Mind Under Money

The whole premise of "rational economics" falls apart when they show the young man walking along the street as the narrator states he is "rationally" looking for ways to increase his wealth.

That idea ended as the age of consumerism started in the 1950s. The 1950s gave us television, credit cards, and the marketing that evolved with them.

People today do not walk along the street looking for ways to increase their wealth. They walk along the street looking for things to buy, looking to consume, looking to acquire things that give them the premise of wealth.

All of these things are ultimately worthless in a matter of years and only decrease their wealth over time. What makes this even worse is the fact that these things are not "consumed" with cash, they are consumed with credit.

Of course the wonderful economic mathematical models that predict our rational behaviour all failed miserably in 2008 when many banks found out that they and the consumers they serve were willing to do some very irrational things.

The Solfest economic model would be based on the premise that humans are stupid and therefore any bank should have risk management systems in place that assume this, and most definitely not assume any rationality in humans.

If humans were rational would we not then learn from our mistakes?

We don't learn.


Recency bias.

Prices went up last year, and the year before, and they're going up this year. Everyone is making money, I must get in, I must not be left out. (maybe the most potent emotion) We start to hear terms like "it's different this time" and the "new economy".

Then the collapse.

When you read, watch, and think about all the factors that are at play in our minds when it comes to money it's no wonder we struggle to trade the markets successfully.

The evidence suggests we are battling our very DNA as we trade.

We all need to ask the question, is this a battle we can win?

The answer for most is no.

The problem is that 80% of us think we are of above average intelligence. In case your math skills are as bad as mine let me remind you that the average in this case is 50%.

Get it?

We are not rational, we suffer from recency bias, we are over confident in our own abilities, we are led by the media bias, and I'm sure the list does not end there.

Good luck. :)

1 comment:

Solfest said...

Exchanged the Mind Over Money video with a feed from You Tube as most outside of North America could not view the one from the PBS site.