Wednesday, March 19, 2008

Fear and good sense

Alex Tabarrok has this interesting post on fear at Marginal Revolution -- which elabroates his recent NY Times op-ed.

What are assets worth at any moment? How do we assess their future? How do others assess their future? These are the everyday questions. When uncertainties pile up, and volatilities rise, these very tough questions become even more difficult. Fear and panic can kick in.

There is more. When and how often to revalue assets to market? Accountants offer businesses interesting arguments on all sides.

But the rule-of-thumb for households was always to ignore short-term fluctuations in their own net worth except, perhaps, small asset mix reallocations every six months. After all, it is "permanent income" that guides us, so why not similar notions of wealth valuation? The overhwelming number of householders are not unemployed, are not selling a home, are not traveling to Europe (or even buying a new import), are not Bear Stearns stockholders and do not work on Wall Street.

Yes, many do watch the TV news, pay for expensive gasoline, listen to politicians and are prone to hand-wringing.

I do not believe that they will ramp up the fear to the point where it can do real damage.