There are a lot of conservatives casting around these days looking for an explanation of the failure of financial market to apprehend the nature of the risks being undertaken and the consequences thereof. David Brooks is one of them. When David puts on his pseudo-science hat, you can be sure that you are about to be taken for a ride.
Doggone it Spot; you did it again.
Did what, grasshopper?
Mixed a metaphor: pseudo psychoanalysts and chauffeurs.
Just wanted to see if you were listening, grasshopper.
Anyway, here's Brooks' introduction to his lecture on the subject:
Roughly speaking, there are four steps to every decision. First, you perceive a situation. Then you think of possible courses of action. Then you calculate which course is in your best interest. Then you take the action.
Over the past few centuries, public policy analysts have assumed that step three is the most important. Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest.
But David is anxious to tell us now that our problem is not that we're irrational, but that we sometimes just don't see things right!
Well, his way, obviously.
What Brooks is describing is the rational man or efficient markets hypothesis. Craig Westover in Sim City. But that idea has been under re-examination for some time now:
Yale's Robert Shiller scoffed at the Efficient Market Hypothesis, commenting after the 1987 crash that the "efficient market hypothesis is the most remarkable error in the history of market theory.
Phillips, Bad Money, Viking Press (2008) pp. 78.
But now, guys like Brooks and his fellow travelers are bustling about looking for an explanation for this latest in a series of market crack-ups that leaves the core of the efficient market hypothesis intact: it was GSEs; it was the Community Reinvestment Act; it was a flock of black swans, whatever.
Brooks winds up his column this way:
If you start thinking about our faulty perceptions, the first thing you realize is that markets are not perfectly efficient, people are not always good guardians of their own self-interest and there might be limited circumstances when government could usefully slant the decision-making architecture (see “Nudge” by Thaler and Cass Sunstein for proposals). But the second thing you realize is that government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they’re even more likely to filter inconvenient facts.
This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort.
At this point, boys and girls, we have to take a little detour and take a look at the organizing principle of securities regulation in the United States, certainly going back to the '33 Securities Act and the '34 Exchange Act: disclosure or transparency. Neither the SEC, nor for the most part the state blue sky regulators, pass on the "fairness" of a stock offering. They are quite concerned about the accuracy of the disclosures made about a security at the time of its issue, and those made about the operation of the business of a company whose securities are publicly traded thereafter.
Spot doesn't think there will be - or ought to be - serious proposals to put the government into the fairness business for securities. But it does need to get into the transparency business in a bigger way.
Hedge funds, private equity, leverage factories, MBS, CDO, derivatives including credit default swaps (thanks Uncle Phil!) amount to what is called a "shadow banking system" with little oversight or transparency.
But David Brooks is trying to scare you, boys and girls, by implying that the government might get into the micro-economic decision-making business is a big way. That's paranoia or demagoguery.