Friday, February 13, 2009

Run for the hills.....

Three items in today's New York Times are sufficienly pungent to warrant mention. Lohr's article gives a clear exposition of the fact that the nation's banking system is effectively insolvent, it's debts being greater than its assets. Krugman again notes the futility of current plans which avoid shutting down the bad banks (and wiping out their investors) and saving the solvent ones. And Brooks, in an OpEd piece that motivated me to go ahead with this post, paints a pessimistic imagined future scenario for 2010 influenced by his reading of current cognitive neuroscience (Here, for example, is a relevant article, more recent than the work that Brooks was aware of, showing structures that appear to be more important than the amygdala in dealing with uncertainty). From Brooks' piece:

The problem was this: The policy makers knew how to pull economic levers, but they did not know how to use those levers to affect social psychology.

The crisis was labeled an economic crisis, but it was really a psychological crisis. It was caused by a mood of fear and uncertainty, which led consumers to not spend, bankers to not lend and entrepreneurs to not risk. No amount of federal spending could change this psychology because uncertainty about the future remained acute.

Essentially, Americans had migrated from one society to another — from a society of high trust to a society of low trust, from a society of optimism to a society of foreboding, from a society in which certain financial habits applied to a society in which they did not. In the new world, investors had no basis from which to calculate risk. Families slowly deleveraged. Bankers had no way to measure the future value of assets.

Cognitive scientists distinguish between normal risk-assessment decisions, which activate the reward-prediction regions of the brain, and decisions made amid extreme uncertainty, which generate activity in the amygdala. These are different mental processes using different strategies and producing different results. Americans were suddenly forced to cope with this second category, extreme uncertainty.

Economists and policy makers had no way to peer into this darkness. Their methods were largely based on the assumption that people are rational, predictable and pretty much the same. Their models work best in times of equilibrium. But in this moment of disequilibrium, behavior was nonlinear, unpredictable, emergent and stubbornly resistant to Keynesian rationalism.

...The nation had essentially bet its future on economic models with primitive views of human behavior. The government had tried to change social psychology using the equivalent of leeches and bleeding.

(A friend of mine claims to know a former hedge fund manager who has converted his assets to gold coins, and bought a safe, and a shotgun!)

3 comments:

Spencer said...

Hi I am a psychology student who was recently introduced to your blog. I love it and read your entries religiously. I also enjoy sifting through your archives for interesting nuggets. Anyway, I thought it would be criminal to get this level of utility from your work and not let you know. Thanks again!

gabriella said...

I hope gold tastes good. LOL

gottschalk said...

I'm a theologian who is building his ideas on both religious and scientific thinking- and - I am more interested in seeing reality well than I am in proving something.

I see much of our current problem stemming from the way we're conditioned to treat our economy with the same mind we use to treat inevitable forces of nature. Economic activity is contingent upon human activity; it is not nature's activity. Abstracting the making of our lives together, when abstracted to numerical logic as it's only form of measurement, by a closed system of self designed practitioners who have decided for us what is relevant, has formed a basis for our life situation that has felt crappy for awhile now.

A bit of unconvention, hopes of furthering insight:

Which of the following description, best describes our human reality?

1. We are the result of random and inevitable forces, developed by natural selection to compete with each other for limited resources. The big dogs win.

2. We are the children of god, endowed with both the need and ability to create a life together that provides a place for us to thrive.

This is a trick question. While most people side with their convention, they miss the fact that we have the unique human capability to transcend nature (with limit). We can choose the characteristics of our life together to fall in line with either. This is not a question of does god exist or not. This is a question of what we will do with this unique human power? Will we hand it over to our genes or will we hand it over to our hearts and imaginations? We can't let ourselves be blinded by our amygdalas (sp) or by a self closed world of economic experts.

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