You are not prone to error, irrationality, and emotion about your money. You always act in ways consistent with your own financial well-being. And have no bias toward the status quo, causing you to put premiums on new risks and casualy discount familiar ones. Why? Because you live in the neoclassical world of economics, where the market prices are always right and you adjust your rate of spending with each fluctuation in your portfolio. Of course, you certainly give no credence to a small band of renegade economists promoting heresy on the scale of Galileo. Right?
Replies: 2 comments so far
Gosh, Kawika, you’re so brilliant. Thanks for sharing.
(posted by Kawika at 03:16 p.m. on sunday, july 22, 2001)
Business 2.0 covers similar ground:
“...when people and economics intersect, listening, learning, and acting differently don’t automatically follow—largely because, contrary to conventional wisdom, economics isn’t about data and numbers. In Shiller’s view, economics is about emotion and psychology…. What drove the astonishing run-up in stock prices in the latter half of the 1990s had little to do with earnings or dividend growth. Instead, it was a reflection of human psychology—a kind of collective belief that almost anything was possible and that financial gravity did not necessarily apply. (And by the way, Shiller notes, the same forces of human psychology can drive the economy into a downward spiral, with equal disregard for economic data.)”
In other words, economics is now mob psychology.
“The behavioral power of human forces that compel people to do what they do will triumph. If the basic force is optimism or greed, then markets will remain exuberant. If the basic force is pessimism or fear, then no earnings or dividend increase will assuage it.”
(posted by Kawika at 01:23 a.m. on tuesday, august 28, 2001)