Wednesday, April 28, 2010


Well, this was not how I’d planned to begin this blog, but I was struck by something I saw on television last night. It may not be too late where you live to catch this week’s NOVA: Mind over Money. It is about the emotional component to our decisions about money (spending, saving, investing, panicking).

First, they gave the background re Adam Smith’s theory that we behave (at least en masse) in a rational way, leading to the “efficient markets hypothesis,” the near-religious faith in a free market to be self-correcting, all those Nobel Prizes for the (University of) Chicago School of economic theory, and the takeover of Wall Street by the “quant” math majors with their elaborate equations that purport to predict how the market will behave.

Then, they reviewed lots of experiments showing how unconscious and clearly irrational much of our decision-making actually is. Anyone who listens to the financial media try to explain the reasons the market was up or down on any given day will certainly appreciate the emotional side of buying and selling. PET scans show that the (completely subconscious) reptile brain lights up at the prospect of food, sex, and money — causing us to behave in ways we do not control and only rationalize later.

The theme of the show, to me, was that the quants and their economic school had way too much faith in their “science,” their “intellectual edifice built on the notion of rational decision-making.” Interspersed throughout the show, there were interview segments with three U. Chicago economists who seemed, to me, in absolute denial that their life’s work might just be all wrong in its conclusions. One railed that emotions and (market) bubbles just “make no sense!” Uh ... exactly. Another said that what others called a panic (the 2008 market free fall), he saw as “a change in taste.” They simply can’t face the fact that “irrational exuberance” might be both real and more important than their equations ... and cause for market regulation to protect us all from it.

As a terminally rational person myself, I understand the desire to think of life, the universe, and everything as non-random and susceptible to analysis and explanation. But I also think we must be prepared to live with uncertainty and unknowns, because it is more damaging to think we have all the answers when we don’t.

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