There's been a lot of discussion in the financial press recently about what exactly caused the crisis that has threatened to bring down the western financial system this year.
Alan Greenspan, former governor of the Federal Reserve, suggested in a recent piece in the Financial Times that the unknown factor that causes bubbles may be what the great economist John Maynard Keynes referred to as 'animal spirits'.
Animal spirits are the unquantifiable, irrational factor in human psychology that means humans do not always behave in line with rational economic models. This is how the Economist's dictionary defines the term:
The colourful name that Keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, "naive optimism". He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". Where these animal spirits come from is something of a mystery.
Now, scientists claim to have unravelled the mystery as to the origin of these bestial impulses in our supposedly rational economies. A team at Cambridge University took blood samples of City traders after a particularly profitable day's trading, and after a particularly tough day.
They discovered that after a very good day's trading, make traders' blood showed high levels of testosterone, which (the team speculated) may have encouraged the traders to carry on taking risks even when it would have been wise to stop.
Likewise, after a bad day's trading, the traders' blood showed high levels of cortisol, the stress hormone, which may have made the traders unusually risk averse, even beyond the point where caution was required.
So the animal spirit behind a bull-run is testosterone, and the animal spirit behind a bear run is cortisol. So presumably in future downturns, rather than pumping billions of dollars into the financial system, regulators will simply pump gallons of testosterone onto City trading floors.
The report is an example of the increasingly popular attempt to bring together psychology and economics, which some people have called behavioural economics, and others have called psychoeconomics. I personally am very interested in psychoeconomics, and shall speak again of it shortly.
1 comments:
True enough, but these market behaviors do not determine basic economic realities but are symptoms of them, however removed.
Oil was $29 per barrel in 2002.
It is now $130+.
That determines not only the price of gasoline and diesel but through insecticide and fertilizer, plastics, chemicals, and almost everything else.
Too, the Euro is now a viable alternative to the US dollar, nullifying the reserve status of the US currency.
In effect, then oil is the new virtual currency.
Insofar as psychoeconomics has worth, it may be in predicting how much homines economici, from traders to bankers to economists and financiers, ignore basic and elemental factors that they cannot control.
In fact, as a simple system, the rise in the price of oil was responsible for the collapse of subprime, and through bundling the rest of the credit marked keyed on inflated real estate prices.
Trained in economics at Harvard, I have in the past traded commodities and also recently worked as a contractor in banking for a time. In this recent period, I was rather surprised how most bankers could not grasp the simple reality that loans to people with marginal abilities to pay were about to collapse because of simple things like the fact that these people also had to pay for gasoline to go back and forth to work and also for food, and so on.
In fact the bankers were living in a fantasy world of numbers and credit reports and assessments and so on, and refused to see the handwriting on the wall.
That in itself is psychoeconomic behavior, is it not?
But that is just scratching the surface.
The fascination with monetary instruments as supposedly concrete realities, apart from the people they were based on, was stunning.
A mortgage was something bought and soul and the promise to pay existed apart from the people whose promises it was based on--a form of what one might call papyrolatry, in which the paper took on an absolute non-symbolic existence.
Another version of animal spirits perhaps--except the animal is the ostrish with its head in the sand or the hornet it its paper nest.
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