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You’ve probably read the recent New York Times article about a financial writer’s personal credit crisis. It’s been going around on forums and the blogosphere, and reading it is kind of like watching a trainwreck.

Quick article summary:
Man has lots of financial obligations.
Man’s future wife has no job.
Man & wife get married, and buy a house they can’t even remotely afford using sub prime financing.
Man & wife have financial problems.
Man & wife don’t communicate well, and continue their downward financial spiral.

Many people react with disbelief when they read the article. “How could they do that?” they ask. “How could they not know that was a bad idea, especially since he worked in finance?”

I’m betting that deep down, the writer did know it was a bad idea.

You know, rationally.

But, realistically, people engage in magical thinking when it comes to many things.

According to the Adjudicative Desk Reference, magical thinking is the “inaccurate belief that one’s thoughts, words, or actions will cause or prevent a specific outcome that does not demonstrate a realistic relationship between cause and effect.”

“Oh sure,” we think. “I can afford that car.”

We plan our budgets using the best case scenario. You know, the one where we don’t have any unexpected bills or emergencies, and where our income remains as expected.

We charge something on our credit card using Wimpy’s philosophy: I will gladly pay you Tuesday for a hamburger today.

We just think that things will work out.

Basically, we want to believe.

This is very, very common. Most of us just don’t want to admit it. Even when you’re aware of the human tendency to engage in magical thinking, it takes a conscious effort to avoid it. Sometimes it seems as though there is an epidemic of magical thinking, which is what I think much of the sub prime crisis was, combined with a heavy dose of fear and greed.

Nobody sat there and thought to themselves, “Hey, if I buy this house, a year from now I’ll be out of work and I’ll be screwed.” No, they thought, “Things are going great, and they’re only going to get better!” or “Oh my god, if I don’t buy a house now, I’ll never be able to get one!”.

Nobody sat there and thought to themselves, “Hey, it’s morally wrong for me to help someone get a mortgage when I don’t think they can afford it.” No, they thought, “Hey who am I to judge? It’s their life, and someone else will just help them apply if I don’t. And the mortgage company is accepting them. Besides, I can help them make their dreams come true.”

It’s easy to see things with hindsight. Of course it’s a bad idea to borrow money on risky terms. Of course it’s a bad idea to lend money to people who won’t be able to repay it.

Yet if things hadn’t collapsed, would we all be sitting here gasping with disbelief?

Or would we be kicking ourselves for not having gotten in on a “good thing” when we had the chance?

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