Blog 32: Giffen Goods by Xavier Lo, FIA, FRM, MBA

Economics [經濟學] is a funny subject. They have a lot of theories which make a lot of sense (especially for logical thinkers like us actuaries). For example, when the price of something increases (lets say a movie ticket), you generally would spend less on it. However, as usual, let me introduce something to you which will challenge your thinking a bit: Giffen Goods [吉芬物品].

Giffen Goods are one type of products where when the price increases, you want more of it. A luxury item [奢侈品] (like diamonds [鑽石]) also fits this definition, but we are talking about really inferior items [次物品] here. For any normal product like the movie ticket above, when the price increases, you can just simply not watch the movie, or maybe watch TV at home. However, with Giffen Goods, what you have here is a product that you really need for survival [生存], comprises a large portion of your income, and is something that is not luxurious. A great example of this is rice [飯] for poor families.

To put this into a practical perspective. Put yourself in a position where you were really poor, and your everyday meals were rice and a bit of chicken [雞] (in this case, chicken is quite a treat for you). When the price of rice increases, its not like you can switch to eating anything else, because everything else is more expensive. You can’t suddenly not eat, as you would die. Also, given that you weren’t wealthy, rice takes up a lot of your money. In that case, your only option for survival is to reduce the amount of chicken you eat, and use all your money to buy more rice to fill you up.

Giffen Goods don’t occur very often at all in real life – so it is more theoretical [純理論] rather than an observable type of product. However, by learning all these different nuances [細微分別]in life, we actuaries can then deal with any curveball [突發事情] that life throws at us…and there have been a lot of curveballs these few years!

Xavier Lo, FIA, FRM, MBA
Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.
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