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The concept of GREED and FEAR can be applied to other finanical transactions as well. As we shall see, FEAR and GREED cause many people to forego even the smallest risks (FEAR) in exchange for a false sense of security (GREED).
The basic premise is this: Most folks let EMOTIONS (GREED and FEAR) dictate their purchases, investments, and other financial matters and usually this results in disasterous consequences. Smart investors use logic, calculation, and cold hard facts to make decisions, and usually come out ahead. And some of this logic is understanding that others are making their decisions based on emotions. Breaking free of economic dependency starts when you take emotions out of your finanical equations.
1. Car Transactions: GREED and FEAR at its worst.
Buying a car brings out the worst aspects of FEAR and GREED in people. Buying a car is usually based on GREED, period. People think about how cool they will look driving their new wheels around. Oh sure, no one will admit to this, but everyone does it, and car salesmen pick up on it. Cars are sold on emotions, primarily, and if the salesman can appeal to your emotional GREED, they can sell you anything.
GREED also manifests itself in this idea that somehow you can get a super-bargain on a car. It seems everyone is convinced they got a "great deal" or can put one over on a car salesman. It rarely happens, if ever. But no one wants to admit they are a poor negotiator, or that the deck is not stacked in their favor. Getting out the "bargain" mindset is important if you want to strike a reasonable deal.
Car salesmen even try to use FEAR to consumate transactions. "You know, they didn't make many in this color, and another fellow was looking at it today," I've heard them say. The reality is, cars come off an assembly line every few minutes - there is little or nothing to fear about "the one that got away". Similarly pressure to "act now" to avoid losing a good deal, rebate, or special sale pricing is another FEAR tactic to force people to buy. There is no logical reason that a car price should increase substantially after some arbitrary cutoff date.
FEAR manifests itself in the form of reliance on extended warranties, buying from dealers, or buying new cars. For example, a friend of mine recently went to buy a car. As I always preach, I advised them to find a late model used car from an individual who babied it. They resisted this suggestion very forcefully. They argued that buying a car from a used car dealer was a "safer" transaction, as the car dealer would "stand behind the sale". Of course, the car was still under factory warranty, and the only "standing behind" the dealer would do is the same thing they would do for a similar (under warranty) car purchased from a 3rd party.
Extended warrantiees are another example of FEAR at work. Many folks are convinced (and salesmen are sure to play on this) that their car will suddenly and mysteriously require tens of thousands of dollars in repairs, bankrupting them. They will be forced, yes, forced, to spend $10,000 repairing their old clunker and end up in the poorhouse.
As I have noted before, once a car repair exceeds the value of the car, the car is junked. You cannot be "forced" to spend more than the car is worth, repairing it. Facotry warranties are very long now, and most items that will fail, fail under such warranties. Spending $2000 or more on the premise that you "might" have a repair for the next few years, is often a waste of money - particularly on a car worth less every year. You are better off putting that money in the bank and saving it for actual repairs than gambling with an extended warranty. And as I have noted before, many 3rd party extended warranties are basically worthless and the companies often go bankrupt.
FEAR also manifests itself in trade-ins. Suprisingly, many folks are convinced they will be "stuck" with a car they can never, ever sell, and thus will dump a perfectly good car in trade for a pittance. It takes only a few minutes to list a car on Craigslist, and it takes only common sense to consumate a transaction without difficulty. But many folks are convinced they will "never sell that old clunker" and as a result, dump it to the first person to call (usually a used car dealer) or trade it in at a fraction of its value (dealers often "inflate trades" to make customers feel better, but they tack on the cost of the inflated trade on the price of the car).
2. The Real Estate Meltdown: Classic GREED and FEAR at work.
Many folks are wondering "what happened" to the Real Estate market in the last decade. How did everyone get snookered in to paying too much for Real Estate and then losing it all when the market collapsed. Most folks want to blame someone else for the problem - the banks, the predatory lenders, the government, Wall Street, whoever. But no one wants to think that THEY might be part of the problem.
GREED caused people to "invest" in houses, thinking that the market would always go up and they would always make a lot of money. So people who never invested in Real Estate before (nd had no real experience) bought homes, convinced that they were going to make money because "everyone else is". The reality, of course is that proper Real Estate investing is a fairly cautious and calculated game, where the profits are often made in the margins, and close attention to detail is important. You cannot buy and flip and make money consistently, unless you pay close attention.
