Our Irrational Financial Choices

Something went wrong last week: I didn’t get the Nobel prize for Economics for some reason… for something I’ve been bugging people about for more than two decades.

All economic models ever taught and used by businesses were based on the fact that we make rational economic and purchase choices. It’s been used forever to explain how markets work to allocate resources and to set prices.

This years, the Nobel prize went to behavioural economist Richard Thaler. He proved that we don’t actually make rational buying decisions at all. We constantly make irrational and illogical choices that are totally opposed to our financial well being. There: It’s the reason we’re mostly broke. We make stupid financial choices that sabotage our savings and put us into debt!

The best example is from the U.S., where employees have always had the chance for payroll deduction, very often with matching employer money for retirement savings. Yet, very few did it. That totally sabotaged their retirement savings. When the law was changed that it’s done automatically, but you can certainly opt out with one signature, very few people did! In just a few years, it’s created $30 billion of retirement savings!

The best destructive example is someone who emailed me that they “had” to buy a new vehicle because they had a new baby. Nice try. The old one was four years old and just fine. The baby was just the final excuse to trade up.

If you’ve ever heard the saying that’s been around forever that “so and so could sell a fridge to an Eskimo”, isn’t THAT the person who should have gotten the Nobel prize? Or the first person selling pots to cook food in by selling the choice of two colors?

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