Tuesday, March 25, 2008
Word of the Day: Greed
greed: (1) excessive desire to acquire or possess more (especially more material wealth) than one needs or deserves; (2) reprehensible acquisitiveness; insatiable desire for wealth (personified as one of the deadly sins)
If you have read a story about the economy over the past few weeks, you have undoubtedly come upon the word "greed." It is normally paired with "fear."
Here's an example: NPR, which liberals take to be the summum bonum of news coverage, has begun a series of interviews on "capitalism and the economy." It began with a "conversation" between Renée Montaigne and former Treasury Secretary Robert Rubin, who was previously a trader at the investment bank Goldman Sachs.
Montaigne brings up "the topic" that—judging from the news—must be on everyone's
RM (quite chirpily): Can you regulate greed?
Rubin (quite lugubriously, as one would expect from a "serious thinker"): The answer to that question, in my opinion is "No." And I think that that is exactly the right question.
I always thought to myself when I ran trading rooms that you were maintaining a constant balance between greed and fear. And what seems to happen in financial markets is that if you have good times for a while, then greed, if you will, seems to take over and participants weigh the risks less and less heavily as they reach for return. And then after a while you get excesses in the financial markets and then that leads to a periodic downturn.
I don't think you can regulate against human nature, but what you can do is try to put regulations in place that will limit the effects of these aspects of human nature. But in doing that you have to maintain a balance so that you don't smother the benefits of a free-market financial system. [a Simply Appalling transcription]
It is easy to see what this bit of balderdash is about—fighting off regulation of the financial markets. There are quite a few capitalists nowadays who fear that the freedom to pursue their greed may be curtailed. So it's quite natural that greed and fear should spring to the minds of the more articulate among them.
I became interested in Rubin's argument because it is so widely repeated that it has become mythic. I have no doubt that media audiences nod in agreement with the same alacrity as if it were asserted that the United States is the greatest nation on earth.
First, Rubin posits a "human nature." Then he asserts what the primary motivators of this "human nature" are—greed and fear. Having asserted these two ridiculous "facts," he then leads us to a kind of despair—the despair of crushing inevitability. We might as well attempt to control the weather, he seems to say.1
In the face of such a fate, what can we humans do but "laissez les bons temps rouler," as they say in New Orleans—"let the good times roll." Only left-wingers and other lowlifes would suggest anything otherwise. And so it is that we have let the good times roll for the financial markets—at least until now.
De natura hominis
As best I can tell the phrase "human nature" has two meanings: (1) some people imply an innate, inherent attribute of human beings—an essence. (2) others use it to describe some set of normative behaviors. Rubin presents his argument using the phrase in the first sense, though my guess is that if he were challenged on it, he would then amend it to the second sense.
Of the first sense I can only say that if humans possess some essential quality that is their "nature," I'm sure I don't know what it is (and if you do, please leave a brief note in the Comments). But let's assume that such a human nature exists. If I wanted to learn about it, would I consult an economist? No, I'd check with philosophers and theologians.
And of the second sense, if I were interested in knowing what normative human nature is, I might consult with geneticists, behavioral biologists, anthropologists, sociologists and psychologists. But I cannot imagine why I would ask a free-market economist, who reduces human beings to such simple organisms that he might as well be describing paramecia.
This "human nature" business is part of the flim-flam. It is ironic that the Christian right—cheerleaders for capitalism all—should accept that a sin is what drives it. And they are joined in this by a number of Marxists, since the greedy capitalist is part of the stereotype.
To be sure there are enough greedy capitalists to go around. But if we're to look for market motives among the Seven Deadly Sins, we might also check out Pride, Envy and Sloth.
The Economist has recently chimed in on human nature—
And, human nature being what it is, Jérôme Kerviel, who lost Société Générale a fortune, and the staff of various loss-making, state-owned, German Landesbanks did not need huge pay to lose huge sums. The desire to show that you are a match for the star trader next door, or the bank in the next town, will do.
Ah, we see Pride and Envy at work here.
Then there's Sloth, my favorite sin. John Gapper discusses the causes of the demise of investment bank Bear
When the going gets tough, the tough get going. That is the cliché about surviving crises. It is not: When the going gets tough, the tough go to Detroit to play bridge.
