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I have to admit I enjoyed watching Donald Trump discipline the 20 year old reigning Miss USA, Tara Conner. Trump simply did what parents today cannot or will not do. Anyone who has had a teenager the past 10 years knows that society is out of control. Personally, I don't really care what other people do as long as it does not affect or danger my family. People are free to make any choices they wish, and must eventually live with the consequences of those choices.
By the way, this is not a lesson in morality; this is a lesson in behavioral finance.
One would assume that the behavior of Miss Conner is an isolated case. This would be a misguided assumption. Miss Conner's behavior is rampant among 17-25 year olds.
Unfortunately, the choices that other people make can affect your family. When a driver decides that they will not what to stop at red a light, this can affect your family. When a you send your child to a school (junior high or high school) where parents turn a blind eye to drug and alcohol use by teenagers, this can affect your family. The results of these choices can eventually end in the death of one of our family members.
Oddly, one of largest demographic groups that retailer’s love to market their products to is the 17-25 year old age group. Come on, you've seen it too if you’re paying attention. Have you walk into an Abercrombie & Fitch (ANF) lately? I can't figure out if they are selling sex, or clothing.
Here are a few examples from the Abercrombie & Fitch website;
Example #1: Why is this boy pulling off his shirt while looking at this girl? How can this girl resist this boy? What in the world does this have to do with clothing? It’s not about the clothing if it’s not the clothing you are looking at.
Example #2: What does this retailer want a consumer to buy, the coat, or the model?
Are you getting my drift? The reigning Miss USA, Tara Conner is a victim of society. Tara is a victim of the marketing campaigns to her demographic group by clothing retailers as well as television shows and movies. Selling sex to the most vulnerable hormonal group in the nation is a very profitable tactic, as well as a recipe for disaster.
My point in this common sense exercise is that the 17-25 demographic are not the only one's manipulated by retailers, television shows and movies. The financial lives of you and the investing public have been manipulated as well. Hopefully, you didn't fall for it.
Behavioral finance attempts to use theories from cognitive and social psychology to explain why investors departure from rational economic behavior.
Like the examples of the 17-25 demographic groups above, some people become victims of their environments. Behavioral finance studies why some are rational and are able to manage their finances successfully, while others carry high credit card balances and are deeply in debt.
While 17-25 year olds are marketed to for their high hormonal levels, the 35-55 age groups are marketed to as a lure of living the lifestyles of the rich. Now, don't get me wrong, some are rich and can afford to buy whatever they want. Others are not so fortunate, feel left out, and feel better when they spend like they're rich. Here in lies the problem.
Here are two examples of lures that have caused, and will cause financial ruin for many;
1) The NASDAQ & the technology bubble of 2000.
2) The Real Estate Bubble of 2005.
Hindsight is 20/20, but the NASDAQ debacle of 2000 should have served as a training ground for any investor. As you are probably aware, almost everyone you spoke to in 2000 was buying a tech stock(s). After seeing the NASDAQ bubble erupt, the Real Estate Bubble should have looked very obvious. The Real Estate Boom was even highlighted on the front cover of magazines like Fortune (the kiss of death).
The real kiss of death for the consumer is the belief that "the more I buy and have, the richer I feel". This of course this does not make you rich; it just makes you appear to be rich. There is a big difference.
I have asked my wife, " how can (name of person) afford to have (car, house, beach house)." Of course I found out later that the appearance of looking rich was an achievable task for these folks, while actually being rich was not.
Now that Miss Conner has been disciplined, it looks as if conditions are ripe for the disciplining of the consumer to commence. Psychologist E.L. Thorndike did a study that resulted in the development of the Law of Effect. Simply put the Law of Effect is:
Learning = behavior + consequences
Unfortunately, our own government encourages consumers to spend. It is all part of the Keynesian economic philosophy that believes "the saver is a threat to the economy in times of recession." So, does this mean that the government should go into debt and to encourage the consumer to do the same to produce benefits for the economy? This sounds pretty stupid to me.
We, the consumer are constantly being coaxed into spending more money. This is why approximately 30 minutes of an hour long TV show are advertisements. You cannot get rich by handing your money over to somebody else. The person on the receiving end is the one getting rich.
Our current debt, deficit, and plunging dollar are a result of the over spending of tax revenues. The economic booms created by the expansion of credit almost always results in a recession. The net result of a recession is someone always gets hurt.
To further prove my point, this week we saw where Al Hubbard, the assistant secretary to the president for economic policy told China's deputy finance minister, ““the Chinese need to move to a lower savings rate. It would both raise the standard of living and increase the quality of imports into China."
Consumers will learn is that the Law of Effect applies to finance as well;
Learning (Pain and Bankruptcy) = behavior (Overspending) + consequences (debt)
Miss USA, Tara Conner learned an embarrassing, but valuable lesson, and so will an over- extended consumer.
