membership

In response, NATO has already told Sweden and Finland that the organization would welcome their applications, highlighting the fact that the four largest military powers of the alliance (US, UK, Germany and France) supported the inclusion of both Sweden and Finland in NATO.

Implications of Sweden and Finland joining NATO

If Sweden and Finland were to join NATO, they would be much less vulnerable to Russian attacks, under the protection of Article 5 of the North Atlantic Treaty, where it is stated that an armed attack against one or more of the Parties shall be considered an attack against them all. At the same time, these two memberships would largely facilitate NATO and difficult Russian operations in the Baltic Sea, as all the countries on the Baltic Coast, apart from Russia, would be part of the Western alliance.   

Nevertheless, from the moment Sweden and Finland file membership applications until their acceptance, both countries will be especially vulnerable to Russian attacks. Dmitry Medvedev, deputy chairman of Russia’s Security Council, has already said that, should Sweden and Finland join NATO, then Russia would have to strengthen its land, naval and air forces in the Baltic Sea – where Russia has its Kaliningrad exclave sandwiched between Poland and Lithuania. 

Russian President Vladimir Putin, on the right, with Prime Minister Dmitry Medvedev, on the left

As matter of fact, Russia’s effective attack options are currently limited, since it would not be able to spare many troops to the Nordic borders while the war in Ukraine still grinds on. Still, other options such as cyberattacks on Finnish and Swedish governments, submarine incursions or fighter jet intrusions in both countries’ territories are most likely to happen. Nonetheless, the bigger concern arises with regards to Russia’s most destructive military weapons, which Putin may choose to use if, aligned with Sweden and Finland’s NATO membership, the war in Ukraine begins to look like a defeat for Moscow. In fact, on the 14th of April, Medvedev explicitly raised the nuclear threat, by saying that “there could be no more talk of any nuclear-free status for the Baltic” if Sweden and Finland were to join NATO. However, Russia was the one responsible for these countries to question their neutrality statute, when it decided to invade Ukraine in the first place.


Sources: EVA, Demoskop, TIME, Aarhus Universitet, Deutsche Welle, Reuters, The Economist, The Guardian

André Rodrigues

Maria Mendes Silva

João Sande e Castro

Natalie Enzelmüller

Towards a better tomorrow: The role of behavioral economics in mental health

Reading time: 6 minutes

Part II: A small nudge for man, a giant leap for mental health

Where do nudges come in?

We’ve talked about how widespread mental health struggles are and how important it is to pay them proper attention. It is particularly necessary to drive people into taking better care of their mental health, as well as end the stigma around mental issues. We will now examine the idea of how behavioral economics can be used for these purposes, namely through nudges.

Nudges influence choices and behavior patterns, which can be critical to mental health

But what, exactly, is a nudge? According to Thaler and Sunstein, the creators of the concept, “a nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives”. 

Many of those struggling with their mental health do not seek the needed treatment. This may be related with the implications of these issues in decision making, which help-seeking models and interventions often fail to account for.

This is exactly where Behavioral Economics comes in. It can help reduce engagement in behavior patterns that represent risk factors in the development of mental problems and provide the necessary and adequate frameworks for incentivizing help-seeking by individuals affected by them. Nudges can, therefore, be a complementary and cost-effective strategy for suicide and mental health issues prevention, both by tackling risk factors and by effectively encouraging individuals to seek help.

But what would such interventions look like? Well, it is necessary to understand that both the field of behavioral economics and our current generalized concern with mental health issues are still very recent. Therefore, they are still in the earliest stages of development, and studies can be costly and hard to implement, so no widespread intervention has taken place so far. Still, there is no lack of initiatives out there!

