Once a year most of the worlds influential businessmen, politicians, investors and economists meet in Davos, Switzerland to discuss the current state of world economy. This yearly gathering is known as the World Economic Forum.

To give you an idea of how high-level Davos is, you should know that in addition to presidents and prime ministers, it is visited by all of the worlds major banking institutions – starting with the banks bailed out last year and finishing with the leaders of the central banks of USA, Europe and China.
Among this years attendees were more than 70 world leaders and over a hundred of the worlds most influential companies (the likes of ExxonMobil and Coca-Cola).

Main topic in the World Economic Forum

You don’t have to be a genius to figure out what they talked about this year – the economic crisis.

It was revealed by private equity giant Blackstone that the current economic downturn has destroyed over 40% of the world’s wealth during the last 5 quarters and that things are not getting better – they are only getting worse! The world will lose even more of its wealth!

Here are some of the things said during this years summit:

“Worrying about inflation now is like worrying about the measles when you might get the plague.”

Kenneth Rogoff  – Harvard professor and former chief economist of the International Monetary Fund

“The outlook is pretty grim. Things are not good and business surveys are coming out showing they’re getting even worse.”

Sir Howard Davies – London School of Economics

“Confidence grows as slowly as a coconut tree, and falls as fast as a coconut.”

Indian economist, Montek Singh Ahluwalia

“The free enterprise system has not failed; the financial system has failed.”

Tony Blair -Former British Prime Minister

“We cannot underestimate the challenges and the dangers that we face in 2009. We are in a global recession the likes of which we have never seen. But there is no quick fix.“

Stephen S. Roach, Chairman of Morgan Stanley Asia

“The crisis is getting worse. It’s going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time.”

Rupert Murdoch – Chairman of News Corp

And from a more positive side:

“In times of recession there are massive opportunities and fortunes to be made, so for new up and coming entrepreneurs, this is the time to go and start a business.”

Richard Branson – Founder of The Virgin Group

I agree that things are indeed bad and they will probably get worse before getting better but among all these quotes I especially love the last one from Richard Branson.

The positivity of this serial entrepreneur and billionaire is what keeps the world running – a true businessman always looks to the future and thinks how he can use the mistakes done in the past to build a better business for tomorrow! As long as there are people like Richard Branson – we will be just fine!

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I am a big fan of behavioral economics which tries to explain why people act the way they do.

Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.

The Ultimatum Game

You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him – you will both get to keep your share of the money. If the other person declines – neither of you get the money.

This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.

A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him – he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B – the second person should accept. Rationally looking it is better to get 1 dollar than nothing.

What really happens?

Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) – you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.

Perceived value of money

The following is a thought experiment. Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same.

Which option will most people choose? A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option – being richer than other people. Some scientist think this experiment demonstrates the irrationality of man. I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends – it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.

The Line Experiment

The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars. A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person. Which would you rather be? Surprisingly most people would choose the first option – getting the $100. Money wise this is a bad decision – you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000

What do these experiments show

These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.

Find the places and areas of life where people make these decisions, play your cards right and you will get to keep their money.

If you liked this post there is a good chance that you will find something of interest on my insights page where I post short reviews of longer articles about the rules of making money:

Insights to money and how getting rich really works

Illustrated Guide to Reading People’s Faces

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