Why the Market Mess? Blame your Brains
I take today’s title from an article in Forbes, by Matthew Harper. (Click here to skip intro and read the article)
Article Introduction (Via Forbes):
What caused the meltdown on Wall Street? Greed. Lax regulation. Panic. And maybe the very biological makeup of investors’ brains. Eight years ago a handful of brain scientists began using MRI scanners, psychological tests and an emerging understanding of brain anatomy to try and overturn traditional economic theories that assume people always act rationally when it comes to financial decisions. To understand the market, these researchers said, you needed to get inside peoples’ heads. They called their new field neuroeconomics.
Article Excerpts (Via Forbes):
So, can these neuroeconomists shed any light on what went wrong? Surprisingly, yes.
“Fear plus herding equals panic,” says Gregory Berns, a neuroeconomist at Emory University. “You bet it’s biologically based.”
“You don’t get mistakes this big based on stupidity alone,” says George Loewenstein of Carnegie Mellon University. “It’s when you combine stupidity and people’s incentives that you get errors of this magnitude.”
“So what’s a regulator to do? One argument against big bailouts is moral hazard–the idea that if you bail the banks out now, future bankers will take even bigger risks.”