Human irrationality about money

I’m a big fan of Financial Jesus and pop in for entertaining financial news. Below is an intriguing article I found and wanted to share it with you.

Bobby


I am a big fan of behavioral economics which tries to explain why people act the way they do.
Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.

 

The Ultimatum Game
You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him – you will both get to keep your share of the money. If the other person declines – neither of you get the money.
This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.
A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him – he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B – the second person should accept. Rationally looking it is better to get 1 dollar than nothing.

What really happens?Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) – you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.

Perceived value of money
The following is a thought experiment. Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same. Which option will most people choose? A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option – being richer than other people. Some scientist think this experiment demonstrates the irrationality of man. I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends – it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.

The Line Experiment
The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars. A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person. Which would you rather be? Surprisingly most people would choose the first option – getting the $100. Money wise this is a bad decision – you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000.


What do these experiments show

These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.

Source: www.financialjesus.com

Should YOU have a say? Iceland Debt Referendum

Are the Icelanders right in their viewpoint of asking why should they be penalised (through taxes) for the excesses of a few banks?

The Americans and British have already printed oceans of money to bail out the banks (NOT the people) and we as tax payers will have to pay to keep the untrustworthy rich in their jobs, businesses (banks) and bonuses! The untrustworthy being those that live off other people’s money regardless of how incompetent they are at providing the service they promise ie. bankers and government workers.
Are you asking yourself these questions too… Is that really what capitalism is about these days?
Is it really fair that we don’t get to vote on what happens to us?
Is it time for a revolution yet or will people wait until the banks and government walk into their homes, eat their food and then kick them out!?

Bobby


Protestors in IcelandMany Icelanders are demanding a “reasonable” agreemen

Iceland has held a referendum on plans to repay the UK and the Netherlands debts owed from the collapse of Icesave bank.
Despite overwhelming opposition to the proposal, the country faces years of financial pain.
What was the referendum about?
Iceland’s 320,000 citizens voted on whether their government should repay Britain and the Netherlands more than 3.8bn euros (£3.4bn) – equivalent to each person contributing 99 euros a month for eight years.
Britain and the Netherlands say they are due the money following Iceland’s financial meltdown in 2008. But Icelanders say the terms of the repayment are too onerous and rejected the package in its current form.
The collapse of three of Iceland’s biggest banks overwhelmed the country’s deposit-insurance scheme.
Some 340,000 British and Dutch depositors in the Icesave online bank (owned by Landsbanki) had to be bailed out by their domestic compensation scheme.
Now these two countries want their money back from Reykjavik.
At stake is nothing less than Iceland’s ability to restore its economic credibility in the eyes of the world
According to Dragana Ignjatovic, analyst at IHS Global Insight: “In order for Iceland to even hope to rebuild its battered reputation, a compensation deal needs to be reached.”
Speaking to the BBC, Chancellor Alistair Darling said the UK would get its money back, if not for many years.
“It’s not a matter of whether the sum should be paid. There is no question we will get the money back but what I am prepared to do is to talk to Iceland about the terms and conditions of the repayment,” he told the BBC’s Politics Show.
Asked about how long it would take for the UK to be repaid, Mr Darling said it would take “many, many years”.
But there was never any suggestion many people would vote “Yes”.
That’s why the referendum became an explosive political issue.
Most Icelanders argue that they should not be penalised for their government’s failure to rein in spending and for the excesses of a few banks.
As we are seeing in Greece, and elsewhere in Europe, the majority of people don’t want to be penalised for the actions of a few.
Iceland’s rising unemployment and high living costs means the country is taking longer to emerge from recession. The economy shrank 6.5% last year and is forecast to shrink about 2.5% this year.
There is also a lingering dislike at the way Britain has conducted itself.
London used anti-terrorist legislation to freeze the assets of Icelandic banks, sparking the worst diplomatic row between the two countries since the Cod Wars fishing dispute in the 1970s.

What does the Icelandic government say?