But a bridge tournament in Detroit was where Jimmy Cayne, chairman of Bear Stearns, chose to be at the end of last week as his investment bank became embroiled in a solvency crisis. By the time he returned to New York to lend a hand in person, the rest of Wall Street had pulled the plug and the Federal Reserve had been forced to provide emergency funding to Bear through JPMorgan Chase.
Mr Cayne’s response to last week’s crisis, which culminated in JPMorgan taking over Bear for $2 a share and wiping out a lot of his wealth, was a fitting end to a year during which Bear executives tried insouciantly to shrug off the doubts of investors and other banks about their business. The end result was humiliation and ruin for Bear’s 14,000 employees.
A Bear Stearns board member holds out for Greed—
It is tempting to think that Bear was simply a victim of circumstance. On that view .... [i]t was a perfectly solvent business that was engulfed in the credit crisis like Northern Rock before it.
This was the conclusion drawn by Stephen Raphael, a former Bear board member. Speaking to The Wall Street Journal, which also disclosed Mr Cayne’s bridge jaunt, he said: “Wall Street is really predicated on greed. This could happen to any firm.”
But no. It was Sloth—
Bear’s leaders were nothing like as hard-working or assertive in defending their bank in the year leading up to its demise. Mr Schwartz, a laid-back corporate financier and former analyst who lacked any experience of running a securities trading business, had put more effort into outreach but lacked the time, and perhaps the appetite, to fight back effectively.
The truth is that Bear’s leadership was old, self-satisfied and inbred. It had become used to telling the same jokes, travelling to the same bridge tournaments and treating the rest of Wall Street with disdain. And when the going got tough, it allowed its institution to perish.
It would appear that Wall Street is so wracked by sin that one hardly knows where to minister.
I bet you know plenty of people not principally motivated by greed. Speaking personally, I hardly know any who are, but some would say I'm moving in the wrong circles. The point is that if the markets are being run by greedy people, there's no lack of people better suited to the task.
Our lawmakers demand that gamblers not be allowed to play college or professional sports, and we try not to assign rapists to head up women's crisis centers—no matter how successful they are in their respective fields. So why do we allow greedy (or prideful or envious or slothful) people to run Wall Street or engage in trading?
What happens when an MIT management prof, a colleague in the MIT Laboratory for Financial Engineering and a SUNY psychiatrist walk into a room? While you think of a better ending to the joke, here's what they did: They produced a study called "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders."
According to the abstract—
We investigate several possible links between psychological factors and trading performance in a sample of 80 anonymous day-traders. Using daily emotional-state surveys over a fiveweek period as well as personality inventory surveys, we construct measures of personality traits and emotional states for each subject and correlate these measures with daily normalized profits-and-losses records. We find that subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side exhibited significantly worse trading performance. Psychological traits derived from a standardized personality inventory survey do not reveal any specific “trader personality profile”, raising the possibility that trading skills may not necessarily be innate, and that different personality types may be able to perform trading functions equally well after proper instruction and practice.
Along with the usual caveats and pleas for "more research," the authors offer some tantalizing observations in their conclusions—
[I]n a recent study by Fenton-O’Creevey et al. (2004) of 118 professional traders employed at investment banking institutions, they find that successful traders tend to be emotionally stable introverts who are open to new experiences. These findings suggest that typical emotional responses may be too crude an evolutionary adaptation for purposes of “financial fitness”, and as a result, one component of successful trading may be a reduced level of emotional reactivity. Given that trading is likely to involve higher brain functions such as logical reasoning, numerical computation, and long-term planning, our results are consistent with the current neuroscientific evidence that automatic emotional responses such as fear and greed ... often trump more controlled or “higher-level” responses.... To the extent that emotional reactions “short-circuit” more complex decisionmaking faculties—for example, those involved in the active management of a portfolio of securities—it should come as no surprise that the result is poorer trading performance.
No, it shouldn't come as a surprise. But my view is that until the day when we can have our day-traders properly wired with electrodes, we must regulate, regulate, regulate!
In the meantime, the authors of the study share some advice from another student of the world of finance—
Be an introvert. Keep your emotions stable. Stay open to new experiences. Oh, and try not to be misled by randomness, stop thinking you are in control of the situation, and don’t expect any help from your boss.
That sounds like advice we all could use right now.