Social Choice Theory

Categories: Ethics/Morals

We can’t please everyone, but we can try. That’s what social choice theory is all about.

Social choice theory begs the question, “What are some rules we can lay down that most people would be down with?” For instance, constitutions are a real life example of social choice theory. Constitutions lay down some basic laws that everyone agrees to follow. But...constitutions are far from perfect. Some people might like the Constitution, while others hate it. Some want to add to it, some want to tear it down. Finding a middle ground that includes all of these different preferences and opinions is no easy task.

Social choice theory, the economic theory that tries to take into account everyone’s individual preferences, was created by economist Kenneth Arrow in the 1950s. Arrow believed five conditions needed to be addressed in order to reflect these preferences: universality, responsiveness, independence of irrelevant alternatives, non-imposition, and non-dictatorship (sorry, dictators).

The real kicker? Arrow’s Impossibility Theorem is the theory which says that creating rules that make everyone happy is impossible without breaking one of those five conditions. Oof.

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Finance: What is Fisher's Separation The...33 Views

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and finance Allah shmoop What is Fisher's separation syrup Fisher

00:08

separation The're um like you have to keep your tuna

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away from your marlin and they're not quite well The

00:14

separation serum was first proposed by economist Irving Fisher Nothing

00:19

to do with the seafood It has to do with

00:21

corporate decision making so a bit about how running a

00:24

big corporation works While a corporation has two sets of

00:28

bosses you've got the owners and then you've got the

00:30

manager In small companies these were often the same people

00:33

The guy who owns the Sneaker Repair Pagoda at the

00:37

mall probably owns 100% of the stock in that company

00:40

and works full time as the manager and probably is

00:43

the only employee to butt in large corporations A separation

00:46

comes into play There are shareholders right people who on

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the common stock And there are the managers People like

00:51

the CEO CFO CEO ahead of technology and so on

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The people who run the Company day today there can

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be overlap like managers often own stock but for the

01:00

most part the rules operate separately Fisher's separation serum deals

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with the fact that a corporation has run by the

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manager's acts separately from the wishes of its shareholders like

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they're not perfectly parallel The best thing for the company

01:14

is often different than the best thing for shareholders at

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least in the short term Each entity the shareholders and

01:19

the corporate managers responds to different forces and thinks differently

01:23

about the best uses of the company's precious resource is

01:26

or assets or money Will the fissure separation Throughem says

01:30

these differences don't really matter at least in terms of

01:33

making corporate decisions The theory states that a corporation should

01:36

maximize its present value regardless of what its shareholders want

01:43

You run treat not Trick Ink a company that makes

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tiny X ray devices to check Halloween candy for razor

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blades You made 10,000,000 box in profit last year You

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have two fundamental choices You can use that money to

01:56

invest in the business things like expanding your X ray

01:59

mine or running in R and D Yet to make

02:01

a better caramel density ofthe center Or you can give

02:04

the money to shareholders in the form of a special

02:07

dividend which means giving them cash as a reward for

02:10

well holding the stock So what do your shareholders think

02:13

you should do with your 10,000,000 bucks in profit Well

02:16

one of your shareholders Polly Favor is sitting pretty Her

02:20

other investments are going well Her second trust fund just

02:23

vested and she miraculously just won the national lottery in

02:27

Mozambique She doesn't need the money She tells you to

02:29

invest the full $10,000,000 in the company to grow it

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Meanwhile another shareholder Artie Loot Flush isn't doing so well

02:37

He got divorced last year and owes a lot of

02:39

child support both to his ex wife and his former

02:42

mistress Meanwhile his other investments have all gone south and

02:45

he lost a ton of money in an unsuccessful attempt

02:48

Teo Rig the National Lottery of Mozambique He really needs

02:52

the money The cash Today baby He asks you to

02:55

turn the full $10,000,000 a profit into a special dividend

02:59

The fissure separation throughem suggests that you'll ignore them both

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that you'll figure out what projects makes sense to invest

03:05

in and commit whatever profit is needed to run those

03:08

programs Whatever's leftover well then you'll give it out as

03:11

a dividend so your staff crunches the numbers and decides

03:14

that well If you buy another Ray excrete ER for

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1,000,000 bucks it'll have a return on investment of 25%

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next year like 250 grand And meanwhile if you invest

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$4,000,000 in developing a new product for checking Valentine's Day

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candy for poison it'll show a return of 15% Every

