I want to share some concepts of behavioral economics from "Why Smart People Make Big Money Mistakes - Gary Belskey & Thomas Gilovich" which i am reading now.
Not all dollars are created equal :
A newly wed groom finds $5 and he goes to roulette table bets his money on number 17 and the ball stops on 17 and he wins $175 he continues playing and winning until the casino runs out of money,He rushes to some other better financed casino and continues betting on 17. He wins $262 millon only to loose it when the ball stops on 18 . When the bride asks about how he did in casino , he tells " not bad ,I lost $5"
He explains this as the human being will have separate mental accounts for earned money and gift money.We some how feel the earned money is more sacred than the casino money eventhough both can buy same amount of things.
What i feel the same applies to stock market also . We feel more pain when we loose our capital compared to the profit . For example if we invest 1 milloin and lost half million the pain will be more compared to loosing one million in 2millions profit.Upto some extent it will be fine but we should not be overwhelmed with the profits we earned in stock market and start taking riskier bets .
Even the spending boom in India can be partly attributed to this .. A young man working in IT or BPO industry earning more than what his father had earned after working for 20-30 years . Some how most these people are not believeing what they are getting as earned money and treating it as a gift money. They are compensating this either by spending more or taking riskier bets in share market.Some of them compensating this by working long hours than neccesary in office which is more dangerous .
RK
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