Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Hangover theory is more psychological than fact-based

- by Alan Duvall 

Published in Dayton Daily News  September 23, 2007 

“My head is like a football – I think I’m gonna die.  Oh me oh my - wasn’t that a party!”  Irish Rovers 

The recent rash of sub-prime debt and housing fears has raised the specter of a latent economic postulate often referred to as the “hangover theory”. 

The hangover theory goes something like this – an economic boom generates unrealistic expectations good times will always last.  Laced with notions of financial omnipotence – consumers, investors and business folks tackle ever greater amounts of spending and risks. 

At some point the theory holds - reality mashes expectations and markets plummet, jobs are lost, businesses fail.  And thus another inevitable recession flows into the roller-coaster cycle of economics.   

Indeed, such long-dormant concerns are bubbling to the surface as statistics emerge of excess consumer spending funded by untenable borrowing.  

In actuality, the theory is more psychologically-based than constructed from statistical data.  Obviously, good times may breed “irrational exuberance”.  But the absolute inevitability of a succeeding crash created by over-risky decisions is not defensible. 

Despite rising oil and falling housing prices, America enjoyed strong economic growth in the second quarter of 2007, overall inflation remains in check and emerging world markets insure an export base.  In short, the basic ingredients for long-term financial stability are solidly in place. 

But the hangover theory should not be entirely dismissed as irrelevant.  Certainly, when more money chases a static amount of conventional investment opportunities – there will be those who court unwise risks to profit beyond reasonable expectations.  Hence we have sub-prime loan issues. 

Businesses too can suffer from irrational exuberance in pushing future agendas.  Witness the business owner who could be quite comfortable if simply maintaining status quo – but gambles too much to create additional adrenaline.  Evolved from adventurous settlers, Americans don’t suffer risk-free comfort well. 

“You got to know when to hold ‘em – know when to fold ‘em.”  Kenny Rogers

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.