Tuesday, October 14, 2008

Revenge is a dish best served cold

A compelling article in New York Magazine ponders whether its possible for the general public to ever trust the economy again. Like a newborn lamb suckling at the teet of excess, we charged this and bought that, overreached for our McMansions (or maybe our McCondos), and thought that our debt would somehow fade away, like a fleeting reality show on a D-list cable network. Not only did the debt stick around, though, it sat growing and festering like that lone, hormonal blemish that appears like clockwork, oh, every month or so.

Okay, so we were a smidge irrational with our loot back in the heyday of 2006, but is it irrational to believe that we're rational enough (say that 5 times fast) to trust those at the top to bail us out?

"One of the things I think that is most irrational is to assume that we’re rational,” says MIT behavioral economist Dan Ariely, author of Predictably Irrational: The Hidden Forces That Shape Our Decisions. Today, he thinks that the same groupthink mechanisms that caused our financial catastrophe are keeping us from getting out of it.

He argues that it’s all a case of peer pressure: banks and public policy made it easy—even socially necessary—for people to borrow more than they should, which inflated housing prices. Then banks felt compelled to buy the mortgage-backed securities everyone else was buying. That didn’t turn out too well.

The idea that the crowd is wise, Ariely told NY Mag, only works when everyone in the crowd is making an independent assessment, not when they are copying each other. He says the one thing the crowd is overwhelmingingly feeling is the need for vengance. Ah, that explains why the public roasting of the AIG and Lehman Bros. execs a couple weeks ago seems like aptly staged political theater.

Ariely say that in trust experiments, people are willing to expend their own assets to exact revenge on those who cheated them—even if they will just end up losing more money.

Would you pay to have a the Lehman Bros. ex-CEO hauled out so he could be pelted publicly with rotten tomatoes? That was essentially what happened with the Congressional hearings lambasting these top executives because of their decisions that led to the financial meltdown. And it was this kind of thinking -- the "off with their heads!" mentality -- that made the bailout of Wall Street fatcats proved so politically unsatisfying.

“When you think of $700 billion, the millions they made are not quite a drop in the bucket,” Ariely told the magazine. “But we’re willing to lose money to get these bastards.”

And that’s why the bailout hasn’t worked. “It didn’t answer the basic need of revenge. It could include future revenge—from now on, we’ll treat white-collar crime differently. Without that, I don’t see how trust is coming back.”
[New York Magazine]

What do you think of the bailout, and does it buttress any faith you have in the economy, or encourage you to invest in the market?

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