Might the bailout of the week strategy in vogue in Washington be simply irrational behavior on an institutional level?
I hinted at this in Peeling Away the Economic Onion. I ran across this Shankar Vedantam column in the Washington Post, Taking More Risks Because You Feel Safe
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He asserts that
Trying to fix problems that affect vast numbers of people has an intuitive appeal that politicians and policymakers find irresistible, but several warehouses of research studies show that intuition is often a poor guide to fixing systemic problems.
For instance, protecting homeowners from foreclosure, dishing out a massive tax rebate and saving big financial services firms all might sound like good ideas, but Vedantam tells us “the problem with most social interventions is that they target not robots and machines but human beings — who regularly respond to interventions in contrarian, paradoxical and unpredictable ways. ”
He cites Clifford Winston, a Brookings Institution economist and author of “Market Failure Versus Government Failure,” who says that government actions generally ‘have little effect, or actually make things worse.’
Not a good sign for the economy. I’m not picking on government officials, either. Businesspeople aren’t necessarily any better — remember this Jim Cramer moment from January?
But what is it in our psychology that causes us as individuals and in concert to, in effect, throw good money after bad?
The short answer may be that we hate losing, and that aversion to losing can override good judgment. That’s the thesis of “Sway: The Irresistible Pull of Irrational Behavior” a book by Ori and Rom Brafman that starts with the dramatic tale of one of the world’s safest pilots inexplicably getting into the worst airplane collision in history, and uses that to illustrate how the desire to avoid losing can make the irrational seem reasonable (here’s the gripping first chapter. If, as they get into a bit later in chapter one, individuals in the stock market will chase a loss, why wouldn’t government officials do the same thing on a larger scale? It might seem to them like common sense, but it’s more like common nonsense. Having started, will they be able to resist its pull? And can knowing what’s going on help you keep your company out of harm’s way?
