An Economy of Faith and Trust - by David Brooks

In this new body of thought, you get a very different picture of human nature. Reason is not like a rider atop a horse. Instead, each person’s mind contains a panoply of instincts, strategies, intuitions, emotions, memories and habits, which vie for supremacy. An irregular, idiosyncratic and largely unconscious process determines which of these internal players gets to control behavior at any instant. Context — which stimulus triggers which response — matters a lot.

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This mental chaos explains how people can respond so quickly and intuitively to so many different circumstances. But it also entails a decision-making process that is more complicated and messy than previously thought.
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For example, we don’t perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. As Andrew Lo of M.I.T. has demonstrated, if stock traders make a series of apparently good picks, the dopamine released into their brains creates a stupor that causes them to underperceive danger ahead.

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Biases abound. People who’ve been told to think of a high number will subsequently bid much more for an item than people who’ve been told to think of a low number. As Jonah Lehrer writes in his forthcoming book, “How We Decide,” there are certain circumstances (often when there are many options) in which gut instincts lead to the best decisions, while there are other circumstances (sometimes when there are a few options) when calm deliberation is best.

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Most important, people seek relationships more than money. If behaving a certain way helps a stock trader or a regulator fit in with his crowd, he’s likely to keep doing it without too much rigorous self-examination.
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A thousand mental shortcomings contributed to the financial meltdown. Republicans have tried to explain it by pointing to irresponsible policies at Fannie Mae. But that only explains a piece of what’s happening.
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This crisis represents a flaw in the classical economic model and its belief in efficient markets.

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But an economy is a society of trust and faith. A recession is a mental event, and every recession has its own unique spirit. This recession was caused by deep imbalances and is propelled by a cascade of fundamental insecurities. You can pump hundreds of billions into the banks, but insecure bankers still won’t lend. You can run up gigantic deficits, hire road builders and reduce the unemployment rate from 8 percent to 7 percent, but insecure people will still not spend and invest.

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Related previous post: The Behavioral Revolution - by David Brooks

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Related books: go HERE

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