There are some initiatives to support mental health

Dodging the risks

Ashleigh Woodend, Vera Schölmerich, and Semiha Denktaş, in their article “Nudges to Prevent Behavioral Risk Factors Associated With Major Depressive Disorder”, look at what they call risk factors, behavioral patterns which can increase the odds of developing mental health problems (or worsen existing ones), and propose a series of nudges that could be effective in tackling them. Those negative behaviors include low physical activity, since exercising has a strong positive impact on mental well-being (it releases dopamine and improves self-esteem), inappropriate stress coping mechanisms, as stress can be a powerful trigger of mental health problems, and inadequate maintenance of social ties, as healthy social interaction promotes psychological wellbeing (if the pandemic has taught us anything, is that social isolation and mental health are no friends!).

Nudges play on our cognitive biases. One such bias is our tendency to prioritize immediate reward over gains in the distant future. For example, how many times have you allowed yourself “just five more minutes” of sleep in the morning, even though you knew it would make you late for class? What if we could use this effect to make us want to get up and increase our physical activity? This can be done through a nudge called temptation bundling, combining an unpleasant activity with a pleasant one.

For example, regarding the improvement of physical activity habits, you can try to fuse that unappealing morning run with something you will enjoy, like hanging out with friends or listening to some music. Or, if a trip to the gym seems like a punishment, throw in an episode of your favorite show. These are easy ways to nudge yourself into building an active lifestyle pattern.

Listening to your favorite songs while running can be a way to nudge yourself into improving your physical activity habits

Another great way to nudge behavior is by fiddling with the phrasing of the message we are trying to convey. It has been shown that positive framed messages are more effective than negative framed messages in promoting prevention behavior. So, putting up a sign with a phrase like “If you meditate, you reduce your risk of mental health problems” is more likely to get people some quiet time with their own thoughts than one phrase saying “If you don’t meditate, your risk of depression will increase”.

When you go to the beach, do you wear sunscreen? And what if, on your way there, you notice a sign pointing out that without protection, you are likely to get sunburnt within half an hour of direct sunlight? Will you wear it now? Most people will. This is called a salience nudge, where some characteristic of a choice is brought to your immediate attention, “put under the spotlight”, in order to influence that same choice. And this can be done to decrease the risk of mental issues too. By simply highlighting, in the workplace, for example, that a significant number of people have engaged in stress management training, it is possible that more people will try it as well, learning appropriate coping mechanisms to keep their minds as healthy as possible through the difficulties that may come their way.  

You are probably familiar with the feeling of meaning to do something but never actually getting to do it. Sure, you will read that book you’ve been wanting to read, catch up on your microeconomics study before the midterm gets too close, or finally try to chat a bit with your coworkers and get to know them better. Eventually. The thing is, we are not very good at moving away from the status quo, i.e., we tend to stick to the current state of things and struggle to find the drive to make changes in our lives and environment. So, if we want to stimulate social interaction, it is better, for example, to create an environment where that is the default option rather than something towards which people have to make an effort. 

An open office can increase employers’ wellbeing

It may be possible, for example, to change the typical workspace from a place with little to no person-to-person engagement into one of sociability, by adopting an open office model. We would be nudging individuals towards building connections by creating an opt-out system of personal interaction instead of an opt-in – a system requiring extra effort to dodge interaction instead of one that requires extra effort to engage in interaction.

So, there are ways to nudge people away from behavior patterns that can be detrimental to mental health. But what can nudges do to help those already in mental distress?

Seeking Help

In these situations, the best to do is to guide someone towards seeking proper help. Instagram, for example, takes preventive measures when users search for a #depression hashtag: a screen pops up redirecting them to help (this will also work with other mental health related searches, like self-harm). A similar thing happens when someone googles depression or suicide. These are small nudges towards the right path, tailored to those who need them the most.

 If you search for depression on Instagram, the suggestion of help shows up
If you google “suicide”, the following message appears:
Help Available
talk to someone today
SOS Friendly Voice 213 544 545

The last mechanism we want to outline is a particularly clever and effective one (as obvious as it may seem): social norms (1). Humans have a strong tendency to follow the norm, tied to a desire for others’ approval. Social norms have been proven to predict behavior patterns. Hence, it is plausible that greater awareness of others recurring to mental health treatment and overall shows of acceptance of those who do it can increase help-seeking behavior. Normalizing the problem can help solve it.


