26 February – IB Economics
• Introduction to Paper 2
• Examine the illusion of knowledge and the 2008
financial crisis (connection to the business cycle)
• Short Paper 2 practice (informal)
- Practice exam on 26 February (Day 6) – Notecards
OK
- Portfolio check on 27 February (Day 7)
- Introduction to IAs – Week of 23 March
How does Paper 2 differ from Paper 1?
Syllabus Item 81
• Explain, using a business cycle diagram, that
economies typically tend to go through a cyclical
pattern characterized by the phases of the
business cycle.
• Explain the long-term growth trend in the
business cycle diagram as the potential output of
the economy.
• Distinguish between a decrease in GDP and a
decrease in GDP growth.
How does a bicycle work?
• On a scale of 1-7, rate your understanding of
how a bicycle works.
• Sketch a working model of a bicycle. Your
model can be simple, but it should include all
required parts.
How accurate is your model?
• Does your bicycle have a chain? If so, it is
connected to the right parts?
• Does the frame connect the front and back
wheels?
• Are the pedals connected to the inside of the
chain?
• Can your bicycle turn?
• How does it brake?
* On average, subjects rated their understanding at
4.5/7. However, major errors were common.
On a 1-7 scale, rate your
knowledge/understanding of the
following:
•
•
•
•
•
Zipper
Toilet
Helicopter
Cylinder locker
How the economy works
Illusion of knowledge
• People tend to think they know/understand more
than they actually do.
• Psychologists call this bias the illusion of
knowledge.
Implications for learning
• By re-reading the textbook or making mind
maps can fool ourselves into thinking we
know/understand more than we do.
• We benefit from testing ourselves. Do we
really know/understand X, Y, and Z?
• How did the financial crisis happen?
• How does the illusion of knowledge
relate to it?
The Causes and Effects of the 2008
Financial Crisis
http://www.youtube.com/watch?v=N9YLta5Tr2
A
http://upload.wikimedia.org/wikipedia/commons/thumb/6/66/Mortgage_backed_security.j
pg/350px-Mortgage_backed_security.jpg
One of the new homeowners…
• Alberto Ramirez of Watsonville, California
bought a house for $720,000 (€520,000) with
no money down.
• He was a strawberry picker who earned about
$15,000 (€10,800) a year.
HCL Finance’s “Ninja” Loan
• No income
• No job
• No assets
Do you know what mortgage-backed
securities are?
• If not, don’t feel bad… Most bankers and
traders didn’t either.
• They deceived themselves into thinking they
understood their value and risk.
Is the financial sector more stable today?
Connection to the business cycle
Only a few people predicted that the housing
bubble would burst and a serious recession
would result.
We know there will be booms and busts but can
we ever predict what will happen next?
For more info about the crisis
This American Life
http://www.thisamericanlife.org/radioarchives/episode/355/the-giant-pool-of-money
References
Charbris, Christopher, and Daniel Simons. The
Invisible Gorilla and Other Ways Our Intuitions
Deceive Us. London: Harper, 2011. Print.
Taleb, Nicolas Nassim. Antifragile: Things That Gain
from Disorder. New York: Random House,
2011. Print.
Syllabus
http://ibeconomics-isd.weebly.com/