To paraphrase JP Morgan, sometimes nothing undermines your financial judgement so much as an eejit with an economics degree.
At its root, most economics – and economists – start with the fundamental assumption that people are rational, and thus will make logical choices. This would be wonderful, but it’s not true. If there’s one thing we can take from this current crisis – and all the ones before, it’s this: irrationality is everywhere.
howdy
I think the statement above and video sums up a lot of my beliefs. I have always been amazed at the lack of ability in many qualified people from all walks of life to come to the answer that their years of channelled schooling should be obvious if logic played its part. However, before 2006, I was under the impression that big organisations that base their business mostly on figures (such as banks) would be headed up and controlled by expert mathematicians and people of great logic who could add simple figures and assess risk. This was not the case… Read more »
Nice work David. I always found the idea of exclusive rational self-interest a bit unconvincing, and very ideological. Care to take on the second part as well?
Sp there is no “h” in exuberant! Otherwise an excellent paper!
We believe what we want to believe. That’s why it’s so important to keep arguing with each other, and make people defend and reflect upon what they believe. Paper money is a bit like god, it only works if you believe in it. Isn’t it really interesting when an economist says most people don’t understand the difference between family budgeting and state budgeting because States don’t pay back the money they owe: they just roll it over. So as long as a country borrows to the extent that the markets think they’ll be able to service the debt,it doesn’t matter… Read more »
Interesting. An interesting perspective on the Irish mentality combining “pendulum emotions”, begrudgery and a dependence on out-dated economic principles. Why we rely on the small core of these economic ‘sages’ (who appear to be more fascinated with trying to adopt some new mathematical fads or Nobel Prize winning theories rather than trying to alter accepted economic principles which refuse to integrate concepts like emotionality in the motivations of “John Q. Public”) has always worried me. I lived for a number of years in Vietnam, where many thousands of undergraduates opt for “economics” as a course of study, which, in Vietnam,… Read more »
I’m not sure I’d consider people with betting accounts to be professional gamblers – they’re just people that gamble a lot.
Horse racing is also an interesting one because it’s not an entirely honest sport. (Yes, I know, few are.) Much like some of the business practices that inflate bubbles.
Actually make that mostly just people that gamble a lot. I know there are a few that do manage to make a living from it but they’re very rare.
In your betting shop visit anecdote, your statistics inference is wrong! If two horses have the same odds of winning, then it doesn’t matter on which one one you choose to bet – they both have the same chance of winning. An analogy would be that there is no statistical reason, if betting on coin tosses, not to keep choosing heads. What would be interesting is to ask if the same emotional tendencies occur if the Irish horse has slightly worse odds of winning. They probably do, so overall your article is spot on!
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Keynes adored “animal spirits”, hardly rational, and Hayek of the Austrian School adored Mandeville’s “spontaneous unknowable” economics from sheer Dionysiac irrationality. In fact Hayek, the esteemed “rationalist” said Mandeville’s irrationality was the greatest trick ever invented. People with degrees in irrationality, which today poses as economics, must assume the pose of logical “thinkers”, so much so they appear robotic. But hidden in their formulations is a rage against creative reason. It is not then surprising the Economics Magazine, that bastion of the logical London School of Economics, must have a Schumpeter Column, posing pure Nietzschean “creative destruction”, the pinnacle of… Read more »
The irrationality of the Euro, the insanity of trying the same formula and expecting different results, as Einstein put it, should make it clear that some are fooled by the Armani suits. The gamblers are the allowed public expession of the institutionalized insanity. The “suits” trick of claiming people are irrational, look at Paddy Powers profit, fools even good commentators, if not all the time. Come on, it’s time to cop on. The best way to prove the point is put on the table the Triple Curve, Hamiltonian credit and major economic programs. The barely capped irrationality reaches boiling point.… Read more »