(1) If you want to know more about this topic check out our article about peer pressure influence click here.


Authors’ Note:

We are writing this article as more of an exploration of the power of behavior economics in the prevention of mental health issues and in easing the burden of those already struggling with it than as simply an awareness-raiser to the problem. However, awareness for these issues can never be too much, both in society in general and in the academic community, so we lay out some of the signs to watch out for and urge you to reach out to your friends/loved ones if you notice these signs in them, and to seek help if you feel them yourself.


Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

Leonor Cunha

Mariana Gomes

Constança Almeida

Towards a better tomorrow: The role of behavioral economics in mental health

Reading time: 7 minutes

Part I: The silent pandemic

If we start being honest about our pain, our anger, and our shortcomings instead of pretending they don’t exist, then maybe we’ll leave the world a better place than we found it.

– Russell Wilson

Did you know that 12% of the world’s population (a little more than 1 in every 10 people) live with a mental health disorder? And that Portugal is the 2nd European country with the highest prevalence of mental problems? Sadly, there’s no way of knowing by how much the real numbers surpass these (and there is no question that they do, particularly in less developed countries). 

Mental health is as important as physical health. It comprises all dimensions of our well-being besides the physical one, namely the emotional, psychological, and social ones. Remember that our body and mind are more than two sides of the same coin. They’re like cogwheels on a machine, making each other spin. And if one of the wheels isn’t turning, you can’t expect the engine to keep running. Your body is a complex system, and if one element is damaged, the others will inevitably suffer too.

A mental health problem is a health problem. Just like a heart issue can limit your ability to exert physical effort, it affects how you think, feel and act. This way, this can interfere with how you cope with stressful situations, with your relationships, and (most significantly for Behavioural Economics) your choice-making process.

It should be noted that, contrary to general belief, not all mental health problems are situational, i.e., not all stem from traumatic events or abusive pasts. There are many factors that can make someone predisposed to these kinds of issues, including genetics, brain chemistry, or personality. At the end of the day, mental illness does not choose age, gender, or class. No one is immune, but there are some precautions everyone can take. Learn how to deal with the stress in your life. Take time for yourself. Do something you love (like reading the latest NAC article). Your mental health is to be taken good care of.

It is important to take time for yourself

We should also remember that we are all different, and so are our struggles. Sometimes, the same condition will manifest itself in wildly different ways between individuals. And sometimes, a behaviour that is a cause for concern in one person can be completely a healthy and normal conduct for another.

Two of the most common mental illnesses affecting people are Major Depressive Disorder (colloquially referred to as depression) and Generalized Anxiety Disorder. These mood disorders can be identified by a professional and are treatable. Depression causes feelings of sadness, hopelessness, reduced energy, and sometimes agitation and restlessness. Anxiety causes nervousness, worry, or dread. It should be noted that all these feelings are expected to occur from time to time. However, they are not expected to overwhelm you. When these negative feelings start to show up too often and take their toll on your life, that’s when there could be a cause for concern.

Economic Impact

We know mentally ill people are not at their best (they are ill, after all). Someone struggling with mental issues is, therefore, less productive than otherwise. This affects the labour force – if mental health problems are, at least, as frequent as current data shows (and we’ve already made the argument that they may be even more), then a relatively large share of the working-age population is not producing as much as they could be. Needless to say, this will hurt the economy. Depression and anxiety are estimated to cost the global economy $1 trillion per year in loss of productivity (WHO). Besides, the current solutions for these problems (therapy, drugs, among others) are costly and lengthy to apply, with patients often requiring a follow-up. This understandingly puts a heavy strain on healthcare systems, resources, and individuals.

