Are These Economic Myths Misleading You?

Mark Riepe (0:10)

I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

Welcome to a new season of Decoder, and we're kicking things off by exploring a topic that's old as humanity, myths. And since this is Financial Decoder, we're looking at economic myths. Before we get to our guests, let's start by looking at myths in general. It's interesting to me that every culture has myths. People have created myths since time immemorial, because the world is complex.

Myths are a way to explain those complexities and make them understandable. For example, the ancient Greeks saw the sun rise and set every day. Why did it keep doing that? Well, the obvious explanation then was that the god Helios drove his chariot across the sky. They happened to have gotten it wrong, but was any damage really done? Well, probably not. After all, we humans love certainty. Even if something is false, if we like the meaning, we'll cling to it because it makes us feel more secure. And that's how myths have served us through the millennia. The fact that they're not exactly true is beside the point.

Where is it?

One of my favorite quotes was originated by Will Rogers. He said, it ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

By the way, the Will Rogers part of what I just said is a myth. He definitely wasn't the first person to say that. Some people think it was Mark Twain, but there are doubts about him as well. The more important point is that the problem with the myth is that when you act upon it, you can end up doing something dangerous. Take, for example, bloodletting. Bloodletting was based on the belief that removing blood eliminated impure fluids from the body. That sounds great. What could go wrong? Well, just ask George Washington. December 13, 1799 was a frigid day at Mount Vernon. It rained, hailed and snowed. Washington was outside, for most of it, supervising his activities on his estate. That afternoon, he developed a cough or runny nose, and his voice was hoarse. By the next morning, he had a fever. Doctors were called and they prescribed bloodletting. By 11 a.m., between five and nine pints of blood was removed from him. To give you some perspective, a man of Washington's age and size, probably only had about 12 pints to begin with. Not surprisingly, he died that night. The point being that acting upon myths can have consequences. Scrutinize a belief before you act. It could be a myth. Today, we'll look at some economic myths that can lead us to make potentially bad decisions and will shed light on those half-trues and nuances that can be confusing. My guest, Jennifer Babchuk, is going to help us separate the myths from reality.

Jennifer Babchuk is the Head of Economic Research here at the Schwab Center for Financial Research. She leads a team that performs macroeconomic research and analysis that helps to shape Schwab's views and strategies. She joined Schwab in 2019 and she has an MA in International Economics from Johns Hopkins and a BS in Neuroscience.

Jennifer, first time on the show. Welcome.

Jennifer Babchuk (3:28)

Thanks for having me.

Mark Riepe (3:30)

Jennifer, I was going to ask you or I will be asking you questions about some specific biases. But before we get to that, what really interested me in your background when we first met is that you've got an atypical background I think for most people who end up in an economist role. I wondered if you could just talk a little bit about that and how that background has informed your approach to some of the questions and problems that people face.

Jennifer Babchuk (3:55)

Yeah, absolutely. So as you mentioned, my path to economics was a little bit unconventional. My undergraduate degree started off in neuroscience, and I've really always been fascinated by how people think, how they make decisions and respond under uncertainty. And it's that interest that eventually led me to pursue a graduate degree in economics.

But in many ways, I really don't view the two fields as being all that different. While economics is often associated with models and data, it's ultimately about people and the decisions they make. And that's one reason that I've always been particularly interested in the behavioral side of economics and investing, and how expectations, emotions, and psychology can ultimately influence both economic and financial outcomes.

Mark Riepe (4:46)

This is a great topic. Glad you're here. We're going to be talking about economic information and how to be good consumers of economic information. And because this is really important for investors, because there's so much economic data out there. It's being released constantly. Financial news is available 24-7. But certainly, when we're interacting with clients, we get the sense that there's some myths that seem to be persisting generation after generation. So first of all, do you agree with that? And to the extent that you do, why do you think some of these myths that we're going to be talking about? Why are they so resilient?