The magnitude of those payments are such that we would have little left for anything else”
Iceland’s economics minister Gylfi Magnusson

Last December Iceland’s parliament agreed – after much soul-searching – to approve a repayment package.
Under this deal the “debt” would be repaid over 14 years at an interest rate of 5.5%, with the interest bill deferred for the first seven years.
However, in January, following public outrage, President Olafur Ragnar Grimsson vetoed the deal. This set up the referendum.
There were last-minute talks in London to resolve the issue, with Britain and the Netherlands thought to have offered a reduced interest rate.
But hopes of a deal which would have forestalled the need for a referendum were dashed.
What are consequences for Iceland of a “No”?
A “No” vote might strengthen the government’s hand in negotiations.
That said, it would still be a blow for Iceland’s shaky Social Democrat-Left Green coalition, which had approved a deal.
Iceland’s Prime Minister Johanna Sigurdartottir has staked much of her political reputation on backing an Icesave deal.
And the dispute has also overshadowed Iceland’s application to join the European Union, which was submitted last July. This application is effectively on hold until the Icesave issue is resolved.
More importantly, a “No” vote could have severe consequences for Iceland’s attempt to re-build its shattered economy and repay its debts.
An application for about $4.6bn in loans from the International Monetary Fund appears to have stalled.
The IMF has said that the Icesave dispute should have no impact on the loans.
But Britain and the Netherlands, along with Nordic countries, are thought to have made the loans conditional on Iceland repaying international debts.
About 1bn euros in foreign debt matures in 2011. Gylfi Magnusson, Iceland’s economic affairs minister, has warned: “The magnitude of those payments are such that we could we would have little left for anything else.”
Rating agency Moody’s said recently that the deadlock may force it to downgrade Iceland’s debt to junk, making it even harder for the country to borrow much-needed funds on the international market.

Source: http://news.bbc.co.uk/1/hi/business/8551673.stm

The Great Rip-off: Tale of the Dead Donkey

The current banking crisis explained:

Young Thomas bought a donkey from a farmer for £100. The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, ‘Sorry son, but I have some bad news. The donkey died.’

Thomas replied, ‘Well then just give me my money back.’ The farmer said, ‘Can’t do that. I’ve already spent it.’

Thomas said, ‘OK, then, just bring me the dead donkey.’ The farmer asked, ‘What are you going to do with him?’

Thomas said, ‘I’m going to raffle him off.’ The farmer said, ‘You can’t raffle a dead donkey!’
Thomas said, ‘Sure I can. Watch me.. I just won’t tell anybody he’s dead.’

A month later, the farmer met up with Thomas and asked, ‘What happened with that dead donkey?’

Thomas said, ‘I raffled him off. I sold 500 tickets at two pounds a piece and made a profit of £898’

The farmer said, ‘Didn’t anyone complain?’ Thomas said, ‘Just the guy who won. So I gave him his two pounds back !’

Thomas then went to work for Barclays.

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Here this tale would have ended… but it didn’t…

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A year later, Thomas (now working for HBOS / Halifax Bank Of Scotland), comes running into the farmer’s yard, out of breath and looking frightened.

“You must help me hide!” cries Thomas.

The farmer asks, “Why? What’s wrong?”

Thomas explained, “I went all over the village, hiring people to sell raffle tickets for the same dead donkey, and then those people hired other people to go to other villages and sell raffle tickets for the same dead donkey, and now there are thousands of raffles taking place all over the kingdom.
Millions of people and pension funds bought my raffle tickets, but the donkey started to stink and everybody found out it was dead, so now they want their raffle ticket money back!”

The farmer suggested, “Just pay back the money, Thomas.”

“I can’t!” Thomas moaned. “I spent it all on bonuses for my raffle salespeople, and private jets, and huge mansions, and an opulent lifestyle to which we, in the raffle ticket business, have become accustomed. Not only that, I borrowed against my raffle ticket earnings 35 fold, so now I OWE 35 TIMES the money I actually earned!”

The farmer thought a moment, then smiled. “Don’t worry, Thomas. I know what to do.”

Thomas asked, “What can possibly be done?”

The farmer answered, “Your raffle operation is the biggest business in all the land. It’s too big to fail. The King will bail you out, for the good of all his loyal subjects.”

And with that, Thomas beseeched the King for billions of pounds to create the R.T.R.P. (Raffle Ticket Relief Program) to buy back all the worthless raffle tickets.

Everybody thought that would be the end of it, but it turns out the King didn’t have enough money to bail out the Raffle ticket holders, so he issued official “Raffle Bonds” to borrow money from other lands.

Everybody thought THAT would be the end of it, except when the rulers of other lands figured out their lent money was being spent on dead donkey raffle tickets, they stopped lending it. So the King decided to just print the money to buy back the dead donkey raffle tickets.

Everybody thought THAT would be the end of it, until it turns out that printing money causes each individual pound to be worth much less, so prices for goods and services rose enormously throughout the kingdom. The King decided to issue a new paper currency denominated at 1/10th the face value of the old pounds, and forced everyone to exchange their old money for new money so prices would come down to normal again.

