Fruitfulista » Financial Literacy

Fear and Greed Economics

Cassie — Wed, 16 Jun 2010 16:53:20 +0000

Is money at the individual level and economics at the larger level based on rational or emotional thought? Most economists claim that the market and people’s money decisions are based on rational calculations that will help their financial situation. The larger market is guided by this “invisible hand” as Adam Smith called it whereby the forces of supply and demand are all that matter.

The balance between fear and greed is like yin and yang

This may be the case in a vacuum where there are no humans present. However, what we really see in action is a dynamic play between fear and greed. More than supply and demand, fear and greed determine the market actions and the financial decisions of individuals (which make up the larger market). Money is intimately tied to our emotional sectors of the brain because it is what we use to survive in this day and age (you can buy all your needs and desires with it : food, shelter, water, even sex).

This tug-of-war between fear and greed is exactly what happens at a casino when gambling. When you make a bet, you are doing so because of your greed -you want to walk out of there rich! You are dreaming of what you could do with millions of dollars. When you are “up” and winning you want to continue whatever it is you have been doing even if you KNOW deep down (rationally calculated) that the odds are stacked against you. (Having said that, most people have no idea what the true odds are of various games they are playing -including outside of the casino.) When you start losing, your fear kicks in. You want to make more than you started with -which is your greed, but you also don’t want to lose everything -your fear. Fear is what makes it so that you don’t lose ALL of your money and start betting your house or all the credit on your credit cards.

Sound familiar? This same type of thing happens all the time in the market, especially in ones that are designed just like a casino -the stock market for example! But really, any item can be pushed into a bubble because of the greed side of emotions and just as quickly can pop when someone calls the bluff and refuses to pay anymore.

If economics were a simple system of supply and demand, we would never have had more houses or cars or whatever than we needed. The demand was fabricated out of a desire for money-greed. And so the supply met that false demand. When the false demand finally came to be noticed, everything crashed and there was far too much supply.

So while supply and demand play a large role in economics, it’s not always driven by a rational desire for the products or services (demand). Generally speaking greed leads people to make, sell and broker more and more for as long as possible. When it becomes obvious that they will not be able to anymore for whatever reason (making a dangerous product that will be recalled, selling products during a bubble, legal issues, the trends change and demand is not there anymore) fear then leads people to want to get out quick, to save and to hoard.

And so this is the way the cycles of our economy play out. During the greedy bull times, people are buying and selling. People are spending. Times look great. But during the fearful bear times, people are saving. People want security. From the market’s point of view, nothing is happening. So the Federal Reserve and government in all its esteemed glory (??!) decide they need to kick start people out of the fear emotion by pouring in more money, bailing out failing and corrupt companies and otherwise encouraging spending.

But it’s not spending that people need to do when that is what caused the problem in the first place. Overconsumption and greed is not cured with more overconsumption and greed (no more than gambling loses are cured by more gambling). People spend money when times are good, but it isn’t the spending that makes the economy good; the economy is sound, so people feel safe and secure and are willing to let go of their money more freely.

The economy is NOT safe and secure right now, so we should be encouraging saving, frugality and thrift! Saving is exactly what we need to do in order to get out of this mess in the first place. Not add another zero to our national deficit!

The opposing actions of greed and fear are necessary to regulate the market just as supply and demand are. The current policies are trying to take fear out of the equation, and that not only WON’T work, but it SHOULDN’T. When people go into a casino with no fear of losing their money, they are much more likely to lose all of it. There is no mechanism to put the brakes on spending/gambling.

We need to allow and actually encourage people to save. Once we have enough savings and the economy is indeed “safe” with “savings” people will spend money again. And in the mean time spending won’t stop completely; people still need to buy things to live, they are just being careful.

So how does savings lead to a strong economy? Well, when people have a large savings, they are more likely to take a risk, make an investment and so on because they feel more secure and less fearful. They see the chance to make their savings worth more (greed kicks in). And they have the reserves to cover any problems. They will still be able to eat and live if the gamble doesn’t pay off. And as more people do this, the economy will slowly come back to life. The savings will be tied to the saved or “reserved” productivity of our people, like a silo of grain would be.

Savings are not only a key component to individual personal finance, but should be a key component to any nation. It seems outrageous to me to think about an individual just living on credit card debt without ever paying it down. But even more outrageous would be to go on shopping sprees when you are in massive debt! But that is exactly what the U.S. is doing right now. We need to pay it down, cut back and save! We need to stop the spending. We need to save so that we feel secure and safe when we do spend. We have plenty of greed, we need to learn to get our fear back.

