“Anchoring” is when you introduce a number to someone to make their mind fix on it. For example, if you walk into a shop and you see drinks at $2 each, then at the back of the store you see one at $1, you think, hey that’s a good price. Meanwhile, the store next door is selling the drink at $0.50.

Anchoring shows up in lots of areas. A common situation is when institutions that profit from share-trading try to stimulate consumers to buy/sell shares (usually, buy, since the institutions tend to already hold those shares, but any action taken by retail investors is generally profit-making for financial institutions – they live off volatility). I saw a fun example today:

Some thoughts:

1. Does anyone remember Sinopac predicting the crash in Taiwanese stocks in 2008? I don’t.
2. Has anyone ever heard Sinopac (or any other institution) predict giant losses for any year, ever, when the market has been going up over the previous months?
3. Where did this magical number 33% come from?
4. Why ‘by mid-2010?’?
5. Do Sinopac have a track record of re-evaluating their past claims to measure the success rate?
6. Is there money on the table?

I’m not saying it can’t happen. I mean, it’s actually quite possible that at some point over the next year, stocks could continue bubbling up another 33%. Stranger things have happened.

But the real story is this: this ‘33% rise’ idea is there to make people feel greedy, to feel like suckers if they’re not already on the gravy train. It’s so that people start talking about whether it will be a 20% or a 50% rise. The idea of a 80% drop will not be discussed at all. But if Sinopac really believed that shares were going to be going up 33%… why tell anyone? Why not buy every share they can find? In fact, why not start screaming ‘the market is going down!’ so that they could buy everyone else’s shares more cheaply and take a nice profit themselves in mid-2010 (or before)?

And that takes us to the magic word “may” in the story headline… which makes the whole article *completely pointless*. Stocks may rise 33%, they may fall 33%, they may do nothing… this is not news. It’s just junk to get the magical number of ‘33%’ into people’s heads. And like 6-3-3, people will fall for it once again, I suspect.

Coupons Revisited

Meanwhile, you might remember the “Shopping Coupon Stimulus” project that the KMT touted back in February as the salvation of the economy. At the time, I blogged repeatedly on this issue, saying that results from other countries in the past showed that this kind of scheme doesn’t work. People just use the coupons for regular shopping, and save the money they would have spent. For example, here and here and here.

Results are now in: the coupon scheme was a near-total failure. 70% of coupons simply replaced regular spending. In fact, some people haven’t even spent them yet, even after 6 months, and despite the fact they’re about to expire. Can you believe it? “Free money” with an expiry date and *still* people won’t spend it?

So, as expected, this was a huge economic failure – for around 70% of people (even by government data), all that happened was that future tax income was borrowed through the government machine as a complicated and expensive loan to consumers in the present. The money will now have to be paid back, less the costs of all the administration involved. They can talk about ‘GDP gains’ all they like – it’s a fact that this will be a net loss for the people of Taiwan, given the pointless bureacracy involved in this nonsense, and that the ‘boost’ to GDP now will be a ‘drop’ to GDP in future of a slightly greater magnitude.

It was also a political failure. The KMT arranged to have this money paid out at polling stations. Think about it… go to the polling station, pick up your money from the KMT? Pavlovian, as Michael Turton and others pointed out at the time – you ring the money bell, the people vote KMT again. At least, that’s how it’s meant to work. Since then, the KMT’s popularity has plummeted, and they just got hammered in a recent election over the weekend. Nice one.

NOTE: A reader wrote to me to remind me of CEPD Minister Chen Tain-jy, who according to the government’s website said he would resign if the program failed to raise Taiwan’s GDP by at least 0.32%. LOL! Has he resigned?

Here is my reply.

I’m not a pessimist. I’m an optimist! I’m looking forward to a world (including Taiwan) where people don’t obsess about their worth in terms of how a pile of bricks is valued; where a family can choose to have an extra room AND have a child; where people don’t need to trade their entire working life to own a small, 2-bedroom apartment in nowhere-ville.

In fact, dropping prices is great even for owners! It means you will be able to trade up to an even nicer house, if you like, more cheaply. The world would be a much nicer place if house prices were considerably lower. The only people that gain from high house prices are landowners, housebuilders, very old people (who downsize), banks, estate agents and the government (through taxation). Most people don’t fall into one of these categories.

Besides, housing is not a measure of wealth. A country’s wealth comes from its productive ability in terms of tools, art, ideas, … Housing on the other hand is generally just a (poorly) assembled collection of mud and dead trees. People would hardly go screaming with joy around the streets if food prices doubled, or if water charges tripled, or electricity bills quadrupled. So why should anyone be cheerful when some other basic, needed commodity goes up? It’s bad news for everyone except those who make that commodity or benefit from its trade!

For me, the pessimists are those who think that high house prices are good, when really they tie up the capital of a society in a completely unproductive way, and transfer wealth from young to old in an entirely unfair and disproportionate way.

Anyway, my view on what will happen to housing is not coloured by what I would *like* to happen to housing or what I think is best for society. Rather, it’s just based on what history shows us, and the ‘laws of finance’, as far as they seem to exist. And besides…