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PBS is poised to run a NOVA special tonight at 8PM ET/PT titled Mind Over Money. The show seeks to explore the differences between conventional economics and behavioral economics. They try to understand how emotions play a role in economics and show various experiments that were conducted to “prove” emotions influence your decisions. This emotional influence contrasts to conventional economics which says that people will always perform rationally when dealing with money. The theory is that you will work out exactly what something is worth to you and don’t allow your emotions to influence your decision.

Now I am not an actual economist so I can’t refute any of these theories on economics, it makes sense to me though that people will be influenced by their emotions. The show uses bubbles as an example of people acting irrationally. We convince ourselves that the value of something is considerably higher than it really is and start jumping on the bandwagon, right up until it pops like an overinflated balloon.

One of the “experiments” they used as an example of people acting irrationally was the auctioning of a $20 bill to a group of students. One student ended up paying$28 for a $20 bill. This is supposedly an irrational measure. What they don’t explain well enough is that the second place bidder also has to pay their bid and gets nothing. The bidding goes up above $20 in an effort to win and cut your losses, the person who lost the bidding war still had to pay $27 while the winner was only out $8. Of course had they stopped at the $20 mark the second place bidder would have been out $19 which is more than the $8 extra he paid for the $20. They artificially forced the price above $20 by instituting a penalty for the second place bidder. To me it would have been rational to continue to bid if I was sitting in second place.

Experiments aside I think you would be hard pressed to say people are always going to act rationally when it comes to money. The rational method of reducing debt would be to pay off your highest interest debt first to cut down the amount of money your debt is costing you. Dave Ramsey has made his career by encouraging you to act emotionally not rationally when it comes to debt reduction. This process makes sense and it works. You get the little wins up front which encourage you to continue to reduce debt by building on your snowball. This isn’t rational but it makes sense. Looking back at the housing boom can we think that the epic rise in house prices was the result of rational thinking or irrational actions.

NOVA quotes Robert Schiller, author of Irrational Exuberance as an example of someone who believed the markets were overvalued and didn’t support the prices being seen at the time. Other economists were shown discounting his claims. Shiller’s theory was that while the booming markets were initially based on solid reasoning it converted to emotional excitement and envy which further fed the building bubble until it burst. Emotions are a big part of how we handle money, whether or not that proves conventional economics is wrong is up to you.

If you are interested in learning more check out the NOVA special tonight on PBS at 8pm ET/PT and/or visit their site at http://www.pbs.org/nova/money for more information.

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tvtrash

This is a guest post from Jason R. Fisher who runs improvethequality.com where he writes about simpler living, personal finance and making life better. If you like this article be sure to subscribe to his feed, you can also catch him on Twitter every now and then.

A while ago I wrote about how I ditched cable to watch my “TV” online. It saves us $50 a month but that isn’t all it does.

When we are constantly bombarded with advertising messages, the sole goal of which it to create an artificial need in our life that can only be filled with the advertised product it, it is difficult to maintain the mentality needed to save and pay off debt. There are two major ways I notices this happening when I was able to step back and look at it.

Changing the Norm

I realized how well off most of the families on TV are, just think some sit-coms and how many families had two staircases in their house and how large the kids rooms were. With a few acceptations that made the effort to show a lower class of American like Roseanne or Married with Children, the people we watch on TV are very well off.

Even if you don’t realize that it is happening you are constantly being shown that this is the norm. All of us desire to be normal and hence live above our means, and for that matter the means of most Americans. This death circle is what created many of the economic problems we now face.

Commercials

The more obvious method of influencing our consumerism is the commercials we pay to have pumped into our homes. Having worked with the marketing team in a large retailer I have learned some things about marketing methods used today that make me very glad I am not allowing those influences into my home. Just like subliminal messages of old modern marketers are using colors, sounds and even scents to encourage you to shop and spend. There approach is one of pragmatism as opposed to morality; if it works it is good.

To over come this I sometimes follow advice my Dad gave about shopping, “Just go in and buy the first thing you see that you like and don’t look at anything else, that way you won’t be disappointed.” In a very real sense that is true because in our world of almost infinite choices we are almost guaranteed some sort of disappointment with our current situation.

Removing those influences from my life makes it must easier to focus on the things that are important to my family. I am not constantly reminded about the new Palm Pre or the new iPhone, so I am not constantly thinking about buying them.

Now this does have its drawbacks because I never know what movies are coming out when my wife and I get time to go out for a date. A movie has to be something special to make it onto my radar. Just last week we decided to go to a move and when we looked at the listings we had no idea what we were looking at. Of course we could just as easily decide to go out for coffee, save the money and actually talk instead of sitting back and allowing ourselves to be entertained without any real interaction.

Fortunately my wife and I have been at the battle against debt long enough to be able to see the finish line, a fact which makes it much easier to resist foolish temptation.

In order to live debt free there is a certain amount of anti-consumerism that I have to have. Maybe some don’t but I know my weaknesses and how to avoid them. Just like recovering alcoholics don’t hang out in bars, recovering debtaholics shouldn’t hang out in malls or in front of advertising. IMAO.

Photo: (AprilLynn)

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