The shopoholic, bankrupt gambler, alcoholic, drug addict and other people who have lost the ability for moderation also lost their fear of the repercussions of their actions. If the U.S. is known for anything, it is not our moderation, but rather to the contrary. It is only until we allow and encourage the moderating forces to balance themselves out that we will be on more stable footing.

On Dieting and Budgeting

Cassie — Wed, 09 Jun 2010 22:20:40 +0000

Dieting and Budgeting. Two words no one wants to hear. And yet, interestingly enough, the end results of both are almost always praised: a thin, healthy body and a hearty savings of money. What’s the saying? There’s no such thing as too thin or too rich.

But it is no surprise really that these two things are so related. They both require discipline, it is much easier and more fun to not think about what you are doing (eating or spending) and you pay the consequences later rather than now if you continue with the bad habits.

Here are some more similarities: With dieting you have to conserve how many calories you consume. With budgeting you need to conserve the dollars you use consuming stuff (including food!).

And what is the best way to have a healthy savings and weight? To not think of it as dieting or budgeting! When people believe they are being starved or denied what they want, they are more likely to binge later (or sooner). But people who make healthy food choices and money choices a way of life do not really have to think about these things. Splurges are truly splurges and are not a constant way of life. And sometimes you have to compensate for overindulgances in either one. This might be accomplished by exercising more than usual or maybe looking for another income stream.

In fact, there is another similarity here: to lose weight you can either exercise more and/or eat less. To save money you can either earn more or spend less! The most effective and easier choice is to eat less when dieting and to spend less when budgeting. Why are these easier?

Both of them require you to do nothing, basically. With food DON’T eat so much. With money DON’T spend so much. Unlike starting an exercise routine or starting a part time job (the compensation for overindulgances), with basic healthy, light eating and budgeting and frugal living, you just don’t buy as much. You don’t eat as much and you don’t spend as much. Easier said than done though right?

Another similarity is that the base words -diet and budget- are in and of themselves completely neutral. Your diet is simply what you eat. Your budget is simply what money you bring in and money that goes out. However because most people need some work on both of these, they have become bad words when turned into verbs (action). Most people need to work on their diet by eating less and their budget by spending less.

However, doing less of these things does not seem to be the norm in our culture. Most people still have pathetic savings (sometimes less than $1000 in cash!) and many have stored up plenty of extra pounds. Two out of every three Americans are overweight or obese! And Americans’ personal savings rate is still less than 4% (of net income after taxes)!

So there is certainly work to do!

However, just like anything, even these good habits of dieting and budgeting can go too far and veer far away from healthy. It might be good to obsess over numbers (pounds, calories, bank statements and receipts) in the beginning to get you on track, but you need to make sure that you have not gone so far that you are truly starving or living without basic things (turning off the heat completley in the winter instead of just turning it down to save money would be an obvious example).

Overall though, I think the message is that we need to think of budgeting and dieting -or saving and living healthier if the words diet and budget scare you off- less in the terms of deprivation and more along the lines of our health and wealth. And maybe we’ll be a little more wise for it, too.

Talking About Investments: A Social Faux Pas?

Cassie — Thu, 27 May 2010 15:58:34 +0000

I was thinking about how easy it is for people to just go out and buy something and then tell everyone about their new purchase. A car, new clothes, new toy, etc. But what about when you decide to invest? Some people feel comfortable talking about 401(k)s or IRAs or other “standard” investments, but when it comes to what I call “direct” investments, that is investments that you directly control, many people feel uncomfortable. Why is this?

Don’t let Faux Pas or Fox Paws stand in the way of financial freedom

I think a lot of this comes from the idea that if you are able to make direct investments, you must be more well-off than others and you don’t want to sound like you are boasting. I can understand this, and often keep my investment ideas/deals quiet around people who may not have the means to do some of the things I can. But when some people are boasting about the huge house or brand new wave runner or tv or whatever, should we feel comfortable talking about our latest “purchase” of a new rental property, side business or lending deal as well?

It is interesting that to “Keep Up with the Joneses” generally means to keep buying and consuming like the Joneses instead of investing. Why is it that that type of competition between people is so ingrained in our society, but talking about investments is not?

We have a few family members and friends who are doing investments and it is great to have someone to compare ourselves to and to work towards. Wouldn’t it be great if there were more people like this instead of the “Joneses”? Then people would be tapped into a group of people and a way of thinking that is completely different than the current consumption model. You start thinking about how to make your money make you money instead of the funnest, coolest way to spend it.

Why do many people feel awkward talking about investments? Maybe this is because it is one of the hidden rules of class. In the middle class you just don’t talk about money. That in and of itself is a social faux pas. (And in poverty, it may be all you talk about because you don’t have hardly any.) In the wealthy class it is much more common to talk about investments because you want the connections to make those direct investments work. You may not talk about your personal money, but you need to talk about your investments in order for them to work. You have to assemble your “team”.