FEAR lead people to stay in the market or get into it because "If I don't buy NOW, I'll be priced out of the market forever!" The spector of being a perpetual renter and never, ever having the chance to own a home lead some folks to overpay. But the reality is, if it is cheaper to RENT than to OWN, then by all means, RENT. It is a sure sign the market is overpriced and that prices will soon come down.
FEAR also lead people to do stupid things like get into bidding wars with other buyers over houses, based on the FEAR that they would never be able to buy a home.
GREED made many more buy homes they could not afford, using dubious financial instruments to finance. They wanted granite countertops and two-story foyers, and to heck with what it costs down the road. The urge to show off trumped common sense.
FEAR is now rampant in the business and causing people to make more mistakes. There are very good bargains in the housing sector now, but folks are shying away out of FEAR. This is driving prices down further as a result. The calm, collected and analytical investors are snapping up the good deals. The emotional investors are cowering in the corner in the fetal position and hoping it all goes away soon.
FEAR is also causing some folks to "walk away" from homes where the value has dropped. Now, granted, for some folks who let emotions sucker them into buying overpriced homes on dodgy loans, walking away or a short sale IS the most rational thing they can do. But others who are perhaps only slightly "underwater" are panicking and dumping properties "before the prices go any lower".
As an exaple of this last phenomenon, I purchased a home at forecloser for $95,000 during the last meltdown. The owner owed $140,000 on the home and since prices had dropped to about $110,000 or so, he was convinced he was "upside down" on the loan and would never recover. But the loan money he took out he had used to add an addition to the property and remodel the kitchen. And the market would recover that value within a few years, if he sat tight. And recover it did, with the values reaching over $200,000 within a few years. He "walked away" from a sure deal because his short-term (6-12 month) outloook was bad. FEAR at work.
3. GREED and FEAR in the Stock Market
As noted above, the phrase "Greed and Fear" originated in the stock market. Many smaller investors get into a stock based on GREED - they see the stock going UP, UP, UP and want to "get in on a good deal". They hang on too long out of GREED - they want to make more and think the stock will keep going up. They refuse to sell because they FEAR missing out on huge profits. The stock then tanks, and out of FEAR they will lose it all, the sell for less than they bought. Many a portfolio has been reducted to tatters this way.
GREED and FEAR also act in the stock market to enable con games. Day traders buy seminar tapes out of GREED - they think they can make easy money on the computer a few hours a day. Most lose their shirts in this legalized form of gambling. Ponzi schemes such as the now-infamous Madoff scheme were based on GREED (a chance to make big money) and the FEAR they would be "left out" of the investment pool.
Both EMOTIONS blind people to the realities of the market. While big killings do occur, in most cases, the average investor is better off hoping for a resonable return on investment over time. The big swings in stock prices are hard to predict and for the amateur investor, nearly impossible.
It is the amateur investors that drive up stock prices beyond reasonable rates - and generate huge profits for other investors.
The best way to avoid this GREED and FEAR cycle with stocks is to buy good stocks with reasonable returns and hang onto them over time. Trying to make a killing in the short term means only that you will be killed. And for many older folks, stocks are probably a bad bet anyway - they would be better off getting into government bonds and money market accounts as retirement approaches. Sexy? No, of course not. But secure.
4. GREED and FEAR in everyday transactions
In everyday purchases, GREED and FEAR come into play as well. When in a store, it is temping to impulse purchase items you don't really need. Flashy items, attractively priced, play to our GREED for THINGS. Similarly, low sale prices or "Buy One, Get One Free (BOGO)" play upon both the GREED to get a good deal and the FEAR that one would "miss out" on a good deal if you don't buy now!
With regard to BOGO's, bear in mind that in most States, you are not required to buy both items to get the same price. If you buy one of the items, you get it at half price. So just because it says "Buy One, Get One Free" on boxes of cereal, it doesn't mean you HAVE to buy both boxes. It has been proven that in most cases, people up their consumption in response to increased purchases. One way to reduce consumption is to buy less.
While the "great BOGO deal" might not be there next week, trust me that some similar product will be offered at a discount when you return to the store. Note also that many stores resort to these eye-catching displays to boost sales and traffic. You are really making no bargain when you pay more for everthing else in your cart, and get only a few bargains in the BOGO bins. Our local Publix plays this game. The BOGOs are good deals, the rest of their prices and selection are dismal.
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These are just a few examples of where FEAR and GREED have caused people grief. There are many other areas in your life, I am sure, where you can find these two largely useless emotions ruining things. Taking emotions out of finanical equations is the key to making sound financial decisions. Remove GREED and FEAR from your decisions and you'll find it much easier to make financial progress.
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