I have always considered myself, ever since I replaced my innate conservatism with more well reasoned libertarian views, a supporter of economic rationalism.
I still do, for the most part, as it is both the most morally appropriate and effective model for economic thinking.
But, as I get older, I see it simply as a theoretical model. I have seen enough of human behaviour in my adult life to know that we do not always behave rationally, or in our best interests. We tend more often than not to be influenced by our emotions.
Take last night on Wall Street for example. There was an 11% surge on the Dow Jones, the largest one day gain since 1933. And this happened, despite a 30% jump in Corona Virus cases in 24 hours, and the postponement of the Tokyo Olympics, merely on the PROMISE of a large economic stimulus being passed by the US Congress.
Does that strike you as rational behaviour? Or is it a sign of the psychology of crowds, or herd behaviour, or mass hysteria? Proof, perhaps, that the share market is driven by the twin emotions of fear and greed (ie fear of missing out)?
I am not an expert in Austrian Economics, but, having read Ludwig Von Mises’ magnum opus Human Action once, I believe that he, of all free market economists, got it closest to right. That is, that humans and their behaviour and motives are too complex to be distilled down easily into a theory which can predict behaviour on the basis of a simplistic model assuming 100% rational self-interest.
Let’s put this in a way that most people can understand (and please remember that I much prefer Star Wars to Star Trek). Consider Mr Spock and Captain Kirk. Spock, the half-Vulcan, tries to remain logical at all times, and perhaps best symbolises rationalism. To us mere humans, Spock seems awfully repressed. Then you have Kirk, who is emotional, intuitive, and empathetic. He is smart, but he trusts his hunches, often going forward without a full set of facts. And he is usually right (well, this is Science Fiction after all!). Kirk, the less than logical and rational human, best represents us and how we behave.
That is, we hope to get it right, but we go on our hunches and our feelings, because we want to feel right at that particular moment.
Putting it in personal terms right now, whilst I have the proceeds from selling my share portfolio parked in the bank earning very little interest and at risk of being eroded by high digit inflation from the current round of money printing, I am finding it hard to control the urge to get back into the share market whilst it is all still so cheap.
What causes me to over rule my FOMO is that I am a student of history. I had just enough skin in the game during the GFC to have learned from it, and I know from having read enough about the Great Depression to know that the bear market on Wall Street lasted until 1939. A big bounce in 1933 was not going to make any share investors any richer. It just was a sign that things were going to stay really bad, for a really long time.