In the past few weeks, I had been engrossed with some new areas of research and reading. It kept me away from this blog, I liked the knock knock comment it made me smile. I have always been fascinated every time I learn something new. The child in us always gets excited when we learn something new and in order to keep that child alive, I enjoy exploring new things.
I have always been fascinated with the area of behavioral economics and finance. Unlike traditional finance and economics, it looks at the psychological aspects and doesn’t consider human beings to simply being numbers. Something I have always noted and experienced personally.
One interesting book I finished reading (listening rather since it was an audio book) was Predictably Irrational by Dan Ariely. There are several interesting experiments that show us how not only all of us are irrational, but very predictably irrational.
One very interesting concept was how we tend to be irrational about finances and money. Let us say you were to buy a kilo of tomatoes and the shopkeeper told you will have to pay Rs. 30 for a kilo. Now you know that if you walk for 10 minutes you can get the same tomatoes for Rs. 15 at another store, let us say in bulk at Food Bazaar, would you walk for 10 minutes?
Most people questioned said they would walk for 10 minutes to save Rs. 15. Probably you would too.
Now let us say in the next case you had gone to buy a nice luxurious Raymond full suit. It was available for Rs. 10,000. You came to know that if you walk for an additional 10 minutes the same suit was available in another store for Rs. 9985. Basically it was available Rs. 15 cheaper. Would you walk that distance to get the discount?
Most people questioned in this instance refused to walk an additional 10 minutes to save Rs. 15 on their Rs. 10,000 suit.
But if you think rationally, both cases have a similar impact to your net worth. If you walk for an additional 10 minutes in both cases you will save Rs. 15. Yet people anchor their decision on the larger price they are paying. This is predictably irrational and makes no sense if you observe from an independent view.
The same things happen a lot with a lot of people. When people are buying a car for Rs. 10 lakhs they don’t mind spending a lakh extra on leather seats. But at home, they might think twice before spending that much on their sofas. Based on such experiments and observations, we can become better investors and learn a lot more about how humans behave.
Human beings are truly exciting because of such things. Irrationalities – specially the predictable ones can be used to capitalize on opportunities and mistakes which might be made by the masses.
Every time we learn something new it makes us realize how little we know, and how vast this universe is. Yet, sometimes so many of us get caught up in things that are extremely petty and irrelevant. Smile at what might seem to trouble you today, it really won’t matter that much soon.
Go out there and explore the universes! As a fellow traveler I would suggest you pay a visit to authors like Dan in this journey.
Keep smiling, learning and having fun!