Economists remind us that underlying all decisions in matters regarding money, human rationality is the prime motivator. People respond to impulses designed to reflect their own selfish economic best interest. Those impulses are vetted in the human mind where human reason sorts through available information to conclude and resolve conflicts with the ultimate goal of a carefully reasoned economic decision.
Earlier this month, the Nobel Prize for Economics was given to Dr. Richard Thaler, who upended the notion of rational man in the economic field. The award recognizes his contribution in the field of behavioral economics establishing that people are predictably irrational in their economic decision making. He showed that people depart from rationally predictable ways that can be modeled and anticipated. He reminded government policy makers that people are often unlikely to join voluntary retirement plans but if they are automatically enrolled and required to opt out, enrollment is greatly increased.
Irrational economic decision making is no surprise to those of us in the beef business. Examples abound in our routine daily observations both of our own behavior and that of others. Why would a cattle operator order another load of high-risk calves from the South when the death loss on the last load was 25 percent? Why would a feedlot operator purchase a new set of feeder cattle with a negative $75/head loss forecast from all the latest data? Why would a hedge fund manager go long October feeder cattle—a month recognized as the heaviest marketing month of the year?
Professor Thaler helped us understand ourselves by explaining irrational decisions regarding money that confront us every day. He reminds us of the endowment effect created when we come in possession of a prized possession. The breeder who is offered a 25 percent profit the day after buying a prize bull and refuses to sell. He also points out a sense of fairness that is built into our psyche. The rancher with a stockpile of fenceposts is approached by a neighbor who has recently suffered a loss of land to a wildfire. Rather than jump the price, the rancher will offer the fencepost at fair value.
We all know people endowed with “market sense” not born of analytic analysis or data driven, but ingrained in their person much the same as their genetics. They demonstrate over and over the ability to engage and survive nonsensical markets, yet at the same time, this data freak who assembles and analyzes every data point available in the public realm can barely get it right 10 percent of the time. Beef producers often live in a “group think” world. All industry participants receive the same information and draw the same conclusions leading often to the same erroneous results. — AgCenter
