Over at The Atlantic. Shiller is the author of Irrational Exuberance, The Subprime Solution and Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global. As I've noted before, Shiller's specific arguments about the causal sequences behind manias and crashes leave a lot to be desired, but it seems entirely correct that he bet on the right horse when it comes to behavioral economics and the importance cognitive biases outside of the bounds of rationality in a market. The same phenomenon can be described from a different angle, such as Benoit Mandelbrot's The Misbehavior of Markets: A Fractal View of Financial Turbulence, but the moral is the same.
On an unrelated note, what's up with The Atlantic and employing elves. Do they figure because of the species' longevity they can reduce per unit labor costs by minimizing turnover? Aren't there added capital costs in substituting pure iron in their offices for equivalent alloys and metals?
- Log in to post comments
A lot of economics stipulates independent actors who do not communicate with one another and do not influence. This is a way of fitting economics methodologically to an atomistic physicist's model of science, but it's a pre-thermodynamic physics without entropy or turbulence. The economist's view of independent actors is inherently implausible and unempirical and is shared by no other body of thought that I know of, except perhaps some schematic versions of psychology.
One factor in bubbles is group psychology, where everyone believes something because everyone else believes it. It's self-reinforcing because, while you're in a bubble, you lose if you don't go along with it. "The market can stay irrational longer than you can stay solvent".
This, BTW, is social psychology, between individual psychology and sociology. Obviously individual psychology has something to do with it, but the phenomenon is social (like fluid dynamics).
My contribution is at the link. I think that 1.) it's very possible that a high proportion of the players in finance were so dosed with (probably legal) amphetamines and antidepressants that their judgment was impaired, and 2.) there was a society-wide irrational optimism both reinforced and fed on the professional irrational optimism.
I am actually pretty serious about this, though I don't actually expect anyone to agree.
Negativism is not a bad thing. Negativism can keep you from jumping off cliff, but Americans are optimists. But I've been cursing the darkness all my life and have never gotten any thanks for it. Boo hoo.
My guess is that this is going to be worse than anyone can imagine. The people who are supposed to know what's happening seem to be improvising wildly and praying fearfully to their idols of choice.
Mirowski's "More Heat Than Light" talks about economics and the physics model. If you like that, you might also like Nicholas Georgescu-Roegan's "The Entropy Law and the Economic Process" (1971). Georgescu-Roegan was a player in his time, but this book of his was flatly ignored. The two books make a nice set with Mandelbrot.
FWIW John, I think your hypothesis has some weight.
I agree with John Emerson that the financial crisis could have been caused, in part, by the massive use of antidepressants in the U.S. Currently, one out of ten people are taking an antidepressant but as many as one out of six people have been on an antidepressant at any one time.
In the Physicians Desk Reference, one of the side effects [and this is not listed as a rare side effect either] listed for antidepressants is hypomania. Hypomania can cause poor judgement, risk taking, impulsivity, excessive spending, etc. The person who has hypomania does not appear sick to people but rather appears to be full of exuberance.
Go to www.SSRIstories.com where there are over 2,800 cases, with the full media article available, involving embezzlements, bizarre murders, suicides, school shootings [47 of these] and murder-suicides - all of which involve SSRI antidepressants like Prozac, Zoloft, Paxil, etc, . The media article usually tells which SSRI antidepressant the perpetrator was taking.