Mental illness hurts job performance

Depression and Suicide

Depression is particularly prevailing. Around 280 million people worldwide suffer from it (the majority of which are women). Moreover, the large number of cases that goes unreported is mostly due to a general feeling of shame or lack of awareness of mental health conditions. Data usually shows higher numbers of mental diseases in developed countries. This does not, however, necessarily mean that such problems are more common in these countries, but rather that they are more readily diagnosed and reported, as developing nations often do not yet possess the resources required to properly address these illnesses.

Depression Rates by country 2022

The COVID-19 pandemic hasn’t helped: in 2020, the global prevalence of anxiety and depression increased by 25% (WHO). Young people have been particularly affected – they are disproportionally at risk of self-harming and suicidal behaviour. Worst of all, this boom in the prevalence of mental health issues was paired with severe disruption of mental health services. Although this situation had somewhat improved by the end of 2021, many of those who desperately need care are still unable to get it. Professional psychological support is not cheap or particularly easy to access in most healthcare systems, and there is still a lot of catching up to do after the major gap in services that the pandemic represented. And as if the difficulty in obtaining help was not enough, there are still people who don’t bring themselves to ask for help. It is still too common to believe that it is wrong, shameful or pointless to acknowledge our struggles and search for outside support. 

The WHO currently estimates that, by 2030, depression will be the world’s most common disease in the world. If we are not careful, the next pandemic we face may be one of mental illness.

In some cases, depression may even lead to suicide. An individual suffering from depression has a risk of suicide around 20 times higher than one without it. The statistics are beyond troubling, they are outright alarming. Over 700 000 people end their own lives every year. This is the equivalent to one suicide every 40 seconds, making suicide one of the biggest killers in the world, and it is the fourth leading cause of death in 15–29-year-olds. 

 A mental health problem gets in the way of your thought process

How does this affect how you think?

Depression doesn’t just get in the way of being happy. It causes chemical changes to happen in your brain, which can seriously impact your thought process. The condition can interrupt or reduce neurotransmitters (chemical “messengers” in the brain), such as serotonin, dopamine, and norepinephrine. These changes may either be what is causing you to be depressed or be another result of whatever triggered it. 

Depression can impair your attention and memory, altering your ability to absorb new information and make decisions.  

Decision Making

Depressed people tend to have more trouble making decisions, even trivial ones. Try putting yourself in such a person’s shoes. Imagine you’re going out to dinner with friends. You have to choose the restaurant, but which one? And there are so many tables there, where will you sit? And what will you order when the menu goes on for so many pages! All those light decisions can weigh so heavily when anxiety keeps telling you that every choice is the wrong one.

Depression frequently brings along hopelessness. People are unwilling to waste their time on plans that they believe will fail. Besides, they experience considerable anxiety when faced with the need to make a call, even the smallest decisions. This results in high levels of what economists refer to as risk-aversion (reluctancy in taking risks), leading to less information collection, idea production, and option consideration.

Fortunately, studies have shown that using specific techniques such as cognitive behavioural therapy can help depressed people make better decisions, leading to better long-term outcomes. Moreover, problem-solving treatment can train people to improve their problem-solving skills and distorted thinking patterns.

Indecisiveness can be a symptom of depression and anxiety

Executive Function

Depression may also impair your executive function, which affects your ability to process information. Executive function is often called the CEO of the brain (you are walking around with your version of a tiny Warren Buffet in your head!) because it is in charge of getting things done. Simple tasks, such as paying bills, cleaning your room, or getting out of the house, can be compromised if that CEO takes an unplanned vacation. Fortunately, the executive function can be improved with educational strategies and behavioural approaches. If you’re experiencing issues with executive function, try breaking large tasks down into smaller chunks, create to-do lists and review them frequently.

As we have seen, depression affects everyone differently, changing habits and the way people live. This translates into changes in behaviour, consumer patterns and decision-making.

There’s a reason why people say depression runs deep. It affects so much more than just your mood. Fortunately, this is a preventable evil – and Behavioural Economics (nudges, particularly) may be a part of the solution.


Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

Leonor Cunha

Mariana Gomes

Constança Almeida

Far-right extremists in the Ukraine conflict

Reading time: 5 minutes

The Russian offensive in Ukraine is posing detrimental consequences to many of its stakeholders. While media coverage has initially largely focused on the daily unfolding of the events directly related to the war, attention has increasingly been drawn to another subject for concern: individuals from around the globe with far-right ideals are leveraging the war to join militia groups that are in alignment with their political views, increasing their social and political influence. With the increase of far-right thinking and the support these political ideologies have received over the last decade across Europe and beyond, it is particularly important to be aware of the movements that are currently happening, what their consequences could be, and if, as well as how, the institutions are proceeding against them.

What is happening?

What we are currently seeing is an inflow of far-right groups into Ukraine and increased support for those that are there for positioning themselves as major protagonists on the stage of the war. Here, the Ukrainian military unit Azov, which holds a central role in an extensive global network of extremist groups, appears to be the most influential. The group was formed in 2014 out of volunteers from the ultra-nationalist Patriot of Ukraine gang and the neo-Nazi Social-National Assembly. Both of these had xenophobic and neo-Nazi ideologies which were evidenced in reports of physical assaults on migrants and people who were opposed to their views. Azov’s volunteers act as fighters in their “National Militia“ vigilante force which has its own military training bases and access to a wide array of weaponry. They are now receiving extensive transnational support which is transforming Ukraine into a hub for the global far-right-oriented minds. Azov has been attracting young men from anywhere in their global network who want to join their training units to gain in-combat fighting experience and engage in their ideology. While the FBI estimates a total of 17,000 foreign individuals to have come to Ukraine in the last six years with these motivations, the Ukrainian Foreign Minister claims another 20,000 fighters to have arrived in Ukraine since the outbreak of the war with a large proportion of them joining for related purposes.

Veterans of the Azov Batallion at a demonstration in 2020 demanding President Zelenskyjs’ resignation.

Ever since the group was born out of an interest to defend Ukraine against Russia, it has been accused internationally of fostering neo-Nazi and white supremacist ideology. In 2019, voices from US congress members have called for the US State Department to classify the group as a foreign terrorist organisation for “recruiting, radicalising, and training American citizens”. Despite lawmakers noting that “the link between Azov and acts of terror in America is clear“, this has never happened. Facebook’s ban of users in support of or representing the group in 2016 was lifted the day Russia launched its invasion to allow praise for Azov concerning its contribution to defending Ukraine. This reflects the shift in perception of Azov as it is taking on a definitive role in the war against Russia.

The implications and dangers

With this overview of the situation at hand, it becomes clear that there are certain risks implicated as these far-right groups gain traction. Mainly, foreign fighters may become radicalised by groups like Azov and return home with weapons, and military and tactical combat experience. Some of the Western neo-Nazis and white nationalists that are going to fight in the war want to turn the country into an ultra-nationalist ethno-state and use it as a role model to expand their ideas across the world. Their objective is not focused on defending Ukraine but rather on spreading their own ideology. Just like in the Syrian conflict, the fragile situation Ukraine could be exploited as an opportunity for extremists to become trained for launching terrorist attacks in the West upon returning. Lessons from the past show that the West has provided military assistance that unintentionally landed in the wrong hands: In the 1980s, the US supported the Islamist guerrilla fighting the Soviets in the Soviet-Afghan War during which Afghanistan became the plotting and training ground for future radical Islamic terrorist attacks on the West. While NATO is equipping Ukraine with weapons and ammunition, there is a risk of a similar chain of events unfolding uncontrollably. It is unlikely that all of the foreign volunteers arriving in Ukraine have such political motivations, but there is clear evidence for extremists being attracted due to viewing the war as an ideal training ground to wage race or guerrilla wars back in their home countries.

