WSJ Weekend: “Fund Fraud Hits Big Names”. New York Times Sunday Business: Schiller talks confidence and beliefs and Ben Stein talks fear.
Madoff’s investors “felt confident” in his long-time consistent returns. Yet every article indicates there were multiple red flags. No investment fees? Not even a 1% management fee when most charge 2%? As Joe Aaron was quoted, “why would a good hedge fund guy work for pennies?” Conflicts of interest, no independent custodian, not even registered with the SEC before 2006 – why didn’t at least the other supposedly sophisticated hedge funds notice that stuff?
Because people want to believe. Read that again – want to believe. It means people have a feeling about having a feeling. Madoff’s spectacular Ponzi scheme only underscores what neuroeconomists are seeing in their pictures of our brains – that we base all our analysis (or lack thereof) and hence our decisions, on our feelings – no matter how much we want to believe (there is that word again) otherwise.
Famed economist Robert Schiller writes in today’s NY Times that if Obama could set a goal of full employment and if people would believe it, then confidence could be restored to the economy. I have met Bob. I like Bob. But.. Bob, c’mon – while you are technically and totally correct about the relationship between beliefs, the feeling of confidence and what people do, I seriously doubt any politician (even the almost-deity President-Elect) can inspire that kind of belief!
Nevertheless the real point is that the X factor here is the criticality of the physical experience (i.e. feeling) of confidence. …. feelings, feelings, feelings. Or take another New York Times columnist Ben Stein, “All that Fear” -? … “there is a new feeling in the land – fear – on a scale that I have never experienced. Chilling right to the bone fear. Fear that there is no bottom to our problems, that we got into this mess in some way we don’t understand, and that no one knows how to get out.”
“IN SOME WAY WE DON’T UNDERSTAND” – truer words have never been spoken! Underneath this entire great recession in the making is the problem that we don’t use our brains in the way they are designed. We simply don’t understand them – or at least most of us don’t.
We got into this mess because we all believe (there it goes again) in numbers and logic. We dismiss, discount and deny our feelings. Yet ironically if “they” had listened to the feeling of fear that the oddities about Madoff induced or the feelings of fear that Mathew Tannin of the Bear Stearns hedge funds wrote in his infamous email that has unfortunately earned him an indictment, we would not be where we are now.
NO! Skip the damn “maybe”. Us sophisticated financial types think that numbers, math and rational logic are the answer to everything. This belief couldn’t be further from the truth and it exactly what got us into this mess.
A group of the world’s leading neuroscientists, Camerer, Lowenstein and Prelec, call it Radical Neuroeconomics and it means that we can neither analyze, decide nor act without feeling. Invert that and it means that we do not analyze, decide nor act without feelings.
Therefore, it is always the feeling that counts – fear of the unknown matters now but while the bubble was blowing itself up, it was fear of missing out and fear of finding out your guy wasn’t making the 12%/year you were counting on.
In both cases, feeling the fear – analyzing and understanding it – would have saved you. It might possibly have saved Bear Stearns… and if BSC had been saved, then where would we be with Lehman, Citi, and the whole debacle of a credit crisis? it wouldn’t have felt good then but it sure would have been a lot less painful then what we have.
Let’s suppose anyone who was in on the chain two years ago – the group formerly known as investment banks, the ratings agencies, the mortgage brokers and yes even the home buyers had paid attention to that voice that was there. “Something about this doesn’t feel right.” Then let’s get really imaginative and suppose that the rest of the group would have accepted that kind of data…what might have happened? Would we have had one less risky loan, one more B- rating, maybe even an exchange for those weapons of mass financial destruction the CDO’s and CDS’s (exchanges keep things trading and it is the lack of trading that sent the credit market into the nosedive that our government is still trying to find a? parachute for).
FDR got it totally wrong. The only thing we have to fear is NO fear!
We just have to learn to systemically feel it, listen to it, understand and analyze it – just like we do with the numbers. Doing so would have saved billions – if not trillions – in worldwide market cap, global GDP and yes, ironically in the most important measure of all – that elusive X-factor confidence.