This is your economy on drugs
Mar. 2nd, 2009 09:54 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
Here's a hypothesis that part of the financial crisis is that the financial industry was running on amphetamines, a drug which increases energy and decreases judgement.
For a while, I've been pushing the idea that the 70 to 90 hour work weeks made it harder for people to ask whether what they were doing made sense. Speed would only make the problem worse.
When I originally proposed this, I was told that, no, everyone in the financial industry was under pressures which made their behavior inevitable. On the other hand, the pressures were the result of policies and choices which were a matter of individual judgment.
"The wisdom of crowds" only applies if the crowd is composed of independent people who aren't nuts.
Link from a comment by John Emerson here. Most of the comments are interesting. I used to read Megan McArdle back when she was Jane Galt, but I got bored when she started writing for the Atlantic.
For a while, I've been pushing the idea that the 70 to 90 hour work weeks made it harder for people to ask whether what they were doing made sense. Speed would only make the problem worse.
When I originally proposed this, I was told that, no, everyone in the financial industry was under pressures which made their behavior inevitable. On the other hand, the pressures were the result of policies and choices which were a matter of individual judgment.
"The wisdom of crowds" only applies if the crowd is composed of independent people who aren't nuts.
Link from a comment by John Emerson here. Most of the comments are interesting. I used to read Megan McArdle back when she was Jane Galt, but I got bored when she started writing for the Atlantic.
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Date: 2009-03-02 02:05 pm (UTC)Procrustes called. He wants his bed back.
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Date: 2009-03-02 02:13 pm (UTC)And I repeat my suggestion that if it makes sense to drug test bus drivers, it makes sense to drug test CEOs. It isn't just to humiliate them.
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Date: 2009-03-02 09:57 pm (UTC)no subject
Date: 2009-03-02 02:30 pm (UTC)Sounds a little like the horror stories about junior doctors taking heaven-knows-what (probably sneaking prescribed stimulants out of their own pharmacies) in order to survive *their* horrendous workweeks and long shifts. And if it can happen in hospitals, there is certainly no reason why it shouldn't also hold true (and have held true) on the trading floors.
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Date: 2009-03-02 05:43 pm (UTC)no subject
Date: 2009-03-03 03:04 am (UTC)But I have a different culprit in mind, having to do with the process by which people decide to stop thinking about some question or problem and just accept the answer they've gotten. In political/social discussions online, you can see this all the time. If the first explanation for some observed phenomenon (increased casualties in Iraq, the black/white school performance gap, the difference in average pay between women and men, the global financial meltdown) re-enforces your basic worldview, it's very easy, and very common, to just go with that explanation. It's even pretty common to get very angry at anyone who questions that explanation. On the other hand, if the first or most obvious explanation contradicts your worldview, it's both easy and common to look for other explanations, to see the need for a more nuanced understanding of the world.
The question is, when do you decide that you've thought about the question long enough and can now reach a conclusion? In an ideal world, that would have a lot to do with the level of certainty you've been able to achieve and the limits of available data. In reality, though, it seems very clear that people usually stop thinking when their conclusions are comfortable and seem intuitively sensible.
When you're making financial deals that, upon a few minutes' reflection, don't make a bit of sense (say, setting up mezzanine CDOs based ultimately on home mortgages, whose top tranche has a AAA rating), you may start thinking about whether they make sense, and whether what you're doing is ethical or safe. But then, if you find arguments to quiet your own doubts (these are reviewed by the ratings agencies, these are sold to sophisticated investors who know what they're doing, this formula or that computer model says it's okay), then you can keep doing your job with a clear conscience. You can feel good about your big paycheck. You need not have an unpleasant confrontation with the part of your bank that is bringing in tons of money, because their operations are exposing your bank to huge, poorly-understood, risks.
I suspect a great many of the biggest disasters you can find have some element of decisionmakers, at a level below conscious thought, looking around for a way to stop thinking about what they're doing at a place that doesn't require them to quit their job, get in trouble with the authorities, become a pariah, etc.
--albatross
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Date: 2009-03-03 01:11 pm (UTC)I do say *may* be needed. It might be that random factors just add up now and then so that pervasive blind spots take you off a cliff.
I'm wondering what proportion of sensible people you need to keep things going. I suspect it's not that high so long as they aren't completely powerless.
Notion of the day: Institutions only work to the extent that people think they aren't magic. This applies to both business and government.
Possibly interesting blog: <a href="http://www.overcomingbias.com>Overcoming Bias</a>-- it's about mental biases.