Impact of Demographics on the World

The Most Important Numbers of the Next Half-Century

By Morgan Housel | More Articles 
June 22, 2012 | Comments (31)

In 1991, former MIT dean Lester Thurow wrote: "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century."

It hasn't, and it likely won't. But 20 years ago, the view was nearly universal. Japan's economy was breathtaking -- rapid growth, innovation, and efficiency like no one had seen. From 1960 to 1990, real per-capital GDP grew by nearly 6%, double the rate of America's.

But then it all stopped. Japan's economy isn't the scene of decline some depict it as, but its growth slowed to a trickle at best.

What happened?

You can write volumes of books analyzing Japan's decline (and some have), but one of the biggest contributors to its stagnation is simple: It got old.

Decades in the makingThe story begins, as so many about the modern day do, with World War II. Japan's toll in the world war was among the highest as a percentage of its population. Some estimate 4.4% of the Japanese population died in the war (the figure is 0.3% for the United States).

Demographically, two things resulted from that population shock that would shape the country's economic fate for the next half-century. Like America, Japan underwent a "baby boom" immediately after the war as returning soldiers married and families were rebuilt. More than 8 million Japanese babies were born from 1947 to 1949 -- a staggering sum given a population of around 70 million at the time.

Yet post-war devastation couldn't be ignored. Its major cities largely reduced to rubble, Japan didn't have the infrastructure necessary to support its existing population, let alone growth -- a problem amplified by the country's relative lack of natural resources. Tokyo-based journalist Eamonn Fingleton explains what happened next:

[In] the terrible winter of 1945-6 ... newly bereft of their empire, the Japanese nearly starved to death. With overseas expansion no longer an option, Japanese leaders determined as a top priority to cut the birthrate. Thereafter a culture of small families set in that has continued to the present day.

This created an extreme bulge in the country's demographics: a spike in population immediately after the war followed by decades of low birthrates.

As Japan entered the 1970s and 1980s, the baby boom generation -- called "dankai," or the "massive group" -- hit their peak earning and spending years. They bought cars, built houses and took vacations, helping to fuel the country's economic boom (which turned into an epic bubble). Observers like Thurow ostensibly extrapolated that growth and became dewy-eyed.

But as the 1990s rolled around Japan's dankai not only waved goodbye to their prime spending years, they crept into retirement. Consumption growth dropped and the need for assistance rose. Meanwhile, the small-family culture endured. Japan's birth rate per 1,000 people has averaged 12.4 per year since 1960, compared with 16 per year in the U.S, according to the United Nations. Combine the two trends, and Japan's aging population has created a demographic brick wall that has kept economic growth low for the last two decades, and will likely worsen for more to come. Adult diapers outsold baby diapers in Japan last year for the first time ever. There's your sign, as they say.

Lesson learned: Keep an eye on demographics. Age distribution is hardly the end-all driver of future growth, but it plays an important role. You could do worse than gauging a country's economic fate simply by looking at its demographic projections.

The ovarian verdictDig through international demographic projections, and one thing becomes shockingly clear: The United States is in a much better position than nearly all other major economies.

There are two key numbers to watch when looking at demographics: the percentage of the population that's of working age (15-64), and the percent likely to be in retirement (over 65). The U.S. Census Bureau has great demographic data for nearly every country in the world, with projections through the year 2050. Here's how things look today:

2012

	U.S.	U.K.	China	France	Germany	Italy	Spain	Russia	Japan
Percent of Population -- Working Age (15-64)	66%	66%	74%	64%	66%	66%	67%	71%	62.6%
Percent of Population -- 65+	14%	17%	9%	17%	21%	20%	17%	13%	23.9%

Source: Census Bureau.

Predictable. China has a young population teaming with potential workers. The U.S. is slightly behind. Old-world Europe is a bit grayer. Japan is the wrinkliest of the bunch.

But where things get really interesting are projections of the year 2050:

2050

	U.S.	UK	China	France	Germany	Italy	Spain	Russia	Japan
Percent of Population -- Working Age (15-64)	60%	61%	60%	59%	56%	56%	55%	59%	49.1%
Percent of Population -- 65+	21%	24%	27%	25%	30%	31%	31%	26%	40.1%

Source: Census Bureau.

Everything changes. Though all countries age, within four decades the U.S. will likely have one of the lowest percentages of elderly citizens, and one of the highest rates of working-age bodies among large economies. China, meanwhile, will see its working-age population plunge and its elderly ranks soar -- an echo of its one-child policy. Europe falls deeper into age-based stagnation. Alas, Japan becomes the global equivalent of Boca Raton. (Note: I excluded India from the list because it has a low life expectancy, which skews the comparison.)

And it's not just the percentages that change. The U.S. is projected to grow its working-age population by 47 million between 2012 and 2050. Amazingly, China's population of working-age citizens is expected to decline by more than 200 million during that time:

Sources: Census Bureau.

For perspective, the U.S. is on track to grow its working-age population by the equivalent of six New York cities between now and 2050. China is on track to lose the equivalent of three United Kingdoms.

Those, folks, may be the most important numbers of the next half-century.