International responses

Some efforts to address this problem have been launched in the countries from where fighters are coming. Germany has seen a sharp rise in neo-Nazism over the last years and the ongoing war has become a highly discussed topic on far-right channels. However, the Federal Office for the Protection of the Constitution takes the stance that while many young men are active on related social media channels, very few have left for Ukraine. Yet, passports of extremists who have been identified with intentions to fight in the war are being seized to prevent them from leaving the country. The UK has implemented measures to position Counter-terrorism police at major airports for identity checks and to question travellers about their reasons for travel. Similarly, American Counter-terrorism officials are paying more attention to travellers after reports of at least half a dozen known neo-Nazis having gone to Ukraine in early February and even more since the invasion began. Overall, there are some government responses to the threat but effective solutions by the EU, NATO, or ONU are yet to be implemented. In an age where democratic values are being challenged by the rise of right-wing parties and extremist thinking, these international organisations must show a strong hand to stop radicalisation and extremist behaviour in its’ tracks.


Sources: Time, Aljazeera, MSNBC, Washington Post, World Politics Review, DW

André Rodrigues

Maria Mendes Silva

João Sande e Castro

Natalie Enzelmüller 

The founding ideas influencing todays’ economic discussions 

Reading time: 8 minutes

The current mainstream economic ideologies are founded on very distinct views on economics and social interactions. From free markets to state ownership of the economy, there is an entire spectrum of ideas founded way back in the days that still deeply influence existing economic discussions.

In this article we go through the main figures behind some of the most influential ideas followed today, expressing their economic and social ideas and the arguments behind them. We also try to establish a bridge with periods in time where those ideas were put in practice thus providing some real-world examples.

Karl Marx and The Communist Manifesto

Karl Marx (1818-1883) was a philosopher, author and economist that became famous due to his theories about capitalism and communism. In 1848, Karl Marx and Friedrich Engels published The Communist Manifesto, his most influential book. Later, he also wrote Das Kapital where he states his labor theory of value that the value of a produced economic good can be measured objectively by the average number of labor hours required to produce the good.                                                                                 

Figure 1 – Karl Marx

Operating from the premise that capitalism contained the seeds of its own destruction, in the mid-19th century, Marxism was created, serving as a theoretical base for communism. Marxism is a social, political, and economic philosophy that examines the effect of capitalism on labor, productivity, and economic development and argues for a worker revolution to overturn capitalism in favor of communism. This theory believes in the revolutionary communism which inevitably happens due to the struggle’s existence between the bourgeoise (capitalists) and proletariat (workers).

According to Marx, every society is divided into social classes with different powers in society. As base for the Marxism theory there is a capitalist society which is made of two classes: the bourgeoisie, who control the means of production and the proletariat, the part which in fact transforms the inputs into outputs. The latter has little power in the capitalist economic system which means that in periods of high unemployment rate, workers will be replaced very fast, and, according to the profit maximization profit, business owners would want the best of their workers while paying the lowest possible wages. All these points would create an unfair imbalance in the society leading to the alliance of the workers and consequently to a revolution in which the working class takes control of the means of production and would dethrone capitalism (capitalism contains the seed of its own destruction) and private ownership of the means would be replaced by collective ownership, first under socialism and then under communism with no more class struggles. Society would then be run by a central committee that would allocate all the means and resources within the economy without the intervention of markets and the price system.

Marxism has developed over time into various branches and schools of thought, and currently there is not a precise, concise, and single definitive Marxist theory.

The Marxism-Leninism was the self-described ideology of many communist states in the second half of the 20th Century. The repressive political regime and famines that led to the deaths of millions of people in the Soviet Union constitute what is regarded as one of the great tragedies of the previous century. Supporters of Marxism argue that the economic ideology and that Stalin’s oppressive political regime can and should be separated, and that dismissing the Marxist critic of capitalism because of the tragedy of the Soviet Union is fallacious.

