The Flaw in Economics

As a trained economist, I always think that we can isolate one variable and analyze how it changes the rest of the system. The Latin phrase ceteris paribus, which translates to “all else being equal” in English, is the basis for this assumption. To add to this neatly defined structure, I also do a lot of accounting work where everything balances and reconciles. However, as I try to apply my perfectionism and everything-should-equal mentality to real life businesses, it doesn’t always work like that. That is because of one major flaw, people are involved, and people don’t behave rationally.

Morgan Housel’s book The Psychology of Money does an excellent job outlining this and the intricacies of how people handle money differently. He mentions that money is more of a soft science than a hard skill, where mindset and behavior are more important than knowledge or formulas. Here are a few key points:

• No one is crazy: people make financial decisions based on their personal history and emotions. Each generation shapes the next generation through their actions and discussions.
• Reasonable not rational: make reasonable decisions for yourself, not rational based on theory. You have different priorities than everyone else, and that’s okay.
• Keeping up with the Joneses: other people are playing a different game than you. Let them play their game while you play yours.
• Never enough: if you aren’t satisfied with what you have, you will never be happy.
• True wealth is the ability to control your time and make choices freely.

There are many other great points and stories in the book too. But those should give some insight into the “feeling” about money and financial freedom, compared to the publicly accepted facts or coffee shop gossip. Our decisions will be based on our personal biases, so when we recognize that, we can make the best decision for ourselves.

When I sit down with Ranching for Profit alumni to run the numbers, we always start with the status quo. Once we know the current situation, I can provide some insight into some strengths or weaknesses, but it is up to them to choose their path forward. It is hard for me to choose their path forward, because I don’t know their history. Their history is what got them to the current, and the history will influence their future decisions. One of my mentors in Kansas told me “once you learn the farm and family history, you will understand their decisions.” You might not agree with it, but you can understand it. That comment has a deeper meaning as I work with more and more families and their businesses.

I encourage you to pick up the The Psychology of Money book and read it yourself. Books are always a good use of your time and money. When you are ready to take your financial and mindset skills further, get enrolled in one of our upcoming Ranching for Profit Schools, as we have plenty of other resources to share with you!