Everybody thought THAT would be the end of it, until the same thing happened with the new currency, so the people rose up and toppled the King with torches and pitchforks, and installed a new ruling government with a new currency backed by gold.

And THEN they all lived happily ever after.

The End.


Modified from the Source: http://www.linkydinky.com/Donkey_raffle.shtml

It’s a Mad, Mad World banking system!

Rates reduced to 0.5% and Quantitative Easing measures to boost economy to be ‘tried’ by pumping £75 Bn into the economy! The Bank of England ‘hopes’ the banks will pass this money onto the public by lending more to individuals and businesses!

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Just a funny comment I thought I’d add:

“I promise to pay the bearer on demand the sum of……”

Oops, just realised it’s not just a funny comment but in reality:

On a bank note it states “I promise to pay the bearer on demand the sum of……”. What that means is, the bank has pledged to the holder of that note, that on demand, they will give to the holder, the value stated on the note in gold or coinage. A bank note is merely an IOU.

Do they have any value left to offer and do you hold many worthless IOU’s?

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UK interest rates lowered to 0.5%

The Bank of England has cut interest rates to 0.5% – a fresh all-time low – and says it will now boost the money supply to help revive the economy.

Interest rates have now been reduced six times since October, and the latest half a percentage point cut from February’s 1% had been expected.

The Bank said it would expand the amount of money in the system by £75bn in an attempt to boost bank lending.

This policy, so far untried in the UK, is called quantitative easing.

Buying assets

Quantitative easing is the process of increasing the amount of money in circulation in an attempt to revive the economy.

While the Bank will initially add £75bn, Chancellor Alistair Darling has given it permission to extend this to up to £150bn.

The idea is that if the amount of money in the system is boosted, commercial banks will find it easier to lend.

Quantitative easing is sometimes incorrectly referred to as printing money, but the Bank will not expand the supply of money by making new banknotes.

Instead, it will buy assets – such as government securities (gilts) and corporate bonds.

Similar measures were implemented in Japan at the beginning of the decade and are considered to have had limited success.

“Today’s decision is a kick in the teeth for savers who will see their already diminished interest payments fall even further” – Adrian Coles, Building Societies Association

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Read my last write up in February on Interest Rates, Banks, Property and the Economy – Feb 09

At least the Americans have the right idea! “In God We Trust” – start praying!!!

Interest Rates, Banks, Property and the Economy

Not only is it freezing outside and snowing, the economy is in a severe winter as well.

March 5th 09 Update: Interest rates reduced to 0.5% and Quantitative Easing measures to boost economy to be ‘tried’ by pumping £75 Bn into the economy!!

– Interest rates at historic lows of 1%.
– Banks still not increasing credit supply.
– Property bargains to be had and investors are buying.
– Is the economy in a recession and can you still make money?

Here is a quick (ish) run down on the Interest Rates, banks, property and the economy.
It started as an interest rate update and a few hours later it turned into so much more. If you don’t have time to read it all, skip to the section that is relevant to you.

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Interest Rates

Falling rates, going down, down and down…
Interest rates are now down to an historic low of just 1%

8 October 2008: 4.5%
6 November 2008: 3.0%
4 December 2008: 2.0%
8 January 2009: 1.5%
5 February 2009: 1.0%


Source: http://newsimg.bbc.co.uk/media/images/45448000/gif/_45448232_boe_466.gif

It’s not really good news for savers or the economy, as there is a huge reduction in the credit supply available for spending.
The pound won’t like another cut either as it is already weak against the other major currencies.

I won’t even go into inflation as the government is not entirely sure how it is measured either and how to fudge it to fit the figures that they want. (RPI, CPI and RPIX)
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Banks



Source: http://newsimg.bbc.co.uk/media/images/45447000/gif/_45447761_key_rates_5feb_gr466.gif

Libor is what banks charge when the lend to each other and it still looks like there are still trust issues between the banks.

Small businesses are being allowed to go out of business but large companies and banks are being bailed out by governments. The money is going into the banking system but not coming out the other end.
Giving the banks money that isn’t passed onto their customers leaves tax payers looking like idiots.

Bailing out companies and banks that should have been allowed to go bust is not a very smart and ethical move, the mistakes shouldn’t be covered up and the entire market allowed to correct to what is an acceptable level.
Putting bans on selling bank and other related stocks short is ludicrous. The whole point of an open market is to allow buyers and sellers to help it find it’s price.
This leaves the stocks overpriced (if you can’t sell short and only allowed to buy, it is artificial inflation of the value!)

