I must admit, I’m a bit irrational. Then again, so are you. (That’s why market research is so important, but more on that in a minute.)
As much as we want to be calm, cool, and collected, apparently, we’re all smoking-hot messes of wild decisions… at least when it comes to money. We refuse to take the clear path that leads to the maximization of our financial goals. In short, we are fiscally challenged.
I know these things to be true because I (and, I assume, you as well) have money in deposit accounts earning less than zip…
Every month, when the U.S. government releases its estimates of inflation in the Consumer Price Index (CPI) report, I can be certain of one thing.
No matter what low-ball, off-the-wall, not-in-touch-with-reality number the government throws out, my deposit accounts and money market accounts will be earning less than that.
This means I’m actually losing money by holding on to cash in these accounts. Every single day, my purchasing power declines and yet, being one of the fiscally dense, I do nothing.
I watch prices march up around me while my money fails to act like rabbits and multiply. Each month, I review my statement and think: “Wow. I earned another 18 cents.” I might splurge and buy 1/20th of a gallon of gas.
This might sound like nothing more than rambling, but my actions — and yours — are serious business. When we stray from the chosen road, we’re not simply showing our lack of money IQ, we’re messing up the plans of those who chose the road.
And that’s where the fight starts.
The people with the maps are the financial engineers at the Federal Reserve and in Congress. Together, these groups set out policies that are meant to encourage us to behave in one way or another.
The way to ensure our compliance is to make the choice “rational.” I put that in quotes because in the world of economic thinkers, the term “rational” or “rational man,” takes on a whole new meaning.
To model an economic policy, there must be some expectation of how people will react to changing factors in the marketplace.
Policymakers use a theory called the “Rational Man” principle to estimate how individuals will respond to changes in supply, demand, and price, in any given market.
The problem is, to model such a thing, policymakers must specifically ignore a host of other inputs. This leads to policies that, on paper, sound good, but in reality, make no sense at all!
A great example, as noted above, is low interest rates on deposit accounts. Per the rational-man theory, all of us should withdraw our funds from such accounts and go spend it on items that will provide us with greater utility.
Likewise, exceptionally low interest on deposits means that it’s cheap to borrow, so all of us should be maxing out our lines of credit and any other access we have to borrowed funds.
But we don’t. Instead, we sit here and grouse about negative real interest rates (our interest earned is lower than inflation), and work our hardest to pay off debt.
The reason is, we don’t live in the theory of economics, we live in the real world, where things are messy, and outcomes unknown… and that’s the problem.
Instead of spending all of our money, we want to save as much as we can. We don’t want more debt just because it’s cheap, and there aren’t any goods that give us more utility than the comfort of knowing we’ve put away funds for the future.
The largest generation in America, the baby boomers, are past the point of spending more. Now they’re squarely in the empty-nester phase of life, where the goal is to save as much as you can, no matter who tries to get you to spend.
While this notion is driving the Fed crazy, it makes perfect sense to me. It’s what our research has been based on for more than two decades — people doing predictable things as they age.
As we continue our research and bring it to our readers, we start with the premise that people are not actually money-stupid, they’re life-smart.
We know the Fed wants us to borrow and spend, but we also know that there’s no rich uncle who will leave us millions of dollars to care for us in our old age.
This might lead people to do some seemingly crazy things, but upon further reflection, their actions fall right in line with financially protecting their family and their standard of living, or at least, this is the case most of the time.
I’ve written about subjects in this realm for more than two years, and now I’ve compiled a book of past articles titled, Irrational Economics. In it, I cover the broad economy, the Fed, investing, and a host of other topics.
The point is to remind readers — and often myself — that we are actually not dumb for going against the grain of what is expected. Instead, we are simply doing our best to protect ourselves from an unknown financial future.
With so much government intervention in the markets causing tremendous asset bubbles in areas like stocks, bonds, and real estate, it’s high time we start questioning our policymakers on why they see themselves as rational, instead of letting them question our seemingly irrational choices!
P.S. To take one more irrational decision off your shoulders, check out Adam O’Dell’s Cycle 9 Alert service. Adam approaches the markets by using a proven system that keeps your investment decisions on track and leaves the emotions of the day behind.
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