John Keynes and the Keynesian Theory

Figure 2 – John Maynard Keynes

In the 1930´s a new economic school of thought emerged that represented a complete break from the previous theories of the deemed “classical economics”. In the wake of the Great Depression, – a gloom period of the world economy marked by low output and high levels of unemployment – the existing economic theory proved unable to both explain the causes of the severe worldwide economic downturn, as well as provide a suitable public policy response to launch the economy back on track.                                                                            

Consequently, in response to this, British economist John Maynard Keynes (1883-1946) developed a new theory that claimed aggregate demand as the most crucial driving force of the economy, calling for the need for government intervention to stimulate demand, hence becoming the founder of what is now modern macroeconomics.

Keynes’s theory was greatly revolutionary for its era, focusing instead on the “demand-side” of the economy and the impact of short-run changes on output, employment, and inflation. In his book “The General Theory of Employment, Interest and Money” (1936), he refuted the then-prevailing notion that free markets would automatically adjust to business cycle changes in order to guarantee a return to full employment (i.e., a situation in which anyone who wanted a job would have been able to get one as long as they were flexible in their wage demands). However, he argued that, as the paradigm of the 1930´s showcased, high levels of unemployment persisted even though people were willing to work for any price, which could simply be explained by the fact that firms were not hiring at all. Indeed, in true snowball fashion, as consumer confidence eroded and uncertainty increased, firms (also plagued by fear and pessimism), responded in kind in a self-fulfilling manner, by cutting back on investment and in their unwillingness to hire people to produce goods that would not be sold due to the weak demand. As a result, the recession became even more pronounced, in the form of a further plunge of aggregate demand and unemployment.

Faced with this, Keynes defended that stabilization of the economy in these recessionary periods should be achieved through government intervention in the form of public policies aimed at reclaiming full employment and guaranteeing price stability. Indeed, in accordance with his belief that prices, and particularly wages, are not quick to respond to changes in supply and demand, he argued that active fiscal and monetary policies were required to reduce the amplitude of the business cycle and thus boost aggregate demand and fight unemployment, ultimately succeeding in pulling the economy out of its depression. For that to be achieved, Keynes advocated for countercyclical fiscal policies, reasoning that during economic downturns the government should incur in deficit spending to compensate for the drop in investment, therefore increasing its expenditures and lowering taxes to promote consumer spending.

An example of the influence of Keynes ideas can be found between the 1933 and 1937 when, following the Great Depression, President Roosevelt implemented “The New Deal”. The New Deal was program of strong government involvement in the American economy through increased public spending, through work programs that employed people in public infrastructure projects, and through the increased government support of unionization.

Milton Friedman and the Free Markets Capitalism

Milton Friedman, born in 1912, was the twentieth century’s most prominent advocate of free markets. In 1976 he was awarded the Nobel Prize in economics for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Before that, he had served as an adviser to President Richard Nixon and was president of the American Economic Association in 1967.

Figure 3 – Milton Friedman

In Capitalism and Freedom, Friedman made the case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. His ideas spread worldwide with Free to Choose, the best-selling nonfiction book of 1980. This book made Milton Friedman a household name.                         

Although much of his work was done on price theory (the theory that explains how prices are determined in individual markets), Friedman is popularly recognized for monetarism. Opposing Keynes, Friedman presented evidence to resurrect the quantity theory of money, the idea that the price level depends on the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect.

Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP (Gross National Product) was a money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear.

Throughout the 1960s, Keynesians had believed that the government faced a stable long-run trade-off between unemployment and inflation (Phillips curve), and thus by increasing the demand for goods and services, permanently reduce unemployment by accepting a higher inflation rate. But in the late 1960s, Friedman challenged this view arguing that once people adjusted to the higher inflation rate, unemployment would creep back up. To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate. The stagflation of the 1970s (rising inflation combined with rising unemployment) gave strong evidence for the Friedman view and convinced most economists, including many Keynesians.

Conclusion

The article discusses some of the main themes behind the most mainstream economic ideas, providing real-world examples for which one. Their ideas have persisted the test of time and influence economic discussion until today.


Sources:

Diogo Almeida

João Baptista

Sara Robalo

Inês Lindoso

João Correia