Fall of the Know-It-Alls
The humiliation of Alan Greenspan last week in publicly admitting his fallible perception of the housing bubble prompts David Brooks to see a larger meaning:
“This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort.”
It’s also a reminder of what has always been the motivation, aside from greed, of not only the so-called experts but the run-of-the-mill stock market investor–the psychic need to be “in the know,” to be able to see more than anyone else and profit from it.
In the era of 24/7 cable financial news, it’s not just the talking heads but the watchers who are constantly trying to confirm their superior perception–a modern version of the traditional gambler’s search for grace in the roll of the dice or turn of the cards–the need to feel superior to the rest of humanity.
“My sense,” Brooks writes, “is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.”
Maybe so, but all that social science may end up just staring at that primal urge that drives human beings to prove themselves special by being “in the know.”
Cross-posted from my blog.
opinions powered by SendLove.to
2 Responses to “Fall of the Know-It-Alls”
Diagnoses are based on anomalies. What was different? Whatever was different was the most likely cause of the economic crisis.
Subprime loans had been around since the 70s, so that was not different. Selling mortgages to be re-packaged has been around since the 1960s, so that is not different. ARS have been around since the 1980s so that was not differnt. Adjustable Rate Mortgages have been around for decades, so that is not different.
The only difference was that the Federal Reserve, who everyone relies upon not to be stupid, lowered interest rates to 1% (not below 3% since 1962) which made everyone act as expected and put this system on steroids. Anomaly #1, BUT that was not the problem.
From 2004 – 2006, the Fed raised rates by 4.25% in less than 2 years. Anomaly #2. That was the problem and caused everything.
It would be better to study the older books written about the behavior of crowds (money from the stock bubble went into a real estate bubble and everyone believed “This Time, It's Different”) as well as the few newer books — not necessarily the very latest, razor-sharp-hindsight marketing maneuvers, but a bit older — that discussed this. Oh, and try to avoid the hype we see how, that is not only maybe the start of panic and pessimism but is compounded by media sensationalism and political aims behind reporting of the news.
Greenspan was “The Maestro” back in the stock bubble. My, how he is reviled now.