Quantitative Easing and pumping more money supply into the economy surely can’t fix the problem can it, how much longer before it all goes bang!?
Check out this brilliant article on The End of Money. The idea isn’t as far fetched as it may first appear. The End Of Money by Chris Martenson

Whereas the banks have been bailed out for their criminal behaviour, they are now treating companies and individuals like criminals. Pot calling the kettle black!?

If you are having a tough time financially then stop waiting and go get good debt advice now.
Check out this article and the below links for more info:
http://bobby-gill.blogspot.com/2008/08/maxed-out-how-much-have-you-borrowed.html
www.thedebtsurvivor.com
www.ideservedebtfreedom.com
(Mention Bobby Gill’s Blog when you contact any recommended parties to make sure they look after you)

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Property

What do interest rate cuts mean to homeowners and investors?
If you can raise the deposit of 25% or negotiate a discounted deal with a seller, then rates are so low that it is a good time to take out some long term borrowing.

Already own property and on a variable rate? Great, if it is discounted rate you will be below 1% already saving you hundreds of pounds a month.
This is a good opportunity not to go out spending but either stockpiling some cash or paying off the capital on your mortgage, better still pay off other high interest debts like credit cards and loans. The extra money is a bonus and it is up to you to either invest (reduce debt) and save it – or splash out on doodads and toys. Make the smart decision now and you’ll be glad you did.

Currently cash is king and those with liquidity and able to structure smart deals will be stocking up on property.

James Caan is still buying. I was lucky enough to see him speak at a presentation in London, at the Wealth Intelligence Academy last weekend.
His views were the interest rates are likely to go down virtually to zero and that there are plenty of great deals out there. For example he recently purchased a £10m property, being offered at £7 for just £4.1m because that was all it was worth to him. Nearly 60% BMV (below market value) is a great deal and this is proof that such deals are just waiting to be done.

Richard Branson says fortunes are to be made in a downturn. Assets can now be bought cheaply and the recession will provide “massive” opportunities for entrepreneurs.
Source: http://news.bbc.co.uk/1/hi/business/davos/7860333.stm

Usually big deals are immediately bought up by large firms and pension funds. They are not buying anymore and more likely to be off-loading their property at the moment to stock up on cash. What a great time to buy.

The current climate is only a problem for flippers and property traders, not property investors.
Investors know property always has been about the medium to long term.

Finance is a little harder to raise but deals are still there to be had. With less competition, as average investors are scared by the news, could there be a better time to buy!?

As a contrarian, like Robert Kiyosaki, my view is that it’s now the best time to buy as people are desperate to sell and panicking.

It may be winter but Spring will be here soon. Look after you cash flow short to medium term and reap the rewards later.
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The Economy

Are YOU in a Recession or making money?

The UK economy (GDP) has shrunk for the second successive quarter meaning that the country is now technically in recession. I won’t even look at inflation as the government fudges that each time to suit and has various methods of measuring one thing (RPI, CPI, RPIX), roll a dice and pick a figure!

McDonalds are one of the biggest winners at the moment:
Source: http://timesbusiness.typepad.com/money_weblog/2008/10/the-10-biggest.html

People are still going to take holidays, so tourism locally will increase as people will not go abroad. With a better exchange rate it will also attract international travellers visiting the UK.

Food companies are still doing pretty well and other companies that provide basic necessities, like utilities. People want to reduce their bills and increase their income so companies like this will expand in this climate.

Drop me an email to find out more on how to save money on your utilities and earn an extra income too. Utility Warehouse can save you money on your bills and household shopping!
Take a quick look at this French & Saunders video, reminds me of the PC / Mac adverts lol…
www.video.lowermycosts.co.uk

There is still money to be made and it is only an economic slump if you aren’t prepared to look for the opportunities.
Bob Proctor
says that their may be a recession on but he is refusing to participate in it. What decision are you making?

Surround yourself with people moving forward, not those sat watching TV, drinking beer waiting for things to change for them. Take a look at these Mastermind groups being set-up around the UK and get yourself a peer group that supports you.
http://bobby-gill.blogspot.com/2009/01/think-and-grow-rich-mastermind-groups.html

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None of the views or news above is good or bad. It just depends which end of the shotgun you are looking at!

And on that happy note, make sure you’re on the right side 😉

Bobby

P.S. Remember it’s all just a game and you can win if you want to!