Behavioral Economics. (3-4 min read)-

-By Shivam Sharma(Guest Blogger)

Aloha strangers on the internet! 

In this blog, I am going to attempt the impossible by making two scary sounding words interesting to you and in the process (maybe?) educate you about human psychology.

That topic is “behavioral economics”. Now as I type this article I realize how scary this looks to a person who hasn’t seen this word before. It’s the universally dreaded word economics preceded by an even bigger word. So let us begin.

According to Wikipedia (what would we do without it) behavioral economics is defined as “method of economic analysis that gives psychological insights  into human behavior to explain economic decision making”. Wait is that supposed to mean. Basically, while economics studies the patterns of decision making by rational economic entities, behavioral economics studies the actual humans who make mistakes most of the time. To me, the basic difference between the two terms is that economics assumes that humans are rational beings who always make decisions which maximize their well- being, whereas behavioral economics acknowledges that homo sapiens (us humans) is a species that makes both good and bad decisions. They don’t always maximize well -being and make mistakes sometimes.

Behavioral economics maintains that our brain is primitive and flawed and we are susceptible to what are known as cognitive biases (error in judgements). To explain these biases, we have to understand our brain is made of two systems 1&2. In my opinion they should have come with a more interesting name but who is complaining 😝.

Let’s talk about system 2 first. It is the goody two shoes part of our brain. It is the one which labors to make plans, knows how to solve complex mathematical problems, knows short term sacrifices lead to long term gains. But sadly for us it has very little control over us. We are controlled by the lazy, selfish and easily deceived system 1. We can see the functioning of both systems in our day to day experience. During exams, our system 2 makes plans and is ready to sacrifice comfort for few weeks for long term gains and prepares meticulous plans for us to follow, then system 1 takes control and we end up sleeping 12 hours a day and spending our every waking minute watching obscure YouTube videos.

Economics assumes that our system 2 is the dominant part of our brain and thus postulates that most of the time we make right decisions. But behavioral economics knows that system 1 is dominant. According to economists ; saving money, exercising and eating better should come easily to us but social scientists and behavioral economists know that our chimp brains will almost always go for the instant gratification and procrastinate the difficult decisions indefinitely.

System 2 is very lazy. It is only active when its need is dire. That makes sense because involving system 2 in day to day functioning of our lives requires effort and energy and we all know that they are perhaps the most important assets in our lives, right after our mobile phones. Thus system 1 has most control in our lives. But the problem is that our system has had the same wiring for thousands of years. We are a new laptop running on the windows 2000.

Back in the hunter gatherer days our main 2 worries was how to reproduce and how to not get eaten by a polar bear. And the same instincts and thinking patterns are still governing our lives. So, the next time you are faced with a choice between short term pleasures and a choice involving hard labor, know that your system 1 is active and will almost always choose the badsuggestion for the short-term pleasure and maybe knowing this will help you better your lives.

So that’s it on my part. If you found the topic interesting and want to know more, I suggest reading these  books:

1)     Thinking fast and slow by Daniel kahneman (he is a Nobel prize winner)

2)     Nudge by Richard thaler

Aloha(that’s both hello and goodbye)!

Thank you for reading. Do write your thoughts in the comments section. Hope you enjoyed it.

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Mutual Funds: The Costly Affair (5-6 min read)

Oscar Wilde said,

“A cynic is someone who knows the cost of everything but the value of nothing.”

But does it apply to the mutual fund industry as well?

Let’s find out…

If you are currently investing in mutual funds or ever plan to do so in future, then this article is definitely for you. It won’t take much time and even if you think you know everything about it, just read to find out what you might be missing out on and if it happens that you did know it all then I am sorry for wasting your 5 minutes…

Let’s not beat around the bush anymore and come to the point: –

People are generally told this thing, “Higher the risk, higher the return.” It’s a significant saying in life, and I too agree with it, but wait a minute; What if I tell you that the statement loses its meaning when it enters through the doors of the mutual fund industry?

Confused? Well, it’s just a matter of cost. Now you may ask, “How so?”.

Continue reading “Mutual Funds: The Costly Affair (5-6 min read)”

Crave to Save

Well, well, Do you find yourself secretly scrolling through that fashion page? Did you always want to be the girl in the green scarf (confessions of a shopaholic reference) or are you one? Do you find yourself mind-noting all those pretty dresses? Do you notice the beautiful accessories from the corner of your eye? Aah…

And finally, do you want to spend a little (or a lot) less than what you already do at the malls?

‘Whoever said money can’t buy happiness, simply didn’t know where to go shopping.’ – Bo Derek

Continue reading “Crave to Save”

“The Ouch Fund” – Do You Have It? (4 min read)

Money magazine says that 78% people will suffer from a negative financial event in a 10-year period.

Lying on the small hospital bed with the IV in his hand and the broken mobile, after the car accident, Mr. Dumbbell was thinking about the next few months and the jolt to his earnings that the car accident had caused. Although medical expenses were not a major concern for him as they were covered by his insurance, his disrupted income stream posed a challenge for the family.

Many of his relatives and colleagues visited him while he was bedridden. Knowing his sudden financial need, some of his relatives and friends offered him help. If he hadn’t got the timely help, he was even prepared to liquidate his assets and investments.

But, each one of us might not be as fortunate as Mr. Dumbbell. So, what do you think he did wrong? Continue reading ““The Ouch Fund” – Do You Have It? (4 min read)”

Whom to trust with your money? (3 min read)

What is the dearest thing to you?

When we surveyed people, and asked them this question, most of them answered -family relations, health and money; in the same order of preference. Mr. Brainy and Mr. Dumbbell also had the same answers.

Since family relations are the dearest, what do you do to help maintain your family relations?

  • Spend time with family, give them due importance.
  • Behave affectionately.
  • Show our appreciation and love for our family.

Now coming to health and its issues,

Continue reading “Whom to trust with your money? (3 min read)”

We know it. Do we?

Many people die with their music still in them. Too often it is because they are always getting ready to live. Before they know it time runs out.”

-Oliver Wendell Holmes Sr.

We all know that we have one life to live and that there are no retakes. We know about all the good habits that one should possess for a successful life. We know about all the secrets there are to it, thanks to all the wisdom shared to us by successful people. We know that smart work and hard work should go hand in hand. So, what is the problem? Continue reading “We know it. Do we?”

Ready to pay the EMIs? Think Again!

Hi there! So here we are with another of Mr. Brainy’s and Mr. Dumbbell’s life experience. Hope you have read the previous ones, if not then do check them out, you might find some things of value and interest.

So, how many of you have really thought of buying a 5 BHK or a penthouse in some posh locality? All of us right? That’s cool!! That’s not a sin! Even I dream of buying one.
Like two ordinary young fellows in their early twenties, Mr. Brainy and Mr. Dumbbell also dreamt of buying a luxurious house. Continue reading “Ready to pay the EMIs? Think Again!”

The Perfect Balance

“He slept beneath the moon, he basked beneath the sun; he lived a life of going to do and died with nothing done”

Do you ever find yourself sitting on the couch cross legged, with the tv on, having a severe headache and a heavy heart, for you are not able to manage your work and social circles? Your friends think of you as being selfish and self-obsessed, your family feels neglected and your personal ambition lies wrapped up in a blanket somewhere. In your mind, you are just facing another bad day but is it just one day of cribbing to yourself? I don’t think so. Continue reading “The Perfect Balance”

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