Economic Decisions and Overconfidence

As I was outlining my response for this blog post, I realized I make little to no economic decisions. I do not spend money because I do not have to and spending money gives me major anxiety. I save nearly every penny I earn and do not have to pay for food or tuition because of ROTC. I am very fortunate in that manner. I even had enough money to pay off my loan from freshman year. That has been the most significant economic decision I have made recently, but as I looked at the works of Nate Silver and Daniel Kahneman, I did not see myself falling under any of the biases. Maybe I am just turning a blind eye to my poor economic decisions, but I am not seeing it.

Looking at the works of Nate Silver and Daniel Kahneman, significant biases exist when making economic decisions. Silver emphasized the over confidence bias. This bias exist when people are more confident about a situation than the parameters of the situation would permit.  Silver gave the example of economic forecasters who only predicted 2 out of the last 60 recessions, yet continue to believe their predictions on the economy are correct. Considering that they were only correct 3.3% of the time, they should not be confident about their economic forecasts, but they are.  That is overconfidence.

Kahneman delved into a similar bias with the optimistic bias. The optimistic bias occurs when people take on significant risk even when they have evidence to prove that they will likely fail. Kahneman gave the example of restaurants. Restaurants open all over the country every single day, but 60% of these restaurants are out of business in three years. Looking at the data, most people would think “wow statistically, I will fail,” but people that open these restaurants do not believe that data pertains to them. Many of them believe they have a 70% chance of being successful. That is the exact opposite of what the data tells them. They are victims of the optimistic bias.

When looking at my economic decisions so far in my life, I do not believe I have fallen under any of these biases. Statistically, I will fall under one of these biases, but at the moment I do not make enough economic decisions to do so. In regards to paying off my loan, I decided to pay off my loan because it was rapidly accruing interest and I felt like it would be best to pay it off now with $200+ in interest after 6 months rather than wait as the amount of interest continued to increase. Ultimately, the little amount of economic decisions I have made has limited my biases, which to me is a good thing.

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