So for middle class people, you may be trying to show your social “value” or “worth” through your clothes, vehicles, toys, entertainment, food, stores you shop in, etc. But by doing this instead of investing, it turns around and makes your actual monetarial investment dollars -and therefore opportunities- dwindle. There needs to be more discussion about investments in the middle class, and not just presentations about with mutual funds you should put your 401(k) or IRA. (Of course, I’ll say it again, first people have to be able to save.)

Don’t let faux pas stand in the way of your financial prosperity. Find like-minded friends and family -especially family! -and talk about these things. Once you start brainstorming investments you will see that they are everywhere and if you collaborate, you can do even more than you ever imagined before.

The Fool and the Authority

Cassie — Mon, 19 Apr 2010 16:58:40 +0000

I think it is only natural that people want to trust what others tell them. And for the most part, it does us well. Our parents want to protect us from that hot stove that could burn us, they want us to look both ways before crossing the street, to wear seat belts, etc. They also tell us things as kids because they know that we will believe whatever they tell us. They tell stories about Santa Claus and Tooth Fairies and Magical Snowmen, Easter Bunnies, and even Boogie Men for fun because their parents told them those stories and now they get to tell their kids the same stories.

But really, especially as children, we will believe whatever we are told. That is the way we learn. That is why our education system and what is taught in the schools are of such concern. But it doesn’t just stop when you are an adult. You (hopefully) start to question things a little more critically and don’t believe in as many fantastic things as you might have as a child, but you are still trusting. And there is but a fine line between trusting and gullible. Because the best way to get someone to trust you -whether you or gullible or not- is the same way that parents get kids to trust them: you become an authority.

We recently played some April Fools jokes on some friends and it was amazing how easy it was to convince them that what we were saying was the truth. If it comes from someone who says that they are an authority on it, it must be true. Even if that authority is a fake. People want to soak up so much information that all they have to do is hear it from the “expert” and they will believe it.

Think about the placebo effect. People dismiss it as the control group next to the other pills they are studying, but what about the placebo itself? Because an authority (usually a doctor or scientist in a white lab coat) tells you this will make your troubles go away, you have convinced yourself that it will -and it does even if it is just a sugar pill. What a power!

With that power you can get people to do whatever you want them to, as long as you are convincing as an authority. This helps to perpetuate the system as a whole. And who decides what an authority is? The system itself! We all do! So it is a big feedback loop. So if we set up a system with that kind of power, then that system controls everything that we know to be true, whether or not it actually is. And they can set it up so that anyone who disagrees is a whack or in more stringent regimes, they are killed (or are “disappeared” as in the cases of Argentina or Chile’s history). But if the system really works as it should, they will be considered crazy and the system will do all that it can to get rid of them. If they can’t, then they will legitimize them as entities and then they will become part of the “system” too.

Examples of this include chiropractic and alternative medicine, homeschooling, organic foods, marijuana legalization, etc. They will legitimize them after a certain level of trying to push them away, especially if they can be crammed into a box (standardized) or turned into money-makers (and tax generators).

Other things that can’t make money or feelings of support are generally just discredited as conspiracy theories. Some of these, like CIA/FBI assassinations or the real reasons for going to many wars, are forever buried and never discussed. They get to make up the stories that we will believe, just like Santa Claus. And our country/organization/group is always the good guy in these stories, right?! The “winner” writes the history books.

And if you’ve ever played a successful April Fool’s joke or lied straight-faced to someone, you understand the power that a lie can have if you look as though you believe it too (or if you really do or want to!). And sometimes it’s not even an outright lie, it’s just telling someone what they want to hear, as in advertising. What a power it must be to watch a product’s sales numbers as they rocket up with every advertisement that is placed on TV, radio or newspaper.

And, of course, our media is a commercial entity. So, could it be that we limit the negative stories about products that we might have large accounts with? That we are quick to point the finger toward an “other” as an explanation instead of inward as a big game of slight of hand? It seems to me that that is often the case.

And when it comes to telling people how to use their money, why would any “authority” ever encourage people to save or invest in directly managed investments? If there is not money behind it, you just won’t find it. And if it does exist it will be very difficult to find sifting through all the propaganda that tells you otherwise.

Without money there is no power, without power there is no authority. The authority tells you where to spend and use your money, the money goes to that authority directly or indirectly, and the authority has then reconfirmed its power as the authority. (Think as only one example: The Federal Reserve -a private entity with public powers!) Thus the loop continues.

