Economy Up-Close: A Tale of Sok and His Friends

*Note: If you hate reading facts, then jump right into the interesting story. I have already marked it for you.
*Another Note: I, however, encourage you to read everything if you are not a Cambodian. Or Laotian or Thai who shares similar tradition, culture and religious belief. Still, whether or not you are one, do read it if you can. Very useful information provided.
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Never before have I been so fascinated by Economics. Writing this article is the only way I can think of to express my impression on an awesome story I had the opportunity to witness with my own four eyes. The story I am going to tell you is about the birth of a small market economy driven by the laws of supply and demand and other factors that could make it happen.

Let me start by giving you a bit of an overview of Cambodia and poverty within this country. Cambodia is one of the developing countries of the global south. We are, however, very fortunate to have such a resilient country which persists and thrives despite the really bumpy road. I am proud to be a Cambodian, but being proud should never be on the same line as being arrogant. There are still many challenges now and in many years ahead. I see the many flaws the country has and the improvements to be made.

Just throwing in some facts. According to the most recent data by Asian Development Bank (ADB), the total number of population in Cambodia is 14.7 million (2013), and about 25% of the entire population is living under the set poverty line of $1.25/day while the poorest 20% only share about 7.9% of the national income. The data from the UNDP also gives us a more inclusive indicator called "multidimensional poverty" which is complementary to the traditional poverty indicator that is solely based on income. This new indicator measures poverty based on three primary aspects: Income, Health and Education. The data shows us that 45.9% of the population is living in multidimensional poverty. That means they are not just poor in terms of having little money, but also in terms of poorer health and education. For more details, please consult google.

Not to take it too far because the whole point of mentioning those basic facts is just to give you an idea of the current state of Cambodia from the half-empty-glass point of view, so we can figure out ways of how to fill the empty part.

Poverty, to be specific, is what I have seen everyday after leaving home to go to work, having a cup of coffee with friends, going for a ride along the riverside, going to restaurant... I am not even talking about what I have witnessed in the rural areas yet. It has become so apparent to me simply because poverty and affluence are occurring along side each other. At night, on the same street, you can see a family in their luxurious and high-class Range Rover, and you can see another family sleeping helplessly on the side of the street struggling to survive each day while suffering from chronic hunger, meaning they wake up hungry, they feel hungry the whole day, and they go to sleep hungry. The scary thing is that such contrasting states of being has become so familiar to us, to the people here, that we have started to become oblivious of it while some have chosen to ignore it.

Enough of this. I will now take you along with me to Prek Ta Tun village, Ksach Kandal district, Kandal Province. We are going to a pagoda named "Botum Raengsey" to join with many people there on a special religious festival called Pchum Ben or Ancestors' Day, which lasts for 15 days, celebrated by Cambodians every year to pay respect and make in-kind offerings to the deceased relatives up to 7 generations.

During Pchum Ben, almost everyone brings food as an offering to their ancestors who are believed to be released, for a period of 15 days, from the underworld in search of their descendants who brought along food-offerings for the starving ghosts of their predecessors. It is believed that by doing so, it is also a kind of merit-offering that is able to release their ancestors from their agony in hell so they can have peace in heaven. What if we do not make any offering at all? We will be cursed! I hope not. I do not know the detail. The explanation has never been very clear to me.

What I want to point out is just that there is normally lots and lots of food in pagoda during Pchum Ben period. You see, I do not know if ghosts exist. If they do, I do not know if they eat physical food, but I know for sure, with absolute certainty, that actual living people do. So, many of the poor gather in pagoda during the 15-day festival hoping to get something to fill their stomach and get some money from people who have become more generous because of the festival effect with the final destiny, heaven, as their incentive.

It works most of the time for the poor. I mean that is why many poor, or less-fortunate, people, especially children, go to pagoda during this religious festival period. Sometimes, to get more than just food, they beg (for money). It works better than on a normal day, but still, they do not get much, and they are often ignored and shunned by the better-off people (or so they seem).

A gloomy article it may seem, a cynical author you may say. However, starting from this point on, we will experience together how Economics can help make even a small change that can improve life quality for the poor, during Pchum Ben day at least.
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The story goes like this... (It is a true story, and this is where it gets interesting)

A woman praying to the Buddha statue

Welcome! This is​ a typical scene inside any Buddhist temples, at least here in Cambodia. You can see a woman praying to the Buddha statue in the picture. Well, there were many more people at the food hall (because it was lunch time!). Did I mentioned that the food hall is also a holy place in pagoda? Pretty much everywhere, except the restrooms.

