Driven: The Psychological Economy vs. Physical Economy
We are driven by what we Believe more than what we Know. Our beliefs are powerful and our emotional outlook drives many of our behaviors.
Relating this to economics our viewpoints on wealth and well-being are more related to our relative feelings and beliefs than our realities. One particularly important concept is our economic velocity – that is the relative sense of speed of our economic improvement over our reality of where we are.
Relating this to economics our viewpoints on wealth and well-being are more related to our relative feelings and beliefs than our realities.
Americans have been “feeling” more concerned and anxious about economic improvements and their financial future compared to Chinese consumers lately. While the absolute wealth of the majority of Americans outstrips their Chinese counterparts by several times, their relative growth rates are opposite. Meaning the Chinese feel richer because their growth in wealth is accelerating at greater rates than Americans – so while we have more real wealth, we feel poorer because our economic growth is slower than smaller economies.
While this may not make logical sense it is how we govern our lives. By what we believe and how we feel.
Moving to the overall USA economy, and the statistics that pummel us on a regular basis I remind my customers and friends there are two economies (Psychological Economy and Physical Economy) the one that is based on our comparative feelings of where we are.
…improvement is delayed and we react based on old information. This is why unemployment is a lagging indicator of where the economy is heading rather than a leading one.
This manifests in frequently ill-timed decisions as to when to invest or divest from investments or asset classes. The physical economy changes in advance of our psychological one. Meaning the improvement is delayed and we react based on old information. This is why unemployment is a lagging indicator of where the economy is heading rather than a leading one. It is why individual investors miss major marketing swings until the crash has occurred or the rise is already underway. Our brains and nervous systems are ill prepared to perfectly sync with our physical realities.
So – back to our basis above. Feeling good leads to spending our savings because the psychological feelings of improvement don’t align with a likely darkening of our economic cycle. This lag inspired behaviors to exasperate an overcharged economy and the boom/bust cycle exacerbates itself as people over-extend at the wrong time and under extending when they should be spending.
This Ying/Yang of how we feel and where we are will continue to impact us until our overall financial literacy improves and we learn to recognize these differences.
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