Q37. What are good sources of economic data?
Data in economics come from three different sources:
• Governments and other bodies.
• Database businesses.
• Experiments by researchers.
Governments and international bodies collect lots of data. So, the Bureau of Labor Statistics (bls.gov) in the US is a good resource for US macroeconomic and microeconomic data. The OECD (oecd.org) is an excellent source of national data across the developed world. Eurostat provides data on the Eurozone at ec.europa.eu/Eurostat. A new World Bank service (data.worldbank.org) promises to provide a huge resource for economists. Google provides lots of data on the financial markets via finance.google.com, and on macro-economics via data.google.com. Generally, when looking for macro-type data, look first at the international bodies, then at the nations themselves you happen to be interested in. Much of this information is freely available.
The next type of data is available from financial publishers or database businesses, which collect specialised information with a view to reselling it. This data is harder to access for free, and also may require lots of data-mining before it can be of use. The important part of any empirical exercise with this kind of data is to compare and contrast it with either previous eras or with other entities experiencing the same conditions. Say, for example, you want to study price changes in copper mining. The Reuters and Bloomberg services will carry the price data but, to give it context, some reading is required to establish the context for the study, and comparative statistical research - on other commodities, say, or other industries within the same country - will prove invaluable.
The final type of economic data you will encounter is bespoke experimental data, which at the moment is much harder to find, but which will become more prevalent in the coming years.
Q38. What is the economic definition of risk - and how does it differ from uncertainty?
Economists distinguish between risk and uncertainty. The risk of an event occurring is linked to the probability of it occurring. If risk increases, then the likelihood of an adverse outcome or loss increases.
Some risks are quantifiable, like the chances of being diagnosed with cancer or having your house robbed. Because these risks are quantifiable, we can insure ourselves against them happening. Other risks are not quantifiable, such as the risk of having a meteor crash into your house, killing you and your family, or the risk of a very sudden movement on the stock exchange wiping out all your wealth. These are such low-probability events that no insurance or hedge can cover their eventuality.
An example: let's say you know you will invest some money. If the outcome of your investment is uncertain, but you've an idea of how likely it is that different outcomes will occur, then your investment is characterised by a quantifiable level of risk. If there was a 50% chance that your income will be €4,500 this year, and a 50% chance your income will be €5,500 this year, then the 'risk' is easy to judge. Risk is not the same thing as uncertainty.
True uncertainty occurs when one cannot even judge how low the probability of an event occurring might be. These are situations in which no repetitive behaviour is present to guide our actions, and no insurance for loss is possible. Examples of fundamental uncertainty might be global warming, the 9/11 attacks, or the launch of a completely new product that creates a new market. So you don't know how likely various events are, and you don't even know what the events are, or the outcomes from those events. In situations of true uncertainty, we simply do not know.
Q39. What is risk aversion?
Flip a coin. If the coin isn't tampered with in any way, there are two equally likely outcomes: heads or tails. Placing a bet on each outcome should be easy, because this game is fair: there is an equal likelihood of failure as well as success.
However, a risk-averse person would not take this bet, preferring instead to choose only bets that are less risky (and thus more certain) than a fair bet. Risk-neutral people would be indifferent between taking a fair bet and not, and risk-loving people would require no risk premium. They would just take the bet, even if it was not fair to them.
Another way to think about risk aversion is that risk-averse investors are only prepared to take on increased risk if there is a good prospect of increasing their return to compensate them for the increased risk. This person would prefer more of an expected return on their investment to less, of course, and prefer less risk to more, all things being equal.