Everyone Is Irrational

Irrational Behavior

As a father of two young children, I think I know a thing or two about irrational behavior. For example, morning might begin with my youngest daughter requesting cereal for breakfast. But it has to be in the orange bowl because the white bowl, which is a perfectly good bowl, just isn't going to cut it. Oh, and she needs the spoon with the rounded stem. Because it's her lucky spoon. Never mind that it's dirty and currently in the dishwasher.

What I've described above may explain why, upon arriving at my office, I've come close to using the wrong dispenser on several occasions. That's because the fruit-infused water and beer dispensers are right next to one another. I've received some strange looks from my office mates when almost pouring myself a beer before 9AM. I think it's just my brain working against me after a sometimes exasperating, yet hilarious, morning routine.

Okay, back to this week's topic.

But First, A Quote

As I mentioned last week, I'm listening to The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis. The book contains a great quote from psychologist Amos Tversky as he's speaking with an economist:

"All your economic models are premised on people being smart and rational, and yet all the people you know are idiots."

Why I Love That Quote

While in school, I learned about many models and theories that never really made sense to me. This was especially true of the time spent in business school. I'd often listen to a professor's lecture and become frustrated by anything that assumed people or investors were rational.

Here are two examples:

  • Rational Choice Theory assumes individuals always make prudent and logical decisions. I don't know about you, but I don't know anyone that's rational all the time. That includes me!
  • The Efficient Market Hypothesis (EMH) states that it's impossible to beat the market because stock market efficiency causes existing share prices to always reflect all relevant information. The problem I have is the EMH assumes:
    • All information is available to the market and its participants,
    • Stocks follow a random walk, and
    • All investors are rational.

I think we can agree all investors aren't rational.

Why Create Economic Theories or Models?

Despite my frustration with many economic models and theories, I believe there's value in trying to understand how our markets function and why people behave the way they do. It's just important to compare the theoretical models against the real world.

Change Your Password!

In case you missed it, Yahoo! was hacked again this week. Take a few minutes to change your password if you haven't already done so.

Listening / Reading / Watching

Here's the only thing that matters this week:

  • I am going to see Rogue One tonight.

That Time I Got Sick After Visiting Iceland

I'm Healthy!

A few weeks ago, my lovely wife surprised me with a trip to Iceland. She wanted us to get away for a long weekend to belatedly celebrate my 40th birthday.

Unfortunately, I picked up some sort of Mutant Icelandic Super Bug at the tail end of our trip. It knocked me out for three weeks! My weekly posts had to be put on hold while I focused on my health.

Frugal? Yeah, Not Right Now

In case you didn't already know it, I'm a frugal guy. However, while I was sick my frugality was temporarily put on the back burner; I would have paid just about anything to feel like myself again. Special tea that's supposed to shorten the duration of colds and the flu? Sure. Six different kinds of Mucinex? One of them has to work, right? An outrageously expensive inhaler? Done.

I'm sure I'm not the only person to temporarily turn off personal spending limits. In fact, I can think of at least two other events that trigger a similar reaction: Vacations and holidays. Of course, the latter is especially relevant right now.

What's the point of this observation? It's certainly not that spending is bad - especially when it's related to your health. I believe it's important to recognize the things that affect our behavior so we can (hopefully) make fewer financial mistakes in the future.

Back to Iceland

Despite catching the Icelandic Plague, our time in Iceland was incredible. The country is beautiful yet sparsely populated. Most of the 330,000+ residents live in Reykjavik, where we spent much of our time.

Nerd that I am, I frequently regaled Heidi with stories of Iceland's financial struggles. In case you missed it, Iceland was one of the countries hardest hit by the 2008 financial crisis. Three of the country's major privately-owned banks went into default and eventually collapsed.

Here's the interesting thing: The banks were allowed to fail. This makes me wonder what would have happened if the US had responded the same way during the financial crisis.

So how has Iceland fared since the crisis? Surprisingly well. Unemployment is low (~4%), GDP growth is an impressive 4%, and tourism has boomed. We saw signs of development all over Reykjavik. Construction cranes dotted the skyline. Major infrastructure projects have been completed to take advantage of the country's natural thermal and hydro resources. An impressive 99% of Iceland's energy needs are now produced by these renewable sources of energy.

Okay, I'm done geeking out over Iceland's fascinating financial history. Go visit the country if you can. Just watch out for their Super Bugs.

Listening / Reading / Watching

Here are the things that had my attention this week:

  • The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis. I'm a big fan of Michael Lewis's work. If you haven't read The Big Short or Flash Boys, add them to your reading list right now. His latest book focuses on the work of two psychologists whose work created the field of behavioral economics.
  • The Devil in the White City by Erik Larson. It's difficult to believe this is a work of non-fiction. Larson details how a serial killer used the 1893 World's Fair to lure victims to their death. It's a heartwarming tale.