Here we are, the Food Hall. Told you so! It was crowded!

There were many village children coming to Pagoda looking for something to eat and to bring home. Money is top in the list. What could those small children do to earn money? They begged. A typical scene all over Cambodia (but definitely not what the picture to your right is about).

Anyway, I am pleased to introduce you to our protagonist and his friends today (see the below picture and its caption). Let us call him Sok, a very typical Cambodian name. Of course, that is not his real name. I was stupid enough to forget asking him for his name. Still, this picture below is enough because a picture is worth a thousand words. Not to say his real name is that long. I hope he is not going to sue me in the future for posting it here. I did ask for his consent to take and post the picture... but without his signature. I doubt he understands what I meant when I said "May I post this on the Internet later on?". He will soon learn, I do hope.

Meet Sok (Red shirt on the left) and his friends! Sok said "Hello" to you too!

Just like any other kids walking around in the premise of the pagoda, Sok was at first begging for money. People did not welcome him, and he did not earn that much from begging either. It is sad, but aside from writing about his hardship, I can only do very little.

For some unknown reason, about an hour later, Sok seemed to have realized something, or maybe he was simply tired of walking around begging for money from people, with little success. His action caught my attention because he suddenly sat down at the entrance of the food hall in which the monk were chanting before having lunch offered to them by the people. Of course, everyone had to get into the food hall to listen to the unintelligible Sutta (in Pali language).

So what was he doing sitting at the entrance like that? Was he too tired of standing and walking? and just decided to sit and beg instead? Not really.

You see, for Buddhists, when going into a sacred place, we take off our shoes to show our utmost reverence for the Buddha and the monks.

This creates a problem. Poverty, Shoes. Povery, Shoes. Poverty, Shoes... Poverty, free Shoes... you got that?

Ain't nobody has the time to keep their eyes on their shoes. Most of the time, they are too busy concentrating on the chanting, whether or not they understand any of that. So shoes are there at the entrance for anyone brave enough to grab a few of them to sell and earn some bucks or riels (Cambodia's currency). Just a side note, since Cambodia is a partially dollarized country, we use both riels and dollars. Anyway, you see the problem. You go in, you lose your shoes, and worst of all, they don't go to your ancestors. Win-lose situation. Nobody likes it.

Sok somehow realized this problem that people were facing. Like many economists said, in an economy, the scarcest resources of all are knowledge and insight. Two working as one. Those with the right knowledge and insight at the right time and the right place, with the courage to initiate and the strong will to persist, will prevail regardless of who they are. This is what happens most of the time. A poor farm boy can even become the richest man of great sophistication because of his employment of his own knowledge and insight.

Tired of begging (probably), Sok might have at first done it out of his goodwill. He saw the problem, and he tried to solve it. He set up a spot where he would just sit and watch over people's shoes. As you have seen in the picture above, He and the other kids did not realize, at first, that this simple problem-solving service will not just help the people but the sole supplier of the service, Sok.

By the way, Sok was the only one who did the job at first. His friends (the three kids in the picture) just joined in for the photo shot.

I was very interested in Sok's initiation. So, I took a picture hoping to see something interesting happened. I wanted to turn it into something that could change his day. I waited and observed what would happen next. Suddenly, a woman walked out of the food hall and handed Sok 500 riels (about a dime). That is my friend, an incentive! Every business needs incentive to continue its operation. Where there are demand and supply, incentive will be made visible through the transaction.

At first, the other kids were just running around, playing, and begging for money from the passers-by from time to time like they usually do. That gave me an idea! I then kept walking in and out several times. Each time, I kept repeating the same act. I handed the shoes to Sok when I entered. When I left, I took the shoes back and gave him 500 riels as a thank for his service. By my 3rd or 4th trip, this act of passing benefit to Sok, the service provider, caught the other kids' attention.

About half an hour later after the fact, this was what happened.

Wait wait wait... they are not Soks! There cannot be more than one Sok. They are 2 other kids offering the same service.

4 more inside of the food hall? 5? So about 7 in total doing the same thing as Sok does.

Yes, a bunch of other kids started to imitate Sok and opened up their own shoes-keeping business, in hope to gain or surpass Sok in terms of profit! They have now become Sok's competitors!

