Another one-year later post – with a twist

A year ago tonight I was merrily watching my Cleveland Browns actually win while on a Jet Blue flight to the CME’s Inaugural Global Financial Leadership conference when my first cell beep on landing was Bill Long calling to say LEH was BK and ML was BAC. 365 days after that watershed event we have endured the panic of complete financial destruction, more than adequately blamed Wall street, inadequately blamed (imo) borrowers, the rating agencies and mortgage brokers but most of all, inadequately attempted to understand the human decision processes behind these events.

Rarely does anyone stop to think about “how do we think” – “what goes into the process”? For one, we think we know. For two, and probably more importantly, BLAME is easier and actually much more fun.

Well to that I say 1) We barely know and are just now, through neuroeconomics, beginning to put the jigsaw puzzle together and 2) blame, vitriol and the almost certain associated regulation isn’t going to stop the next “Black swan” as long as the underlying causation isn’t fully understood – which is exactly where we are.

It is far too easy to assign responsibility to “animal spirits” and “greed” …. but it is not clear at all that neuroscience would support those two well-accepted demons. For one, animal spirits generally can be taken to mean emotion and unbeknowst to those who care about markets – whether on Main or Wall – is the fact that without emotion, nary a single decision can be made. In fact, the latest news is that without emotion our ability to see and identify objects might not even work. Think about that – without emotion you might not even know if you were making or losing money!

Furthermore, to the topic of greed specifically – a number of experiments show that it isn’t about making more money – it is about the fear of regret over not making money that you could have made. THAT is a whole different ballgame. It means for example that Morgan Stanley or Citigroup, while they may have recognized the ensuing wobbliness of MBS’, it was hard to stop… or as Chuck Prince, then CEO of C infamously said, (roughly) – if the music is playing, we have to keep dancing.

In order to have even a remote chance of averting the next killer black swan, we simply have to come to understand the true role – both good and potentially bad – of feelings/emotions in perception, judgment, decisions and actions. Right now we are still on the complete wrong track thinking that regulation, pay-cuts and better models will solve the problem.

Markets are a game of predicting of other human behavior in the midst of changing circumstances- social markets vs. efficient markets. Our brains understand them as such and use context to interpret the data. In the use of context, we rely on implicit learning to which we may or may not have conscious access. The trick is to start getting conscious access – that is the ONLY path to fully objective decisions. And actually it is the only path around fudge factors and confirmation biases in model building too.

In other words, deliberate understand and conscious access to how our brains understand risk – the psychology of risk – is the true uber-risk management tool. Conscious access, by definition, means internal and external emotion analytics.

In short, it is time to Re-Think Thinking.

More to come….

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