Sunday, June 8, 2008

Basic Economics

I came to be interested in economics through my interest in personal finance, over time this has in turn improved my view of rules for 'how to manage your money' in ways I find that many people miss.
In particular I enjoy the approach advocated by the "Austrian" school of economics, which focuses on logic rather than statistics and therefore leads to much more individually useful insights.
A simple example is the definition of trade: in many schools of thoughts if I were to trade my apple for a dollar the economist would say the apple was worth a dollar; but this isn't necessarily the case. I may have been willing to part with more - say $1.10, and the seller may have been willing to part with the apple for less - say $0.90. What is important however is that when we make the trade we both believe it is for our betterment. I believe the apple will make me better off than the dollar, whereas the apple merchant believes the opposite.
Many people have trouble with this concept and think something should have a concrete value. A simple real world example, however, can demonstrate how value is an individualized trait and not one inherit to the object in question (the apple). Assume there is an island with two people and two trees - one apple tree owned by Al and one orange tree owned by Betty. If they do not trade Al's diet is entirely apples, and Betty's diet is entirely oranges. Both in terms of nutrition and the fact most people desire varied meals we can see that Betty would benefit from having apples to eat, and Al would benefit from having oranges. If the two were to trade these items both would enjoy life more than they did before the trade.

How this matters for personal finance:
Too often the world of finance is seen as competitive. If I win then someone had to have lost. The problem is this leads to a "logic inversion" - people actually start to act like if they make someone else lose they must have won! It sounds odd on the face of it but I see the behavior all the time. There are others who have caught the concept that helping others can help yourself and turned it into a marketing angle, which unfortunately gives the idea an air of some utopian scheme (MLMs and similar organizations in particular are guilty of this)

A good example of the application of this in another concept is real estate. There are investors who become "slum lords", thinking that neglecting maintenance or other expenditures on their property will improve their profits. Over time, however, what happens is that the best renters move on and, therefore, over time those who took care of the property on their own, paid rent on time, and otherwise improved the neighborhood disappear. The 'slum lord' has higher collections costs, and the major repairs come sooner than they otherwise would have. If they sell the property, it is worth less.

The bottom line: Helping others and helping yourself are often one and the same, and improve your reputation as well as your standing at the same time.


Welcome to Stolid Finance!

I decided to start this site since I have been enjoying several other personal finance blogs but often find that I have a lot to say and don't want to crowd comment fields with a lot of my personal thoughts.
You can call me Stolid; it's a name I picked for referring to my finance back when I originally joined the website NetworthIQ (view my profile here). Stolid means impassive or not being easily aroused or excited; and this is a perspective I feel has been one of the most vital elements of my financial journey. So many times I hear of people being "afraid" when the market is down or "excited" when it goes up, and it almost always leads to silly decisions. I love my emotions but I don't let them dictate what I do, especially with regards to money.
There's a lot I'd like to talk about; sharing how I got where I am, which financial personalities I like and dislike, common misconceptions or patterns in finance that I think get people of all stripes into trouble. I've also got a lot of questions that I'm hoping to build up a good readership to ask on these topics.

I hope you all stick around and enjoy!