"Where did they come from? They are taking away my customers!" Sok thought (I made this up). 

                                                                                                                                                              Sok was not very happy about this (See his face? ha!). But sorry kid, this is free market, and for this particular type of competition, we can call it a perfect competition in which businesses offer identical products or services with no barrier to entry and exit. As Sok realized his profit, he could not hide it from the eyes of the other kids who were also profit-seeking individuals. Sok could not monopolize the business because the demand was too much for him to handle alone, and there was no rules or regulations stating that only Sok can provide the service. Plus, he could only watch over limited number of pairs of shoes if he did not hire other kids to work under him (and he did not). As the shoes-keeping business, which existed on the same timeline and place, offered greater incentive than standing around beeing, begging now incurred a huge opportunity cost (a huge loss of money that could have been made by entering into the tiny shoes-keeping industry). Consequently, several other kids ended up in the same business.

Before the shoes-keeping business took off! Lots of shoes in
risk of being stolen! We need Sok!

The problem arising from having to take off your shoes and the risk of losing them had given Sok a great idea to begin this little business of his. His insight, despite how young he still is and difficult conditions he is in, gave him the edge against the other kids and probably adults as well as allowing him to help solve the existing problem people had on that day. Thus, we can see that demand has created supply or in this case, it can be also said that supply has created demand because people might not have realized that they even needed this kind of service at first. However, after Sok started his little business, people welcomed him at the entrance. They smiled at him and thanked him while at the same time compensated him for his time and energy with some money. This is exactly what incentive is. Once profit had been realized, other kids with profit-seeking behavior became more and more interested. Eventually, at the entrance, we had our little shoes-keeping service industry with perfect competition operated under the free market system. The only thing that did not happen as expected based on the economic theory I have learned is that as more kids supplied the same service as Sok did, price did not fall. There were people who actually gave 2,000 riels and such. This is why development economics can be a little bit difference from the fierce business competition stated the orthodox economics. It factors in "Generosity" of the people. This is what drove up price offered by the demanders of the service, and thus, a greater satisfaction to them and a greater benefit to the suppliers.

Lucky him that Sok started all this.

So, were the kids better off? Surely they were. About 2 hours later, before I left the pagoda, I asked them about the amount they made (and still, I forgot to ask for their names... regret that!). Sok made 15,000 riels and another kid made 5,000 riels. I do not know about the rest. Well, early bird gets more worms, I guess. The initiator benefited more due to the smaller competition and more customers of his own while the followers also benefit greatly but to a lesser extent. Still, they were all much better-off that day!

Moreover, to attract more customers, they had also thought of ways to provide better quality services. Sok and the other kids neatly arranged the shoes in order, and for my patronage, Sok even put my shoes (the biggest black pairs on the right of the pink shoes) at the front (He told me that). What a nice kid! Due to this privilege he gave me, I was also more inclined to further use his service. What a great entrepreneur Sok is!

Is this the end of the money circulation in that small economy? Not really. So where will the money go next? Probably to the ice-cream seller in the right picture.

See the street vendor in the middle of the picture?

As ice-cream is really sweet and makes people feel thirsty, it is a complimentary product to drinking water products. So the next person to benefit might be the street vendor selling drinking water and beverage in the pagoda that day (The street vendor was in the picture far back).

This is just a small economy that has been improved to an extent thanks to one kid with a great entrepreneurial spirit. I salute you, kid.

I consider myself very lucky to be able to witness such an improvement in people's income, even if for a day. This shows us that the law of economics, the law of supply and demand, applies to every level of our society. I, thus, urge the development workers to start thinking economics and employ solutions to poverty that consist of 5 elements:

- Relevance
- Effectiveness
- Efficiency
- Impact
- Sustainability

The use of economics to improve life quality can meet the 5 conditions while being much less costly than the traditional solutions which do not factor in much of economic thinking.

Once again, this article could not be made possible without Sok and his friend. I still am fascinated by what I have observed, and this particular experience has reassured me of the crucial role economics plays in development and life in general.

Thank you for spending time reading this article, and I will see you again next time with an even more amazing piece of economics!

All the best.



