The process of enculturation doesn’t just afflict middle-aged scientists, struggling to appreciate a new anomaly. It’s a problem for any collection of experts, from CIA analysts to Wall Street bankers. Let’s stick with Wall Street, since Goldman Sachs is in the news. The question for senators and regulators is why some very smart people (and their very clever quantitative models) missed a financial bubble that, in retrospect, looks devastatingly obvious.
Let’s begin with a classic experiment, led by Jerome Bruner and Leo Postman. A group of undergraduates was briefly shown a series of playing cards. The vast majority of the cards were normal, the usual assortment of face cards and numbered suites. Every once in a while, however, one of the cards was “anomalous,” so that Bruner and Postman would flash the students a card that couldn’t exist, such as the red ten of spades, or the black five of diamonds. Interestingly, the subjects almost never recognized these aberrations. Instead, they distorted the perception to fit their expectations, so that they remembered seeing a black ten of spades, and a red five of diamonds. They were so familiar with the standard deck of cards that they could no longer see what was unfamiliar. This meant, of course, that they ended up missing the most interesting bits of information.
Such are the hazards of enculturation. The only difference is that, instead of becoming too familiar with a standard deck of cards, we become too familiar with the standard model of physics, or the Wall Street models that assume real estate prices won’t drop simultaneously all across the country. And so we become blind to our blind spots. I wrote about the neuroscience of this process earlier this year in Wired:
In one 2003 study, Kevin Dunbar had undergraduates at Dartmouth College watch a couple of short videos of two different-size balls falling. The first clip showed the two balls falling at the same rate. The second clip showed the larger ball falling at a faster rate. The footage was a reconstruction of the famous (and probably apocryphal) experiment performed by Galileo, in which he dropped cannonballs of different sizes from the Tower of Pisa. Galileo’s metal balls all landed at the exact same time — a refutation of Aristotle, who claimed that heavier objects fell faster.
While the students were watching the footage, Dunbar asked them to select the more accurate representation of gravity. Not surprisingly, undergraduates without a physics background disagreed with Galileo. (Intuitively, we’re all Aristotelians.) They found the two balls falling at the same rate to be deeply unrealistic, despite the fact that it’s how objects actually behave. Furthermore, when Dunbar monitored the subjects in an fMRI machine, he found that showing non-physics majors the correct video triggered a particular pattern of brain activation: There was a squirt of blood to the anterior cingulate cortex, a collar of tissue located in the center of the brain. The ACC is typically associated with the perception of errors and contradictions — neuroscientists often refer to it as part of the “Oh shit!” circuit — so it makes sense that it would be turned on when we watch a video of something that seems wrong.
So far, so obvious: Most undergrads are scientifically illiterate. But Dunbar also conducted the experiment with physics majors. As expected, their education enabled them to see the error, and for them it was the inaccurate video that triggered the ACC.
But there’s another region of the brain that can be activated as we go about editing reality. It’s called the dorsolateral prefrontal cortex, or DLPFC. It’s located just behind the forehead and is one of the last brain areas to develop in young adults. It plays a crucial role in suppressing so-called unwanted representations, getting rid of those thoughts that don’t square with our preconceptions.
When physics students saw the Aristotelian video with the aberrant balls, their DLPFCs kicked into gear and they quickly deleted the image from their consciousness. In most contexts, this act of editing is an essential cognitive skill. (When the DLPFC is damaged, people often struggle to pay attention, since they can’t filter out irrelevant stimuli.) However, when it comes to noticing anomalies, an efficient prefrontal cortex can actually be a serious liability. The DLPFC is constantly censoring the world, erasing facts from our experience. If the ACC is the “Oh shit!” circuit, the DLPFC is the Delete key. When the ACC and DLPFC “turn on together, people aren’t just noticing that something doesn’t look right,” Dunbar says. “They’re also inhibiting that information.”
The lesson is that not all data is created equal in our mind’s eye: When it comes to interpreting our experiments, we see what we want to see and disregard the rest. The physics students, for instance, didn’t watch the video and wonder whether Galileo might be wrong. Instead, they put their trust in theory, tuning out whatever it couldn’t explain.
How can Wall Street escape such blind spots in the future? David Brooks has a nice riff today on the virtues of decentralizing markets. Or we can look to the Israeli intelligence services. After failing to anticipate the 1973 Yom Kippur war – in retrospect, the warning signs of an Egyptian/Syrian attack look obvious – Israel didn’t gut the Mossad, or centralize all authority in a single office. Instead, the government added an entirely new branch of intelligence analysis, the Research and Political Planning Center, which operated under the auspices of the Foreign Ministry. The mission of the new Center wasn’t to gather more information; the Israelis realized that data collection wasn’t their problem. Instead, the unit was supposed to provide an assessment of the available data that was completely independent of both AMAN (the military branch of intelligence) and the Mossad. It was a third opinion, in case the first two opinions were wrong. In other words, the country reacted to the problem of enculturation by creating a new intelligence culture, with a different set of assumptions, expectations and beliefs.
The success of financial reform won’t ultimately depend on the precise details of derivative regulation, or the specific powers of the Consumer Financial Protection Agency. Instead, it will depend on whether or not reform has created a structure – either in the private sector or in government – where people are able to notice the red ten of spades before it’s too late. Every mind has blind spots; that’s an inevitable side-effect of knowledge. The key is to make sure not everyone is blind to the same thing.
PS. Maybe Wall Street should embrace neurodiversity. My favorite part of The Big Short was really about the cognitive benefits of Asperger’s.