The next legLook around at commentary today. It's a predictable dose of tombstone preparation for the U.S. economy and trumpets hailing the arrival of China as the world's new superpower. Will we one day look back on these assumptions with the same amusement we now give Thurow's prediction for Japan? I wouldn't doubt it. "The trick is growing up without growing old," baseball great Casey Stengel once quipped. That's true for countries, too.

Overconfidence rewarded

Why are people overconfident so often? It’s all about social status

08/13/2012

Researchers have long known that people are very frequently overconfident – that they tend to believe they are more physically talented, socially adept, and skilled at their job than they actually are. For example, 94% of college professors think they do above average work (which is nearly impossible, statistically speaking). But this overconfidence can also have detrimental effects on their performance and decision-making. So why, in light of these negative consequences, is overconfidence still so pervasive?

The lure of social status promotes overconfidence, explains Haas School Associate Professor Cameron Anderson. He co-authored a new study, “A Status-Enhancement Account of Overconfidence,” with Sebastien Brion, assistant professor of managing people in organizations, IESE Business School, University of Navarra, Haas School colleagues Don Moore, associate professor of management, and Jessica A. Kennedy, now a post-doctoral fellow at the Wharton School of Business. The study will be published in the Journal of Personality and Social Psychology (forthcoming).

“Our studies found that overconfidence helped people attain social status. People who believed they were better than others, even when they weren’t, were given a higher place in the social ladder. And the motive to attain higher social status thus spurred overconfidence,” says Anderson, the Lorraine Tyson Mitchell Chair in Leadership and Communication II at the Haas School.

Social status is the respect, prominence, and influence individuals enjoy in the eyes of others. Within work groups, for example, higher status individuals tend to be more admired, listened to, and have more sway over the group’s discussions and decisions. These “alphas” of the group have more clout and prestige than other members. Anderson says these research findings are important because they help shed light on a longstanding puzzle: why overconfidence is so common, in spite of its risks. His findings suggest that falsely believing one is better than others has profound social benefits for the individual.

Moreover, these findings suggest one reason why in organizational settings, incompetent people are so often promoted over their more competent peers. “In organizations, people are very easily swayed by others’ confidence even when that confidence is unjustified,” says Anderson. “Displays of confidence are given an inordinate amount of weight.”

The studies suggest that organizations would benefit from taking individuals’ confidence with a grain of salt. Yes, confidence can be a sign of a person’s actual abilities, but it is often not a very good sign. Many individuals are confident in their abilities even though they lack true skills or competence.

The authors conducted six experiments to measure why people become overconfident and how overconfidence equates to a rise in social stature. For example:

In Study 2, the researchers examined 242 MBA students in their project teams and asked them to look over a list of historical names, historical events, and books and poems, and then to identify which ones they knew or recognized. Terms includedMaximilien Robespierre, Lusitania, Wounded Knee, Pygmalion, and Doctor Faustus. Unbeknownst to the participants, some of the names were made up. These so-called “foils” included Bonnie Prince Lorenzo, Queen Shaddock, Galileo Lovano, Murphy’s Last Ride, and Windemere Wild. The researchers deemed those who picked the most foils the most overly confident because they believed they were more knowledgeable than they actually were.  In a survey at the end of the semester, those same overly confident individuals (who said they had recognized the most foils) achieved the highest social status within their groups.

It is important to note that group members did not think of their high status peers as overconfident, but simply that they were terrific.  “This overconfidence did not come across as narcissistic,” explains Anderson. “The most overconfident people were considered the most beloved.”

Study 4 sought to discover the types of behaviors that make overconfident people appear to be so wonderful (even when they were not). Behaviors such as body language, vocal tone, rates of participation were captured on video as groups worked together in a laboratory setting. These videos revealed that overconfident individuals spoke more often, spoke with a confident vocal tone, provided more information and answers, and acted calmly and relaxed as they worked with their peers. In fact, overconfident individuals were more convincing in their displays of ability than individuals who were actually highly competent.

“These big participators were not obnoxious, they didn’t say, ‘I’m really good at this.’ Instead, their behavior was much more subtle. They simply participated more and exhibited more comfort with the task – even though they were no more competent than anyone else,” says Anderson.

Two final studies found that it is the “desire” for status that encourages people to be more overconfident. For example, in Study 6, participants read one of two stories and were asked to imagine themselves as the protagonist in the story. The first story was a simple, bland narrative of losing then finding one’s keys. The second story asked the reader to imagine him/herself getting a new job with a prestigious company. The job had many opportunities to obtain higher status, including a promotion, a bonus, and a fast track to the top. Those participants who read the new job scenario rated their desire for status much higher than those who read the story of the lost keys.

After they were finished reading, participants were asked to rate themselves on a number of competencies such as critical thinking skills, intelligence, and the ability to work in teams. Those who had read the new job story (which stimulated their desire for status) rated their skills and talent much higher than did the first group. Their desire for status amplified their overconfidence.

De-emphasizing the natural tendency toward overconfidence may prove difficult but Prof. Anderson hopes this research will give people the incentive to look for more objective indices of ability and merit in others, instead of overvaluing unsubstantiated confidence.

See the present version of the full paper athttp://haas.berkeley.edu/faculty/papers/anderson/status%20enhancement%20account%20of%20overconfidence.pdf.