Wednesday, December 31, 2008

The rationality myth

I have been studying Economics lately and every lesson in free markets, finance, and economics starts with an assumption that human beings are rational decision makers. We weigh all our options and always choose what is best for us so it says (and yes, we think at the margin :) !). But the current global crisis, the associated economy slowdown and the market panic seems to indicate otherwise! Reminds me of a funny rendition of the 10 Principles of economics by Yoram Bauman...

So finally, after reading months of print media, this is my understanding of the markets:

Most of the times we are just crazy speculators, who like to follow the herd or the so called "analysts" who can never even predict what's gonna  happen an hour from the time that they write the article! We are overly optimistic with our investments, and always feel that the future is somehow brighter for our doomed investments. To substantiate this argument let me quote Bruce Schneier - "People tend to be risk averse when it comes to gains, and risk seeking when it comes to losses". To read interesting evidence about this argument read this and this article!

Most of us (read menial small time investors) have no clue of what actually is going on inside the organizations that we invest in! And most of us enter the stock market as short term investors with limited budget to make money. In no time our investments lose value, so we invest more and become long term investors :) !!

These are the things that I had learnt as "facts of life" which were proved wrong in 2008:

  • Real Estate can never lose value, the world population is continuously growing, we will always need more land, so go ahead and invest all your money in a house!
  • Oil is a scarce resource, in no time we will see $200 a barrel!
  • Indian rupee will be so strong that the USD will soon lose value!

As 2008 comes to an end, I figured that I did some major changes in my life this year. Invested a bit in stock market and "safe" mutual funds (yeah, lost almost all that I invested!). Stayed in 3 different countries, quit my first job, took up education, made quite a few new friends, crossed the magical figure of 100 blog posts :) !! And yes, got older, fatter and more cynical. Thank you all for being with me for one more year :)! Catch you all in 2009....


  1. When they say invest in land, they mean "LAND" not a "HOUSE". Land is scarce.

  2. Congratulations for completing 100 posts.. That's awesome.. I would love to see this blog alive during this lifetime.. Wish u all the best in 2009 and also for future years.

    Most importantly, continue learning every moment and enjoyyyyyyyyy life


  3. @Anonymous -- Didn't I tickle you in the wrong way? Huh! I know I shouldn't have made fun of Analysts. The post was my way of showing my ignorance. I completely believe in the theory of economics. Its just that as a layman, I am not in a position to "implement" it in my daily life.

    @Krupa -- Thanks for your wishes. I am at 111th post now ;) !! And yes, I am enjoying life...

  4. Old, Fat and Cynical ... you sound like me ... don't take after your 'other mother'! Even though your are older ... you have plenty of time for the economy to recover and you will live through many more economic downturns/recessions/depressions as well as record returns. As for me ... I just hope I will have enough to retire comfortably ... not rich ... just comfortable.

  5. Obama is looking for someone who can help him with economic recovery plans. Can I recommend you ?;)