Friday, November 28, 2008

Delayed Gratification and the Economy

I am trying to figure out how to deal with the current turbulent times. Today is a key day in US retail - Black Friday. Hopefully we will see strong sales.

Overall, I am a business optimist. We recover from all down cycles eventually. I actually find this an inspirational time to be in business. I wrote about this at the Create Business Growth Blog.

Books can have opposite views on what is going to happen with the economy. I think that sums up where everyone stands and that uncertainty adds to the crisis itself.

One book, "The Sub-prime Solution" by Robert J. Shiller talks about what got us into the problem.

It boils down to a failure by people to delay gratification which I have blogged about. We have great respect for people who delay their gratification. There has even been the famous marshmallow study. Children were given a marshmallow and told if they did not eat it when they were in the room alone that they would be given another marshmallow so they would have two. The study showed that those who did not eat the first marshmallow were more successful in life than those who ate the one in front of them rather than waiting for second one.

Unfortunately I see this in my business life where people who can't delay gratification tend not to be very successful. Instant gratification is the same challenge we sometimes have with people who get paid on Thursdays (they go out and get drunk) and miss work on Fridays.

The thesis of the book was the current meltdown in the financial market was equivalent to the repatriation crisis in Germany after the Treaty of Versailles at the end of WWI. The repayments that Germany was asked to provide were so onerous that ultimately WWII happened.

The author makes a parallel between that and the real-estate bubble particularly in the U.S. In the United States everyone was promised the right to own homes. Now that trust has been broken.

If you are feeling too cheerful, this is a great book to read.

The other book that had a more depressing name, "The Return of Depression Economics" by Paul Krugman examined what happened in the 1930s and made comparisons to today. The gist of it is that the crisis now will not be a depression because the current economy and countries are much stronger.

The investor panic that has hit is just that - it is panic and over reaction and in the medium term everything will return to "normal".

Read this one if the current economy has you depressed.

The titles of the books are opposite to their message.


At 12:59 PM, Anonymous Anonymous said...

Hello Jim,

Towards the end of your piece you write:
" the medium term everything will return to "normal".

Now, that's what we sould really be concered about! Even though you put the word "normal" in quotation marks (perhaps indicating that you, too, have qualms about it), I'm really worried that that's exactly what will happen. And that's a tragedy.

It means that we will have learnt nothing, have not changed our behaviors, have not changed our attitudes, our values, our ways of life, our culture...really nothing. Individual and corporate "greed" will continue to rule.

Returning to "normal" is what we should avoid at all cost.

Alex Revai


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