Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen My Amazon Authors' page Twitter:@ jacolineloewen Linkedin: Jacoline Loewen Profile

October 5, 2011

So Why Are We In A Recession, Business Owners?

A behavioral psychologist won the Nobel Prize in Economics. This is a first person not trained as an economist to scoop the award. Daniel Kahneman invented a new field in economics examining how rational the markets truly can be with human creatures and our emotions messing around. Kahneman explores the consumers' irrational decision making and, even more fascinating, studies Governments and discusses how their political agendas will interfere with rational, thought through decisions. 
When I did my MBA, the case studies and the theory are seductive because they make you believe you have power and control. Time and outside forces then put everything you learned on the MBA on hyper speed. It is never simple in the real world.
Kahneman does tackle why business owners are sitting on the sidelines:
Why are we in a recession? Taxes are too high, say conservatives and free-marketers; thus, entrepreneurs have no incentive to invest or create new jobs. Demand is too low, say liberals: if wages were higher—whether paid by private employers or subsidized by government—consumers would buy more, and entrepreneurs would then produce more and recruit new employees.
Well, as a business owner myself, I hire people and I do not want to fire them, ever. Over the past three years, my business bank balance has been swinging between having to close down and then being at over-capacity. Yes, it is that psycho right now and my bank manager is no longer caught up in the spirit of the 1990s. Every two weeks, I am responsible for my employees' pay checks, their families and homes. I had better have a full pipeline of great private equity projects for the next year. 
Why would I take on the awesome responsibility to ensure long term exciting employment for new people with the chaos going on with the governments in Europe and the US? (Thank goodness for our baking system and for our bland government.) When we talk about strategy planning, at first we think big which has driven our success in the past, but there are too many "what if's" to make growth a top objective. We are going down the rapids right now - not the time for anything fancy, just keep paddling through the rollers.
The uncertainty of government policy in the US is also having a huge impact on many company's business plans, not just my business strategy. The EPA changes has just removed $20M from one of my client's 1914 projections. The EPA change might happen, or not. Meanwhile, we plan for the worst. 
This is an interesting article because we are witnessing governments playing huge stakes with economic theory. If you need a brush up on the big themes, here you go:
 Kahneman does not contradict Smith’s self-love or Keynes’s animal spirits, but he elevates them from intuitions into something like hard scientific evidence. As his important new book Thinking, Fast and Slowdemonstrates, economic behavior can be better understood through scientific and psychological experiments. Most of the book describes the psychological experiments that Kahneman and his colleagues conducted to understand how people judge and decide. Kahneman concludes that our minds are divided into two very different operational systems: System One is fast, intuitive, and emotional, while System Two is slower, more deliberative, and more logical. The former can result in erratic decision-making and even in compulsive behavior, like buying what we don’t need; the latter leads to slow, deliberate choices. In daily life, we constantly and intuitively shift from one system to the other, depending on circumstances; but external incentives—well understood by marketing experts—can activate one system against the other.
Kahneman’s theory is in tension with another influential economic and psychological doctrine: rational-action theory, or RAT, whose leading proponent is University of Chicago economist Gary Becker. According to RAT proponents, people behave “as if” they were rational, whether in their personal lives or as economic actors. On this view, markets are generally rational and efficient, while government interference means less rationality, less well-being, and less happiness in society. Yet if RAT is true, behaviorists ask, how can we explain manias, bubble speculation, and self-defeating choices—none of which, moreover, depends on government? Becker and other RAT theorists accept that the market may not be fully rational, but they don’t believe that the government is any more so. 
Read about Jacoline Loewen's opinion on quotas for females on Boards.

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