Why We Care (or Don't) About Causes

It's unusual for me to post twice in a day, but I just saw this link posted by one of my colleagues, and it's an interesting piece on human behavior that I just had to share. Simply click on this blog title to go to the article.

Economics- Information or Buzz Kill?

Economics has been dubbed "the dismal science" (it's not a hard science like chemistry, but is lumped in with sociology and psychology). I suspect one of the reasons that it has this moniker is due to its basic definition: "the study of competing demands for scarce resources." Do you find that depressing, or at least, not very uplifing? To me, the concepts of competition and scarcity are trigger words (more about that in a moment).

Interestingly enough, the study of economics, during the past 20 years or so, has developed a sub-category called "behavioral finance." Economists study what is considered rational behavior (buy low, sell high, hold for the long term, maximize your economic benefit), but they have observed a lot of "irrational" behavior (which could be summarized as irrational exuberance and its dark cousin, terrified capitulation) and decided to study that scientifically as well. So, you could say that behavioral finance is the shadow side of classic economics.

In my opinion, a lot of the "irrational" behavior is quite explainable without requiring equations - it is a fear-based reaction to these concepts of competition and scarcity. In a more perfect world, we might recognize that competition and scarcity are human concepts, not reality. In that case, the fear would immediately lift, behavior around money would normalize, and life would be a lot different.

But this isn't a perfect world. And, although behavioral finance has been around for a while, very little of this knowledge has trickled down to the average citizen, who still is at the mercy of his or her fear-triggered irrational money behavior. Financial advisors are aware of these concepts, mutual fund managers try to use these concepts as portfolio management strategies, but the average citizen still has to cope with their uncomfortable feelings without any understanding.

A few years back, I developed a course for investors that discussed some of the most applicable concepts of behavioral finance and showed these individuals how to understand their behavior and avoid some of the bad decisions that would otherwise result from reacting to their instincts. It's a fascinating study, and once clients took this class, they were much more comfortable and patient investors, since they had tools to ease this discomfort. I have attached a preliminary flyer for this course, since it's high time that I teach it again; it will be re-cast as as series of teleconferences. So, watch for an announcement for Preparing to Invest Wisely!