Jon Corzine, who those of us who watch markets have watched as he moved from Goldman to the Senate to being defeated for Governor and now being defeated – reportedly by his own doing – as CEO of MF Global, evidently made a series of very bad decisions. Now Corzine is a smart man with market experience so why?
If Nobel Laureate Daniel Kahneman is to be believed, Corzine was probably thinking “fast” and not “slow”. He acted on his intuition about what European markets would do and then when that went bad, possibly allowed some sort of panicked-driven cover-up. (Without rushing to judgment, they do say it is always the cover-up don’t they?)
But does this concept of thinking fast or thinking slow and the characters of the brain’s ostensible “system 1” and “system 2” really explain it?
First, all decisions require emotion. This is an indisputable scientific fact. So to deconstruct any decision, the question is what emotions was Corzine feeling when he made or authorized was now seem to be very regrettable decisions. The easy answer for most people will be “greed” but that gets us exactly nowhere. What’s missing from the “rational man” model of decisions is the reality of regret – or the worry or perception of future regret. In market decisions this turns into a burning fear of missing out. In trading cases, this makes the idea of “reversion to the mean” (or things are just too cheap), way too appealing.
When that doesn’t work, it makes, “well if I get out now I will take a big loss and it will come back” way too compelling. In disaster scenarios, it turns into, “I just need to buy time“.
But here’s the secret, if the emotion involved was routinely reviewed as relevant data then Corzine or anyone else will be less compelled to take action driven by it. Totally revamping emotions as data allows for the evaluation of alternative emotions like “what if I am wrong“. And that is the only way to get out ahead of any concept or fact of our brain’s ostensible “system 1” and “system 2”