Sources used:
http://www.kh.undp.org/content/cambodia/en/home/countryinfo/
http://www.adb.org/sites/default/files/pub/2014/basic-statistics-2014.pdf
http://en.wikipedia.org/wiki/Pchum_Ben

Explaining Stock Market using Behavioral Economics: Level of Resistance and Level of Support. Seriously, how do they work!?? (revised)

**Note1: For those who don't like to read long article, you can skip the first several paragraphs. Scroll down a bit, and jump to the text below the line. I clearly mark it for you. 

**Note2: However, the first several paragraphs do introduce you to a bit of new knowledge as well. If you have time, read them all. 

**Note3: I want to let you know that though I did some research before I wrote, my explanation is purely based on my thinking and the knowledge I have so far. So do not use this as a reference, unless it really convinces you that this article makes a lot of sense. 
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I have been thinking of trying to post something new and refreshing to give a bit of breadth to the blog... and voila, there you have it. Today, I was doing some reading, and I came across the terms: "level of resistance" and "level of support" used in trading stock and forex. I do not know if these 2 terms are broadly used in any other types of trading like trading securities in general. That does not matter anyway.

Just a bit of additional info before we start. What are securities? By definition, securities are divided into debt securities and equities. Trading debt securities is none other than trading debt. An example of a debt security would be Bonds, like government and corporate bonds. In contrast, equities represent ownership of assets. Example? Stock, and that is what I am going to talk about today.

Our discussion will be related to stock market, but I am not trying to teach you about how to trade or how to make millions of dollars. If you read this article hoping to make some bucks, then the exit is right there. 

I mean, come on, I, myself, have not even bought or sold any stock once in my life. How can I provide you with the million-dollar tips? Plus, I am a risk-averse person, probably because I have no money, which make any financial loss a huge deal for me. However, I have a decreasing absolute risk aversion trait. What does that mean? That means as I am getting richer, I will become less risk averse, and thus, the amount of wealth I am willing to expose to risk will increase. When that time comes, hopefully, sooner rather than later, I will give it a shot.

Neither am I going to explain you about stock, about stuff like long/short position... okay, may be a bit about the long/short jargon. Nothing much, really. Long means buy. Short means sell. Think of it this way; you have a line of cookies, and when it is getting shorter, then means you have sold some cookies to someone else. By the same token, when it gets longer, that means you have bought some cookies to include in your collection, the long line of cookies in your kitchen. Simple, but not 100% correct. There are more to long/short stock. They are not simply buy and sell, but buy and sell are close enough for the purpose of this article. For more information (if you are curious), please google them.

As you can see, I am not here to teach you Finance 101. I am here to talk about how the level of resistance and level of support are what they are, and why they have been used widely despite the lack of explanation. The thing is I have been going around trying to find a good explanation of why and how those two work, but sadly, I could not find any good sources on the web that provide a clear rationale of what is going on behind the scene (maybe, you can. Give it a try!). I can just imagine the frustration of students trying to digest this knowledge while having little idea of how it works and why it is there.

So, I am going to explain them by myself, using economics or just common sense. There is no secret to it. Things are the way they are because of a reason or two. 

Enough chitchatting, let's get into business.

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**The real stuff begins here:

Before we begin, I want to introduce three important elements I am using today to make some sense of the stock shenanigans. (Note: There is not point in using the word "shenanigans" here. It is not even relevant. However, I just think it sounds cool and what to put it somewhere in the text. Try to understand it from the context only, not the exact meaning. lol)

You need to understand three explanatory elements and the definition of the two terms (support and resistance) before we can unravel the mystery. 

First, knowledge of common. What is it? Knowledge of common is common knowledge. I just think it is cooler to use "of". Basically, it is the knowledge shared by either most or all people.

Second, rational expectation. Rational expectation is pretty much what rational people expect to happen as a result of their actions or some uncontrollable exogenous force or shock. Mostly, people use the knowledge they have gained from the various sources such as personal experience, media, books, grapevine and so forth; they then combine the knowledge of the past with the available information of the present to arrive at a final product, the conclusion in the form of expectation, a rational one. Can you see the connection between the first and second elements yet? Get it? People use knowledge to form a rational expectation!

Third, self-fulfilling prophecy. Just a heads up, in case the third element makes you think there is something spiritual about this article, the answer is No. No, There is nothing here for you if you want a fortune-telling. Anyway, self-fulling prophecy is basically a prediction that becomes true because people simply believe the prediction and act accordingly anticipating what foretold to be realized in the future. There are instances in which no matter how ridiculous or baseless the prophecy may sound to the logical thinkers, it can become true with enough people believing in it. That just means being logical is to take this fact into account when engaging in thought. So, can you see how the first, the second, and the third elements are connected yet? People believe in the prophecy (in the form of knowledge), act it out with rational expectation, and the prophecy is actualized!

knowledge of common, rational expectation, and self-fulling prophecy. We will use these three to explain level of resistance and level of support. However, to explain how and why they happen, I need to first clearly define the two financial terminologies.

