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3 September 2000 Sunday cloudy, no rain, getting colder
PENNY WISE, POUND FOOLISH
It's reassuring to read that behavioral economists are finally accepting that people are not rational as economists have assumed. All this time, everything I studied in economics was based upon individual's value-maximising behaviour.
T he truth is we are easily penny-pinching and procrastinators when it comes to what to do with loads of money. We are penny-wise but pound-foolish, or rather dollar foolish. Is it because it's easier to count pennies and much harder to imagine huge sums of money?
T he Business Week article I read today says that this sort of behaviour is due to the high transaction costs involved in deciding what to do about huge sums of money. I think people procrastinate when it comes to huge uncertainties that the mind can't handle. It is difficult to commit when there is great uncertainty.
I am precisely in that position now. After months of penny-pinching and saving here and there, I finally got some money in the bank. The article says that people would leave huge amounts in the bank collecting pitifully low rates of interest rather than putting in investments that would yield better returns.
The way I see it, however, is that it is much easier to leave it in the bank than to embark on a complexity trip. Risk, return, stock-picking, mutual fund ranking, etc, are all way too complicated for the simple mind to handle.