Are your financial decisions based on emotions or are they a rational evaluation of facts? Would making decisions like an economist help you further your financial goals?
Recently, on The Goldstein on Gelt Show, I discussed the role of reasoning in making economic decisions with Randall Bartlett, a professor of economics at Smith College. Professor Bartlett explained that, “When we talk about economics and rationality, we’re really talking about the means that people use rather than the ends that they try to achieve.” People can have dreams that seems to them perfectly rational and logical, but others might dismiss them as totally impossible. In this case, who is rational?
If you are an economist you might realize that even if a dream itself is abstract, if there are planned steps towards achieving it, the dream may become logical. As such, reaching your dreams is a type of economic thinking.
Professor Bartlett gave the example of buying a Ferrari sports car, a nearly impossible dream for someone with an average income: “The rationality has to come when you compare that with the possible means. You have to tell the person, ‘Here’s what’s available to you.’ Economics is all about tradeoffs. If you buy the Ferrari, you may not have enough money to afford retirement. You need to decide to be hungry and happy with a fancy car, or settle for taking a bus and having a full stomach.” Number crunching and making decisions based on reality and information is rational, but the fact that the other person loves Ferrari is emotional.
Likewise, financial planning is all about weighing the ramifications of your dreams against reality and making choices. A good financial plan takes into account your dreams, the financial facts on the ground, the sacrifices you are willing to make in order to achieve them, and the unpredictability of the economic market, and attempts to balance them in a rational way. To hear more about Professor Bartlett’s thoughts on how rational thinking can improve your financial situation, listen to the interview here.
And, if you are able to make the leap from dreaming about retirement to planning for it, call your financial planner today.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published August 8, 2014.