Fraud & Fear: Weekend Papers report on Facts & Feelings

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.

This Post Has 16 Comments

  1. Denise,

    You have it so right. Since jumping on your bandwagon I’ve discovered the more fearful I am the better are the decisions I make. This goes against everything society teaches us. Society tells us to trust the calm individual not the emotional one. I have come to the conclusion that being too emotional is not a liability but an asset.
    I wonder how many people would have placed there life savings with Bernie Mardoff if he came across as an emotional wildman instead of the trusting Grandfatherly type he has been portrayed as.
    Keep up the great insights.
    Dominic

  2. Denise,

    You have it so right. Since jumping on your bandwagon I’ve discovered the more fearful I am the better are the decisions I make. This goes against everything society teaches us. Society tells us to trust the calm individual not the emotional one. I have come to the conclusion that being too emotional is not a liability but an asset.
    I wonder how many people would have placed there life savings with Bernie Mardoff if he came across as an emotional wildman instead of the trusting Grandfatherly type he has been portrayed as.
    Keep up the great insights.
    Dominic

  3. I do not understand you to be saying that it is better to be more emotional, but to acknowledge our emotions and their physical expressions (our feelings), and become more skilled at evaluating the potential benefit of those emotions in the moment. Being emotionally numb is one extreme, often reserved for, say, the worst of criminals. But being extremely emotionally reactive does not seem to be a useful place to be either. One would be spending most of his time in self-analysis over the constant barrage of emotional fits. Having a sense of peace and calm seems to be a better place to be. Having the experienced wisdom to acknowledge and understand the feelings of the moment, and calmly, thoughtfully respond seems preferred over being content with the full feeling and expression of one’s emotions. Consider the seasoned veteran of war in the field with the new recruits: who would you rather follow?
    Better yet, who would you rather be?

  4. I do not understand you to be saying that it is better to be more emotional, but to acknowledge our emotions and their physical expressions (our feelings), and become more skilled at evaluating the potential benefit of those emotions in the moment. Being emotionally numb is one extreme, often reserved for, say, the worst of criminals. But being extremely emotionally reactive does not seem to be a useful place to be either. One would be spending most of his time in self-analysis over the constant barrage of emotional fits. Having a sense of peace and calm seems to be a better place to be. Having the experienced wisdom to acknowledge and understand the feelings of the moment, and calmly, thoughtfully respond seems preferred over being content with the full feeling and expression of one’s emotions. Consider the seasoned veteran of war in the field with the new recruits: who would you rather follow?
    Better yet, who would you rather be?

  5. Neal, you are as emotional as you are…. it isn’t really your choice.

    Analyzing emotions and understanding them inevitably calms them down but when they arise, they just are. And they have very useful information in them – whatever level they exist at.

  6. Neal, you are as emotional as you are…. it isn’t really your choice.

    Analyzing emotions and understanding them inevitably calms them down but when they arise, they just are. And they have very useful information in them – whatever level they exist at.

  7. Oh yes, one more thing – there is a huge difference between feeling an emotion and reacting to it or expressing it. In the above the latter sound merged which is one of the core realities – only actions (which include expressing an emotion as physical movement of some sort is required) need to be “controlled”.

  8. Oh yes, one more thing – there is a huge difference between feeling an emotion and reacting to it or expressing it. In the above the latter sound merged which is one of the core realities – only actions (which include expressing an emotion as physical movement of some sort is required) need to be “controlled”.

  9. I agree with your statements, and that was the intended direction of my comments. My thoughts were personified in the example of the veteran of war, perhaps well-expressed by the quote: “Courage is not the absence of fear, it is acting in spite of fear” – acknowledgment of emotions and experienced controlled response. I do not see that the advantage goes to the more or less emotional, but to the one who understands and responds wisely.

  10. I agree with your statements, and that was the intended direction of my comments. My thoughts were personified in the example of the veteran of war, perhaps well-expressed by the quote: “Courage is not the absence of fear, it is acting in spite of fear” – acknowledgment of emotions and experienced controlled response. I do not see that the advantage goes to the more or less emotional, but to the one who understands and responds wisely.

  11. Neal

    I know its hard to believe but having a barrage of emotions does not mean one cannot find inner peace or contentment. The denial of those feelings is what actually leads to the opposite, poor decisions and constant anxiety.By going through the unconcious internal checklist the emotional individual is usually the calm and take charge individual in the room when an emergency occurs or when immediate action is required.
    My beef is with our society telling us you have to supress those emotions if you are going to be successful. Why do you think so many young minds are medicated today in the classroom?
    A better solution whould be to chanel those emotions into constructive activity’s.
    What are constructive activity’s?
    It could be as simple as walking out of a room for 5 minutes or as intense as a physical workout.
    Its interesting that the calm and collective Barack Obama has chosen Rahm Emanuel to be his chief of staff. Calm and collective are not words that would describe his chief of staff. Is it possible the highly emotional Rahm Emanuel is good at making decisions and calm under fire.
    You might want to think twice on who you want leading you into battle.

  12. Neal

    I know its hard to believe but having a barrage of emotions does not mean one cannot find inner peace or contentment. The denial of those feelings is what actually leads to the opposite, poor decisions and constant anxiety.By going through the unconcious internal checklist the emotional individual is usually the calm and take charge individual in the room when an emergency occurs or when immediate action is required.
    My beef is with our society telling us you have to supress those emotions if you are going to be successful. Why do you think so many young minds are medicated today in the classroom?
    A better solution whould be to chanel those emotions into constructive activity’s.
    What are constructive activity’s?
    It could be as simple as walking out of a room for 5 minutes or as intense as a physical workout.
    Its interesting that the calm and collective Barack Obama has chosen Rahm Emanuel to be his chief of staff. Calm and collective are not words that would describe his chief of staff. Is it possible the highly emotional Rahm Emanuel is good at making decisions and calm under fire.
    You might want to think twice on who you want leading you into battle.

  13. Dominic, well said. I believe we each have our own unique innate temperament that helps define our emotional nature. As I said above, I do not see that the advantage goes to the more or less emotional person, but to the one who understands (what their emotions are revealing) and responds wisely. I think Denise is doing a great service of helping us to better perceive how the mind and body function together, and how we can consider the insights revealed and respond in useful ways.

  14. Dominic, well said. I believe we each have our own unique innate temperament that helps define our emotional nature. As I said above, I do not see that the advantage goes to the more or less emotional person, but to the one who understands (what their emotions are revealing) and responds wisely. I think Denise is doing a great service of helping us to better perceive how the mind and body function together, and how we can consider the insights revealed and respond in useful ways.

  15. Neal, you hit the nail on the head.When I first started to learn this trading business I read somewhere that trading was the most expensive way to get to know yourself.It took a while before I understood what that really meant. Trading forces you to deal with the emotions inside or you won’t survive very long in this business. Best wishes to you.

  16. Neal, you hit the nail on the head.When I first started to learn this trading business I read somewhere that trading was the most expensive way to get to know yourself.It took a while before I understood what that really meant. Trading forces you to deal with the emotions inside or you won’t survive very long in this business. Best wishes to you.

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