Economics, Rationality, Investment
From the Financial Times, How economics lost sight of real world
Since the 1970s economists have been engaged in a grand project. The project’s objective is that macroeconomics should have microeconomic foundations. In everyday language, that means that what we say about big policy issues – growth and inflation, boom and bust – should be grounded in the study of individual behaviour. Put like that, the project sounds obviously desirable, even essential. I confess I was long seduced by it.
Most economists would claim that the project has been a success. But the criteria are the self-referential criteria of modern academic life. The greatest compliment you can now pay an economic argument is to say it is rigorous. Today’s macroeconomic models are certainly that.
But policymakers and the public at large are, rightly, not interested in whether models are rigorous. They are interested in whether the models are useful and illuminating – and these rigorous models do not score well here.
Via Infectious Greed, Dan Kahneman on Irrational Everything, a Nobel Prize winner in Economics speaking:
“I once told a story about this: We once traveled from New York to Boston on a Sunday night, and we saw a car on fire on the side of the road. A week later, again on a Sunday night, we were traveling and again saw a car on fire in the same place. The fact is, we were less surprised the second time than the first because we had learned a rule: Cars burn at this spot.
“We find this everywhere – the speed at which people create rules, norms and expectations, even when they know it’s ridiculous. This is the intuitive method at work. It remains true that whenever I travel, I always look for burning cars at that spot.”
Finally, a note at LifeHack on 3 Areas You Must Invest in During an Economic Recession
The global economy is plummeting and people are starting to lose hope, faith in our government practices and in their ability to be successful during these challenging times. With millions of job losses and the media poisoning our minds with information that may be only half accurate, we need to start taking the time to invest in three main areas: our financial education, our personal brands and building strong relationships that will last through the recession.
I point them there to Jason Zweig’s Your Money and Your Brain, perhaps tying these three links together.