Behavioral Economics

Mind Over Money

PBS Nova (2010)

Film Review

Mind Over Money is an intriguing Nova documentary about the new field of behavioral economics. At present, banks and governments use complex mathematical models in making decisions about lending, investment, taxation and government borrowing. These models are based on the premise Adam Smith put forward in Wealth of Nations that the “rational self-interest” of groups of individuals causes economic markets to be perfectly self-regulating without government regulation or control.

While the economic “rationalists” who subscribe to this belief acknowledge that not everyone makes totally rational decisions about money, they claim enough do to enable bankers, governments and economists to 1) predict the behavior of markets mathematically and 2) guarantee the overall stability of markets without government interference.

In contrast, behavioral economists argue that most decisions around money are based on emotional and unconscious factors. They further argue that without government regulation, waves of irrationally sweep through the stock market and mercantile exchange (where commodities are traded), causing destructive speculative bubbles and crashes as they did in in 1929 and 2008.

John Maynard Keynes was the first economist (during the Great Depression) to raise concerns that destructive booms and busts result from irrational investing behavior. Because he could offer no clear explanation why this was happening, his views were largely dismissed.

Economist Robert Shiller echoed Keynes concerns in his 2005 book Irrational Exuberance, in which he predicted the 2008 global economic crash.

Thanks to a pressing need to understand the 2008 downturn (and prevent another one), social psychology research into spending and investing behavior is enjoying its own boom. The documentary describes a number of fascinating experiments that validate Keynes’s original claim that these decisions are largely controlled by emotional and unconscious factors.

For my own part, I question why we need to produce absolutely scientific certainty for something that’s blatantly obvious. In contrast to economists, Wall Street traders all readily agree that Wall Street volatility is driven by waves of emotion. It strikes me that Wall Street economists refuse to accept the behavioral basis of market activity because they have a vested interest in continuing the high priesthood of complex mathematical models.

The film implies that more market regulation is needed to prevent this type of market volatility. I disagree. In my mind, the best way to strip Wall Street of this vested interest is to strip banks of the power to create money out of thin air and restore money creation to public control (as Andrew Johnson and Abraham Lincoln attempted to do.) See An IMF Proposal to Ban Banks from Creating Money

 

16 thoughts on “Behavioral Economics

  1. It seems they want to sell the revisionist story that it wasn’t the rational self-interest of greedy bankers and traders who caused the 2008 crash, and were later bailed out with trillions of dollars, it was the irrational people who bore the damages and then had to pay the people who caused the trouble.

    In fact most market activity is driven by insiders who are driven by profit not emotion. Think Goldman Sachs, which has its operatives all over the scene in US and European banks, and took $13 billion in bailout plus the bailouts to lenders who had lent money to Goldman.

    This reminds me of the bloggers who falsely prattle about how the stupid “sheeple” believe that the government should be reaping all its mayhem in the world, when the truth is that the people are never consulted, and polls indicate they are against it.

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    • I think you’re probably right, Don. The film does tend to obscure the fraud that occurred.

      What I find really ironic is the investment banks who created the bubble ended up with major losses rather than profits. In that sense, their behavior was irrational, in that it led to bankruptcy. They didn’t know at the time that the government would bail them out – the government didn’t bail Lehman Brothers out.

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      • The bankers got stung but then a young first-term senator with zero life accomplishments was elected in 2008 with huge financial support from …..the people who then expected a return on their investment, and got it. Trillions. And now comes the revisionism — it was the people’s fault. I don’t buy it.

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    • I believe the international banking system deliberately caused the Great Depression by shrinking the money supply – allowing them to increase their wealth through land foreclosures. Carroll Quigley asserts in Tragedy and Hope that all the major panics and depressions of the 1900s were caused by the banking establishment manipulating the money supply. Which was why the populists and progressives were so militant about ending the ability of private banks to create money in the early 1900s.

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    • Remember he who controls the money ultimately controls all. So much for democracy. No way the bankers will ever give up this power. The average Joe does not really care as long as they have some money.

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      • Thanks for commenting, Andy. Unlike the average Joe, the average Jill does care. I point to the inspirational work of Moms Across America building a large and successful grassroots movement against GMOs. When I left the US in 2002, the vast majority of Americans were totally unaware there were GMOs in most of the foods they ate. Thirteen years later 93% of Americans support mandatory labeling of GMO foods.

        Just leave it to us angry mothers and grandmothers. We’ll sort the assholes out.

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    • Again, I reject the notion that citizens bear any fault for the actions of corrupt national leaders and institutions. Personally I don’t know of any ordinary people of moderate income whom I would call “greedy.” Do you?

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    • Interesting link, Gerry. I tend to agree with Don that blaming homeowner greed for the 2008 collapse is blaming the victim, especially the subprime borrowers who suffered the biggest losses. Renting accommodation is the biggest rip-off there is. If you look at the numbers, most people reduce their housing costs by 25% or more by buying a home.

      The banks aggressively pursued subprime borrowers and promised them they had no risk of defaulting because house values would continue to increase indefinitely. The subprime borrowers had no reason not to believe them because all the Wall Street economists were saying the same thing. It makes sense that low income borrowers saw it as an opportunity to increase the money they could spend on kids’ clothing, health and dental care, etc. People really struggle at this income level, and I think its a little unfair to categorize their motivations as greed.

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      • My comment was meant for people who bought a house for $ 500,000 IN 2000 in 2005 refinanced it for $750,000 and took $250,000 as cash then tuned around in 2007 and refinanced it for $1,000.000 and took the $250.000 in cash and in 2008 when value of there house fell simply stopped paying there mortgage Not a few people did this but thousands.

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    • Thanks, Jerry. I’ve long been admire of Black’s work. With his prior experience prosecuting bankers whose fraudulent behavior caused the collapse of the savings and loan industry, he brings an important perspective to the issue.

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  2. Pingback: Behavioral Economics, Film and Review (52:55) | Tales from Genie and Lou

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