03:30

other possible project has unexpected return of only 7% or

03:34

less Well meanwhile your nerd crew determines that capital markets

03:38

would return 8% over the coming year And all this

03:41

means that if you borrow money you'll have to pay

03:43

8% interest on that loan Or if you loaned money

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out while you'd get a return of 8% right so

03:49

there's your cut off If you can't get more than

03:51

8% return on your money well you might as well

03:54

just loan the money out or give in to your

03:55

shareholders as a dividend So that's what you do You

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invest 1,000,000 box in a ray excrete er it has

04:01

a 25% of year return for a long time I

04:03

mean it gets you 250 grand by the end of

04:06

the year and then another 200 50 grand then next

04:08

year in 2 50 the next In the meantime you're

04:10

Ray X Streeter has all kinds of other values for

04:12

it However you do the calculation It's a really good

04:15

return 25 per cent away better than eight You also

04:17

invest 4,000,000 box in the Valentine's Day Poison prevention project

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the VD three p As you call it you expect

04:25

it to return 15% meaning you'll wind up with 600

04:28

grand in profits next year and then 600 next and

04:32

600 than next And then the value will go up

04:34

and however you do the math at 15% is way

04:37

better than 8% kind of returns you invested then 5,000,000

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ofyour 10,000,000 in high yield high return projects You have

04:44

5,000,000 bucks left Well what do you do with it

04:46

You give that out in dividends So Polly is a

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little disappointed because she wanted to keep the money and

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invested But she takes the extra money you give her

04:54

and loans it out on her own at 8% interest

04:57

It therefore gives her the same return as she would

04:59

have gotten from keeping the money with your company You

05:02

already invested in all your high return projects The best

05:05

the company could have done with that money is earned

05:07

8% at least return in the capital markets The same

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thing that Polly is going to get returned to her

05:12

with her investing it in the capital markets It doesn't

05:15

matter whether she has the money or the company has

05:18

the money Meanwhile already is bummed He needed that extra

05:21

money bad but he still has access to the money

05:24

he needs He can go into the capital markets and

05:26

borrow it at 8% interest He can just give Holly

05:29

a call and Violet from her like why not Okay

05:32

but how is already gonna pay the money back Wealthy

05:34

company that he invests in took $5,000,000 turned it into

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a 5.8 5,000,000 in a year Right That's the 1,000,000

05:42

invested A 25% return and the 4,000,000 invested A 15%

05:46

return What blended together That's a 17% return on the

05:49

$5,000,000 investment Much more than that 8% interest or 8%

05:54

return would have returned to them had they invested it

05:56

in a lesser return project So next year come dividend

05:59

time he'll get that additional amount paid out which he

06:02

can use to pay down debt Unless the company can

06:04

invested at a higher rate than the vanilla capital market

06:07

rate at which point then already will just roll over

06:09

his loan or his investment turn he'll sell for another

06:12

year and let the company or in a higher return

06:14

again So that's the math behind the fissure separation serum

06:18

The company will take a CZ much profit as it

06:20

needs to run its high return projects anything more than

06:23

it could get by just loaning out the money at

06:25

interest rates or investing it in some analogous project Everything

06:29

else then goes to shareholders with shareholders Stay happy because

06:32

they can just use the capital markets to make up

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the difference in investment returns If they wanted less money

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they could loan out the extra if they wanted more

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than they can borrow what they need Meanwhile if company

06:42

needs more money it can borrow it as well Like

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say next year you bring in 7,000,000 in profit in

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the capital markets are paying 8% again but you have

06:49

$10,000,000 in projects that can make more than a 15%

06:54

return For that extra 3,000,000 bucks you'll borrow the funds

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at 8% interest and pay it back after the investments

07:01

return At least 15% right borrow it ate Earn it

07:04

15 You end up pocketing 7% on the plus side

07:07

So in that year shareholders won't get any dividends All

07:10

the money plus extra that's been borrowed gets reinvested in

07:13

the company But shareholders don't mind because they can also

07:16

borrow money if they need it Meanwhile the money invested

07:19

with you makes an above market return and a key

07:21

here is that it makes no difference how the firm's

07:24

investments are finance whether by dead or cash or stock

07:27

whatever it is they have in their coffers And if

07:29

things get too bad for Artie well he can always

07:32

sell his stock and treat not trick ink right Well

07:35

the sale will give him plenty of money for child

07:37

support and for legal costs related to the charges of

07:40

lottery tampering he faces in Mozambique But that's a separate

07:43

story

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