It will be difficult to sift through everything you hear and see because you need to think about why they are telling you this, what is the benefit to them, if any, who is their sponsor(s), what are they trying to get you to feel or do, and on and on. It will take some time, but you will begin to see that many times the authority is making a fool out of you. And a fool and his money are soon parted.

Question authority! Question it to yourself and question it outright if you need to. It will be the only way for you to know whether or not Santa Claus is doing you any good, and if he’s even real at all.

Money Choices Vs Money Traps

Cassie — Mon, 12 Apr 2010 20:36:41 +0000

I’ve talked a little bit about liabilities in terms of items that you spend money on that not only cost you initially, but have ongoing costs associated with owning them. I would like to talk a little more about the difference between money choices and money traps. Because money is a form of energy, and of power, there is a lot we can learn from these otherwise mundane occurrences about who we are as people.

Money choices are so much more fun than money traps, as you can imagine. You have control over what you decide to purchase and generally these are reflections of your interests, hobbies, preferences, or even addictions. They feel good, at least initially, to buy and decide. Sometimes there is buyer’s remorse, but overall these are items that you WANT, or else why would you choose to buy them?

Money traps on the other hand are usually things you were not expecting to purchase, but for one reason or another it is something that you will probably have to pay. This could be a car that needs fixed, a parking ticket, something that you thought was going to cost “only” X amount that ends but being double -or triple- that cost. These are the “random” expenses that are thrown your way because that is just how life seems to play. It is kind of like Monopoly. Sometimes you draw a good card, and sometimes you get sent to jail or have to pay a luxury tax. We generally neglect to truly appreciate the small windfalls that happen quite frequently if you pay attention, but we always notice these money traps that we seem to fall into from time to time. The traps or windfalls we generally refer to as “luck” both good and bad.

What do money choices and money traps have to do with each other? Well, on the surface they look like completely separate items. One represents the things you consciously bring into your life (or spend your life energy on) and the other represents things that just seem to happen, randomly. But is this really the case?

Generally the money traps are connected one way or the other with other money choices you made previously. Take my recent parking ticket. I decided I wanted a car and all the associated liabilities that come with it because I wanted the ability to easily transport myself. I decided to drive (instead of bike) and then park in an area without free parking (though I thought it was free). This seemingly random misfortune (minor annoyance really) was completely connected to my earlier money choices. Everything is connected in that way. Humans tend to separate events in our mind. I have a car. I got a ticket (or an accident, or a huge maintenance bill). Completely different, but yet without one choice, the randomness of a windfall or misfortune could not have occurred.

So the first lesson in money choices (or choices in general) is to understand that they do not stand alone. The consequences from these choices can be some that you may anticipate, or they can seem to be totally random. But we not only have the ability to make a choice in the beginning but also how we react to the “random” consequences (either traps or joys -like windfalls). The ticket I received was for $30. I could have shoved it into my glove box and forgotten about it. But instead I called the very next day and talked them down to $10 -about the price of parking there. It still wasn’t fun and it took time to take care of it, but this decision helped to lessen the impact and stopped a chain reaction that might not have stopped for a long while into the future (DMV, bills, court?, who knows).

If you feel like you got the short end of the stick in some situation, first think about what brought you to that unfortunate place in the beginning, then think about ways you can recover from it in the best way. You will become more conscious about what you bring into your life. Pick the battles you want to fight and ask if it’s worth it. Remember the saying: “Be careful what you wish for, it could come true!” You never know the chain reaction in front of a decision or after. And sometimes what may initially look like a misfortune can be positive in disguise.

The other lesson with money choices and money traps is that you may not be able to prevent all of the misfortunes (but many you can), but you can control your choices and this may make the difference of whether or not you can weather the traps that come your way. If you are conscious of all the little choices you make on a daily basis, then not only are you decreasing the odds that something could go wrong with these objects, but you are saving money (your life energy) to offset the costs of any random traps that may come your way. Be conscious of the drama that you bring into your life. Everyone brings in some, but just be sure that it is drama that you are indeed ok with dealing with.

If you buy, find, or otherwise bring into your life a __________ that you care about greatly, there is a chance that it will break, or get sick or get stolen or any number of things. You have brought that into your life because you cared about it and that is fine. But just be sure that you are willing to deal with all the downsides (known and UNKNOWN) to any of those choices as well as the benefits. Then when these random (set into motion by you) events do occur -which they no doubt will, work to make them the most positive situation possible. This is the connection where chance and choice meet: where free will and destiny interact. Make your choices well and your chance occurrences will be much more positive as well.

And remember to say “thanks” every now and then for the things you brought into your life that you wanted or that “randomly” landed there and brought you happiness. It works both ways. You reap what you sow; karma is real. Be careful with your choices and the traps might just set you free.