All too human

David Brooks in today's NYT: "money was entrusted to a few thousand traders who sloshed it around the world in search of the highest returns...

 

These traders live in a high-tech version of Plato’s cave. They do not see reality directly. Instead they see the shadow of reality as it dances around in numbers on their computer screens. They form perceptions about other people’s perceptions of where the smart money is going next, so they’re three or four psychological levels removed from normal economic activity.

 

These traders are driven to take big risks because the glory goes to the biggest stars. And because they are human, they assuage their ensuing uncertainty with self-deceptions. They develop an excessive faith in “value at risk” computer models, which seem to calculate their exposure in soothingly rigorous terms. They adopt accounting techniques that tell them they’re on firm footing. They go in for complicated financial instruments that promise “riskless risk” by dispersing risk into a million small pieces and casting them into the ether.

 

The economists talk about “mispriced risk” and “illiquidity” in the system. But many economists are trained to downplay emotion, social psychology and moral norms, and so produce bloodless and incomplete descriptions of what’s going on. The truth is, decision-making is an inherently emotional process, and the traders in charge of these trillions become bipolar as a result of their uncertainty.

 

When things are going well, they don’t think they’re just lucky and riding a wave. They’re infused with a sense that they have it all figured out. When these traders are in their manic phase, they flood countries and economic sectors with capital. Without meaning to, they dissolve the moral fabric and spoil their own profit zones...

 

This is more than a mortgage problem. We live in a world in which trillions of dollars can move instantly, but they are in the hands of human beings who are, by nature, limited in knowledge, and subject to self-deceptions and social contagions. By one count, financial crises are twice as prevalent now as they were 100 years ago."

 

I keep quoting Brooks, so it's clear I'm drawn to something in his worldview, though I disagree with many of his opinions on the leaf-level issues. I think what I appreciate so much in his writing is his focus on humans: how humans work, their frailties and strengths, the lies we tell ourselves and our moments of insight. That's the lens I use to understand the rough seas of our current social challenges. So though we disagree in many of our conclusions, I appreciate his paradigm.

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