Richard Thaler has always been an interesting figure in economics, and there is a lot to learn from the recently released memoir detailing his professional life, which Thaler appropriately titled “Misbehaving.” Thaler, now tenured at the University of Chicago, has long provided a number of insights into behavioral economics, and there is a great deal investors can learn from these insights. This is especially true for those who do not realize how human nature affects every aspect of the decision-making process, including those related to our investments and long-term financial plans.
Perhaps the most important lesson is to understand how we make decisions based on the way a situation is framed. Thaler uses a number of examples to show how irrational we are with regard to financial matters, using simple situations such as an individual who would not pay $10 to have his lawn mowed by someone else but would also not accept $20 to mow a neighbor’s lawn. There are obvious human errors in the way we value the things, and the way these things are framed is often the sole determining factor. For another example, a patient who is told that they have a 95 percent chance of surviving a surgery is much more likely to go ahead with the procedure than the person who is told that there is a 5 percent chance of dying.
So what does all of this have to do with finance? Well, it is necessary to understand how information is presented to us and to make decisions based on the actual information rather than the manner of presentation. This requires a willingness to thoroughly evaluate each opportunity, and it also requires that we begin to place more trust in the advanced metrics that eliminate presentation and focus solely on the pure data available. As humans, we like to believe that we are able to think rationally at all times, but there are too many times in which we make poor decisions –- financial or otherwise –- due to the way our choices are presented to us.
In reading Thaler’s book, it is clear that we have a lot to learn. Understanding how we make decisions and the manner in which we are affected by behavioral economics is key to overcoming our own inherent flaws. The process through which we overcome these flaws is quite difficult, but it is ultimately worthwhile for ensuring consistently sound financial decisions.
Consumer demand has been pushing a great deal of technological change in recent years, and that demand is finally making its way into the financial sector. The development of a number of financial technology services has made it easier for consumers to manage their finances in a manner that they are able to completely control. As a result, traditional banking institutions are being forced to adapt quickly or risk being forced out of the marketplace entirely. This is a positive development, as the enhanced transparency for consumer finance will ultimately stimulate a great deal of change in the way financial services are delivered.
There are a few obvious examples –- Paypal, for instance — of financial technology companies establishing a significant hold on the market recently, and these companies are not just making financial management more convenient for consumers, as they are also changing the way financial institutions do business entirely. It seems clear that consumers will no longer be dealing with a single financial institution to handle all of their financial needs; instead, consumers will be able to identify the most ideal platform for their specific financial goals and will be able to invest accordingly.
Companies such as Robinhood and Simple have made it easier for consumers to control their personal finances and to modify the options at their disposal so that they are suitable for their unique goals and needs. It is therefore the case that these financial technology startups are not just making personal finance easier and more accessible, but they are also creating a highly personalized option that makes money management more effective over both the short- and long-term.
Of the most interesting developments among these financial technology startups is the advent of the robo-adviser, which has threatened to make personal investment corporations seemingly obsolete. The robo-advisement process is quite simple, as the automated system invests according to your goals and input with regard to diversification, much in the same way as a personal finance manager would but without the added costs.
The world of finance is clearly changing, and technology startups are finally entering the financial world to stimulate the kind of change that is long overdue. The services that are now being offered by these tech startups will ultimately prove to be exceptionally beneficial to consumers who want more convenient and effective personal finance options, and it is now up to the established financial institutions to either adapt or dissolve.
While most observers have taken the news that the major United States automakers are enjoying record monthly sales as a sign of the growing strength and continued improvement of the U.S. economy, there are some other effects that should be considered before getting overly excited. Yes, the dollar has regained some of its strength and this has buoyed concerned consumers, and declining gas prices have certainly encouraged the increase in car sales, but it is important to avoid overlooking the fact that this perceived consumer strength will very likely lead the United States Federal Reserve to consider raising interest rates.
It is for this reason that the true causes of the surge in auto sales should be evaluated more closely to determine whether the increase is indeed due to the current strength of the dollar and not simply a confluence of factors that boosted sales above the norm but do not hint at sustained success. The fact that, for example, many regions throughout the country have suffered through extended winters may have led to many potential buyers delaying their purchase. After all, automakers are coming off of a very poor sales month in April, so perhaps this recent May increase may be nothing more than a product of buyers waiting out the inclement weather before investing in a new vehicle.
The fact that the financial crisis kept many consumers away from the automobile industry for many years may also have something to do with this, and it is fair to say that consumer confidence is not exactly at an all-time high within the auto industry. To draw any sweeping conclusions over the strength of the entire United States economy due to one very strong month of sales following a very poor month seems to be a potentially significant error. This is especially true if the Federal Reserve is indeed considering a raise in interest rates simply due to a momentary increase in one sector, however important or sizable that sector may be.
Ultimately, consumers should be pleased that auto sales are on the rise, but the long-term health of the auto industry is hardly secure, and the idea that the automobile sector should serve as any reflection of the United States economy is incredibly flawed. The dollar may be stronger and more consumers may be buying cars, but to say that the economy is fully recovered and thriving to the point in which interest rates should be raised is a frightening proposition.
Much has been made of the long-overdue thawing of relations between the United States and Cuba, and the matter has remained a somewhat surprisingly contentious issue among parties on both sides. This is going to be a long process of normalization due to the resistance that is still apparent on each side, but the economic changes that should come from all of this ought to prove overwhelmingly positive in the long run. It should be plainly evident, however, that the majority of people on both sides of this issue see an economic opportunity in Cuba that should prove mutually beneficial for both nations. The issue is how to optimize these opportunities in a way that equally satisfies the leaders of both the United States and Cuba.
The trade embargo has had an undeniable effect on the economy of Cuba, but the point of the embargo was to stimulate the type of political change that would push Fidel Castro and his regime out of power. The embargo and the other financial sanctions imposed upon Cuba have not been able to accomplish this despite the effects on Cuba’s diplomatic relations with other countries, and the political impact on the perception of the United States in Latin American countries has been too great for this to continue to go on. Improved relations and, eventually, the lifting of the trade embargo, should aid in reducing the anti-American sentiment that has spread throughout Latin America.
Private enterprise has been opening up in Cuba since Fidel’s brother, Raul, assumed power in 2008, but the thaw in relations between the island nation and the United States should bring about more opportunities for growth while simultaneously loosening the grip of the Castro government’s state monopolies. The issue facing Cuba and the Castro regime, however, is determining how increasing economic liberalization will affect the regime’s ability to retain power. This is likely the reason that Cuba has thus far focused on improving diplomatic relations before discussing broad economic issues, as there is a chance that rebuilt relations could accomplish what the sanctions had initially intended by pushing the Castro regime out of power in Cuba.
As political fodder, the upcoming Presidential election should see plenty of discussion regarding relations between the United States and Cuba. From a purely economic standpoint, a thaw would be mutually beneficial for both countries, as Cuba would undoubtedly see its economy improve tremendously while the United States could enhance its political standing among the Latin American nations in which there has been a growing sentiment of anti-Americanism.