When I first started reading Richard H. Thaler’s “Misbehaving – The Making of Behavioual Economics”, I couldn’t help but think of my ex-wife.
Now, I realise tales of one’s ex are always problematic. As Christine Keeler so eloquently said all those years ago, “Well, he would say that, wouldn’t he?” However, I’m going to step right in and risk it.
My ex-wife had a credit card with a limit of $2000, which used to hover somewhere between $1700 and $1950. When I suggested taking out a personal loan and paying it off, she rejected the idea on the grounds that she didn’t like borrowing money.
“What do you call that stuff on the credit card then?” I said, demonstrating to everyone reading this both my superior grasp of economics, and why the marriage was doomed. This brought an end to the conversation.
Every now and then, she’d get some windfall money like a tax return and pay most of it off, and resolve never to use it again, but this usually only lasted a couple of months. When I suggested that rather than paying the minimum off, that she pay off a large chunk of the credit card and put the petrol and groceries on, which would mean that she wasn’t paying interest on that chunk of money until the next month where she could do that again. This would mean that she was paying down more than if she simply paid the minimum. (And also, I suspected would mean she was less likely to make an impulse purchase than if she had money left in her actual account, but that’s a whole other story!)
No, I didn’t understand, she was trying to not use her credit card, at all.
Richard H. Thaler’s book is full of examples of how people think about money, and how much economic theory works on the basis that we’re all rational people who do what’s best for ourselves in the long run.
He gives the example of people purchasing wine which appreciates in value. When they drink it, many of them argue that it’s not like they’ve gone out and purchased the wine for what they could sell it for – it only cost them what they paid, so therefore, it’s quite ok to drink it, even though they’d baulk at paying the $XX.
Another good example is how people feel about “sunk costs”. Sunk costs are the costs of what you can’t get back whatever you decide to do. For example, if I pay a deposit of $400 and organise construction of gigantic statue of Tony Abbott in our front yard costing $4000, when I argue that we have to go ahead with it, or else we’ve just wasted $400, my wife can correctly argue that if we do go ahead with it, we’d actually be wasting a further $3600 and we could do better things with the money.
(This is an interesting one in the context of the East-West link in Victoria. There were many people arguing that because it was going to cost money to get out of the contract, then it was better to build the road, because at least we’d get something for the money. The question is not about the sunk costs, the question is whether the several billion extra to actually build the road could be better spent on other projects.)
As I read on, I started to think of my ex-wife less, and more on the whole way we’ve been encouraged to think about the economy and debt.
And in particular this week, as Tony Abbott responded to the Infrastructure Australia audit which told us that traffic congestion could be costing $53 billion a year (or over a billion a week as the PM helpfully added, once again doing our division for us. Give him credit, he’s always been good at division!)
What I find interesting is the notion that we can’t land future generations with “debt”, but apparently it was OK all through the Howard years to put off infrastructure spending because there’s nothing wrong with giving them inadequate infrastructure.
Or inadequate education.
Or not enough hospital beds.
Like my ex-wife’s refusal to take out a loan to pay off her credit card, it’s all in how you look at it.
30 total views, 4 views today