#economics #NobelPrizeForEconomics #RichardThaler #BehavioralEconomics
People make poor choices about money.
That may seem obvious to some, but Richard Thaler of the University of Chicago has made a career of studying people’s economic behavior. He was rewarded last week with the Nobel Prize in economics.
“Far from being the rational decision makers described in economic theory, Thaler found, people often make decisions that run counter to their best interests,” write David Keyton and Jim Heintz of the Associated Press. Their article on Thaler’s prize was published Oct. 10, 2017, in The Atlanta Journal-Constitution.
“To contain the damage from such collective actions (like not saving enough for retirement, buying houses as prices soared, or failing to get out of a bad investment even as the value plummets etc.), behavioral economists say, policy-makers must recognize human irrationality,” the reporters write.
Irrationality is part of being human. It applies not only to economic decisions, but also other life choices. Everyone knows smoking is bad for you, yet there are still people smoking. Everyone can cite all the foods that are bad for them, but eat those foods anyway.
Not everyone makes bad decisions all the time, and not every “bad” decision is terribly consequential. But a pattern of bad decisions over time – or just one bad decision made consistently over time – can be detrimental, even disastrous.
It hardly takes a Nobel laureate to figure out that if one does not save for his retirement, his life will be worse for it.
There’s good news in all of this. The world has created ways to perhaps compensate for bad economic decisions – ways that don’t involve someone, or something, bailing someone out.
There are actual ways to earn extra money, perhaps even lots of extra money, by spending a few non-working hours a week in their pursuit. To learn about one of the best such vehicles, message me.
One always can put himself on a path to good economic decision-making. It boils down to spend less, save more and, to continue borrowing from consumer adviser Clark Howard’s tagline, “don’t get ripped off.”
It requires discipline, of course. It requires rational thinking throughout your life. It requires watching where every penny goes. Yes, even a few pennies saved here and there can add up over time.
It requires thinking less about today, and more about tomorrow, and years from now. That may be difficult to do as a young adult, just starting to build a life. You’ll have expenses, family etc., that will cost you money. But a good way to start is by saving a specific amount every week – even, say, $5.
Save it and don’t think about spending it. As your pay at work increases, save that increase. As your savings grow, get good trusted advice about how to invest it.
Thaler joked to the AP reporters that he would spend his Nobel Prize money “as irrationally as possible.”
“In traditional economic theory, it’s a silly question,” Thaler told the reporters. “And the reason is that money doesn’t come with labels. So once that (Nobel) money is in my bank, how do I know whether that fancy bottle of wine I’m buying (is being paid for by) Nobel money or some other kind of money?” he told the reporters.
In other words, money is money. When it is put into our hands, being a good steward of it is essential. That’s not to say that we can’t have a nice bottle of wine, or some other treat, once in a while. We need SOME irrationality in our lives just to be human. It gets dangerous, though, when one allows irrationality to always trump rationality.
Peter