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


Human Beings as Machines

Trapped: What Happened to Our Dream of Freedom

Adam Curtis

BBC (2007)

Film Review

Part 2 The Lonely Robot

Part 2 takes a close look at the role American economist James Buchanan played in extending free market economic theory to human biology, politics and governments. The Impossibility Theorem is fundamental to Buchanan’s concept of “market democracy.” According to the Impossibility Theorem, collective will is impossible in a democracy because the desires of millions of individuals are too varied and complex. Buchanan maintained the only way to respond democratically to people’s wishes was to allow them to fully pursue their selfish self-interest in the marketplace.

Clinton Dismantles New Deal Welfare Programs

A direct result of Buchanan’s influence over Margaret Thatcher, John Major, Tony Blair, Ronald Reagan and Bill Clinton was massive cuts in taxes and social services, coupled with a repeal of corporate regulation. The most immediate result was a massive increase in inequality. Corporate elites became much, much richer – while nearly everyone else became much poorer. Ironically the gap between rich and poor would increase far more rapidly under liberal-leaning Blair and Clinton than under Thatcher and Reagan. Clinton will go down in history as the president who dismantled the welfare programs Roosevelt enacted under the New Deal.

Meanwhile overconfidence in computers and so called “behavioral economics” (free market theory) would result in government departments run by targets and incentive schemes. Sociopaths and economists quickly learned how to game the system by cheating on their targets.*

The Selfish Gene Hypothesis

Likewise biological scientists used free market and game theory to promote the Selfish Gene hypothesis. This theory conceptualized a simplistic view of human beings as machines that were controlled entirely by their genes. It held that genes, which were likened to on-board computers, compelled people to act selfishly to guarantee their genes’ survival.

This mechanistic view of human biology would lead to a profound change, led by psychiatrists and drug companies, in the way Brits and Americans viewed themselves. The new checklist diagnostic system the American Psychiatric Association (APA) launched in 1979 (see Part 1), coupled with the aggressive marketing of selective serotonin reuptake inhibitors (SSRIs) would lead people to view themselves as machines – machines that needed to be fixed if they experienced unpleasant emotional states, such as worrying, conflict, insecurity or anxiety.

People Pop Pills to Cope with Deteriorating Social Conditions

Because these checklists deliberately ignored life circumstances that might cause unpleasant feelings, common reactions to life stresses became medicalized. This, in turn, led to an expectation that people would take pills to adjust to steadily worsening social conditions.**

The theoretical basis of behavioral economics began to unravel in the 1990s. The Selfish Gene hypothesis was abandoned when new genetic research revealed that cell’s ability to choose, based on environmental conditions, which parts of the DNA molecule become operational.

*More recent research shows that only two sectors of society are driven purely by self-interest: sociopaths and economists.

** For example, loss of good paying and secure jobs, loss of representation in a rigid and corrupt government and overall loss of control over our lives.

Free link to film: The Trap 2 The Lonely Robot [BBC]