Tuesday, October 28, 2008

Fall of the Know-It-Alls

The humiliation of Alan Greenspan last week in publicly admitting his fallible perception of the housing bubble prompts David Brooks to see a larger meaning:

"This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort."

It's also a reminder of what has always been the motivation, aside from greed, of not only the so-called experts but the run-of-the-mill stock market investor--the psychic need to be "in the know," to be able to see more than anyone else and profit from it.

In the era of 24/7 cable financial news, it's not just the talking heads but the watchers who are constantly trying to confirm their superior perception--a modern version of the traditional gambler's search for grace in the roll of the dice or turn of the cards--the need to feel superior to the rest of humanity.

"My sense," Brooks writes, "is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking."

Maybe so, but all that social science may end up just staring at that primal urge that drives human beings to prove themselves special by being "in the know."


Joe Hornbaker said...

Mr. Stein --

I enjoy your blog and try to read it every day or so.

I read the Brooks column, and like so many of his musings, he makes the simple appear more complex (talk about the oddness of human perception).

This meltdown was as predictable as sunset. The simple reason is the human nature of greed. Add to that the battery acid of "free-market" ideology, and it makes Alan Greenspan's mea culpa as convincing as Claude Raines' shocked discovery of gambling at Rick's Cafe Americain in Casablanca.

Mr. Brooks was, and remains, an apologist of the first order for the (now, literally) bankrupt theory of "Reaganomics" that has brought us to this day. I'm sure he's a nice man, but he's never going to admit that the world view he has so ardently embraced his whole life is a sham.

wpd said...

Why should one argue that normal investors 'think they know more than everyone else' to paraphrase part of the original article.

There are investors who are in it for the long haul, who try to guess which business areas, or businesses themselves, will continue or grow profitably, and put their money into these businesses. Perhaps this is naive, but I think for most of us, this is the reality, since investing is not something we think about day in and day out, except for these terrible days.