Image source: http://www.tradingacademy.com/assets/images/fec/supportresistance1.jpg

The picture above will act as an illustration to aid your learning of the concept. They might look simple, but their inherent complexity is undeniable, even to the experienced traders. Let's not make life any harder that it is. There are simple definitions too.

Just like the picture shows, the level of support is a line, a price level, which stock price seems to have difficulty falling below. You will see that the price was pushed down several times, but it could not go lower than the level of support.

On the contrary, level of resistance is the price line, the price ceiling that stock price cannot seem to break through. As you can see in the picture, the price, most of the time, could not increase any further once it reaches the red line, and the fluctuation, most of the time, is within the band of the support line and the resistance line.

This concept is most useful in short-term trading. Why is that? Because short-term trading is influenced more by the profit-seeking behavior of individual traders who do short-term speculation based on their instinct or belief of when and at what point to buy and to sell. Unlike long-term trend, short-term trend is unlikely to be affected by real variables like exogenous (or external) economic shock, new innovation, new products or services, government policies, or any changes in the actual operation of a firm or the whole industry or the business environment. It is based mostly on the animal spirit of the people. That is, by my own definition, what short-term trading is, and this is when level of support and level of resistance work best.

So what does this tell you? It tells you that there are a lot of psychological factors coming into play here, and what I am doing now is using behavioral economics to explain why resistance and support lines exist. (Behavioral economics can be simply regarded as a branch of economics that studies human behaviour and how that influences their individual economic decision and the collective economy)

First of all, we have to understand that short-term traders are always interested in understanding the tools, the concepts to give them the edge in trading. Once level of support and level of resistance have been introduced, once the terms have been coined, people become curious and they study and study to absorb this new knowledge. Sooner or later, the concept becomes a common knowledge for the mass. This particular topic will be everywhere in school, in finance class, and people become more and more acquainted with it, more convinced that support and resistance lines actually work. Once enough people, whether or not they understand the underlying reasons, believe in support and resistance lines, this new knowledge will then become the knowledge of common.

This is when rational expectation comes into play. As you may have guessed, traders are rational people. Well, most profit-seeking individuals are rational. They make rational decision to arrive at a logical conclusion based on what they know, on the information they possess to speculate the future. You will see what I mean by "rational expectation". Keep reading.

Based on the past low stock price and its persistence to fall below that low mark, people start to draw a line and they call it support line. So when a large number of people expect that price will not fall below support line, they will want to buy stock at this point hoping to gain from the imminent increase in price. Voila, now everyone buys stock based on the expectation they form rationally. What does economics tell you? Buy = Demand. People demand more stock at the point of support line, and consequently, the price rises! This pattern repeats itself again and again a few times or many times, leading to what we call "the level of support". In the end, price really does not fall below the support line because people keep buying more stocks pushing the price up as it nearly reaches the support line.

This is what I mean by self-fulling prophecy. Enough people believe that price will not fall below the limit that they draw, they act it out as any rational being would, and due to this reason, price does not fall below the level of support. This further reassures people that level of support does work! So they continue to repeat and the result repeats itself as well.

Same goes for the line of resistance. Same process; knowledge of common and rational expectation lead to self-fulfilling prophecy. Enough people believe that price will not go beyond the resistance line. They start selling when price comes close to the line to gain the maximum profit because they know that price will soon fall. Again, what does economics tell you? Sell = Supply. As people sell their stock, the company's stocks pile up due to sudden increase in supply, and price simply falls as a result.

In the long run, however, stock price will follow the changes in the real-world variables. For instance, just like when Apple announces its new products, and its shareholders start to buy more stock due to their strong faith in the company believing its new products will bring Apple much more success as a company, and thus, a greater return for its shareholders. That is why we see either upward trend or downward trend of a company's stocks. This is one way to break through the support or resistance line.

And that's a wrap. I hope you enjoy reading and ingesting new knowledge just like how I enjoy writing this article. It is just refreshing being able to write something new once in a while.

Until next time,