*Editor’s Note: CC Biz Buzz is a new monthly column series that will feature insightful commentary from a member of the Columbia College School of Business faculty.
Award-winning author Morgan Housel, in his book The Psychology of Money, stated, “Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
One can easily imagine that individuals who lived through the Great Depression of the 1930s likely have a different view of investing in stocks than Millennials who have lived through some of the largest expansions in US history. We all approach our worldview with our own biases that help to form our opinions of who we are and what our role in the world is. The same goes for our financial biases. Some of us are savers and some of us are spenders (the majority of us fall somewhere in between); some of us balance our checkbook each month while others look at our online banking accounts daily and figure that’s good enough. Why do these views matter today?
They matter because of the amount of uncertainty combined with the extreme volume of information available. Thomas Jefferson often said that “knowledge is power.” While this axiom is generally held to be true, one must be realistic about the “knowledge” that we absorb. Do we tend to gather information from diverse viewpoints, even some that counter our own? Or do we stick with what we believe to be true and look for information that validates that truth? I am not attempting to make an argument for gathering information from one source over another, as I, too, have my own bias. What I am attempting to communicate is that during uncertain times it is in your own best interest to gather sufficient information that allows you to resolve your questions with minimal bias.
Bias is neither good nor bad in itself, but is often a byproduct of our lived experiences, cultural backgrounds, beliefs, and value systems. These are very personal and individualistic experiences and would likely never be representative of the population in general. Likewise, your finances and financial health are unique to you and your family, often based on the same lived experiences that are mentioned earlier. As a result of this truism, I would argue that knowledge can be power. The interpretation of the information that you gather with the understanding that the absorption of this information includes the view from a biased lens will lead to truer knowledge than the mere gathering of information otherwise would.
So, is there inflation currently? You bet there is… that is an economic fact. Is this increased inflation the result of political action or inaction or is it the result of a perfect storm that included COVID, supply-chain issues, and consumer pent-up demand to spend money? I say PÔTATO, PÖTATO. In other words, it depends on your own unique interpretation of the information and likely how that information is affecting your family. What about the student loan forgiveness program just introduced – is this a positive thing for the economy, or a negative? Again, PÔTATO, PÖTATO. Increased interest rates? PÔTATO, PÖTATO. If you are a retired person living on interest income, yay; if you are a young couple looking to purchase your first home, boo. Rain this weekend? PÔTATO, PÖTATO. If you have plans with friends at an outdoor activity, boo; if you are a farmer in much need of moisture, yay. I think you can see where I am going with this.
Ultimately what I would love to get across with this piece is that what can be good for some can just as likely be awful for others. We seem to have lost our desire to see win-win solutions forgetting what is PÔTATO for me, may very well be PÖTATO for you. There is a political saying that “all politics is local;” likewise, all finance is personal and unique to you. Understanding the inherent bias that we bring to financial decisions will ultimately allow us to choose the PÔTATO or PÖTATO that suits us best.
Dr. Mary Dorn is an assistant professor of finance in the Columbia College Robert W. Plaster School of Business.
The post CC Biz Buzz: Knowledge is power when it comes to financial decisions appeared first on CC Connected.