Desperately Seeking Amanda

Carparker: "To win big you gotta do what?"
Other carparkers: "Lose big."
Carparker: "What are we doing now?"
Other carparkers: "We're losing big."
--Some Kind of Wonderful

Another round of stimulus is being poured into the system as President Obama underwrote a nearly $800 billion package yesterday. A bewildering number of perspectives have been offered among talking heads as to whether this program will 'work.'

Stay focused on the basic situation. We spent more than we earned for a long time. Absent savings, we borrowed in order to maintain high lifestyle.

Now, bills are now coming due and we can't pay them.

There are two primary choices:

Door #1. Scale back present lifestyle. Pay down debt. Save.

Door #2. Borrow even more in attempt to maintain present lifestyle.

Door #2 is where we are. I've heard many bureaucrats, including the President, suggest that we 'have' to do #2 because the consequences of doing #1 are even greater. Yet, few people would look at the two doors above and conclude that #1 is risker than #2.

We're engaging in classic prospect theory (Kahneman & Tversky 1979) behavior. Essentially, we're 'behind' and we're taking more risk--in this case anteing up our kids' future on a leveraged bet that we can 'save' current living standards.

And what if this leveraged bet loses? This is one question you won't hear bureaucrats answer.

References

Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.
Kahneman, D. & Tversky, A. 1979. An analysis of decision under risk. Econometrica, 47: 263-292.