We are not rational when we make financial decisions

We cannot leave our financial decisions to our intuition or our hunches, because the human being far from being a rational actor, as evidenced by the fact that the financial crises produced by investment expansions, the credit boom and asset bubbles are a constant in all capitalist countries.

In fact, between 1945 and 2007, of the 76 most important economies in the world, only Portugal, Austria, Holland and Belgium have avoided a banking crisis. In 2008 no country was released.

As we do not plan our lives by coldly calculating our probable future income, adjusting our savings accordingly, it is important encourage financial education and, above all, to reach scientific truths in relation to the economy.

That way we can also better address our debts, for example, by consuming less during the years in which we earn more so that we can consume more when we have less or retire.

Economic science

Another of the pitfalls of financial decisions is that the economy is not a science in its entirety and is based on unproven (or unprovable) assumptions, in addition to the fact that human reason, even that of experts, has its limits and needs be assisted and monitored continuously.

In the history of behavioral economics, reference should also be made to the limited rationality theory of the Nobel Prize Herbert Simon, who postulated that the people, when we make economic decisions we are not optimizing, as the neoclassical economic theory proposes, instead we are satisfying.

After the financial disaster generated in the US real estate market, for example, the University of Chicago (the cathedral of efficient markets), already includes staff psychologists who study what happens when rationality fails. Here you have more information about the use of behavioral sciences in economics because we are not rational agents:

Eduardo Porterin his book Everything has a price, abounds in it:

The fact of including all these dimensions of humanity is likely to turn the economy into a more confusing and less mathematically elegant discipline than the one we have used over the past half century, which considered a simple process (the permanent impulse to maximize our well-being objective) could explain all the behavior. You will have to consider other considerations, and understand how they interact with the satisfaction of our desires. It is likely to be more experimental, but, in return, the new science will provide us with a more global understanding of the world. And also, and that is important, it will allow us to deal with the many ways in which the decisions we make based on the prices presented to us can lead us in directions that, individually or collectively, we should avoid.

Video: Why We Make Irrational Financial Decisions. Simple Steps for a Retirement Portfolio Course (February 2020).