CONFIDENT THINKING, THE WISDOM OF INSECURITY!

CONFIDENT THINKING, THE WISDOM OF INSECURITY!

James R. Fisher, Jr., Ph.D.
© May 14, 2009

“The subprime crisis was essentially psychological in origin. Denying the importance of psychology and other social sciences for financial theory would be analogous to physicists denying the importance of friction in the application of Newtonian mechanics.”

Robert J. Shiller, “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It” (2009).

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THE LIMITS OF MACROECONOMICS

If you are like me, considering macroeconomics hurts your head. Clever people have taken arithmetic to new heights of complexity. In the process, banks and lending institutions have suffered loses of more than $4 trillion (re: International Monetary Fund); unemployment is 9 percent and threatening to go higher, industrial production is off 13 percent compared to last year; and most companies find their profits falling or morphing. What’s worse, no one knows for sure if the Bush-Obama stimulus packages will work.

Economic Nobel Laureate George A. Akerlof and economist Robert J. Shiller feel there is a troubling lack of reform in macroeconomics. What they find especially troubling is the share of the “finance” sector in total corporate profits rose from 10 percent on average (1950s through the 1980s) to 22 percent in the 1990s, and to an astonishing 34 percent in the first half of this decade of the twenty-first century.

The finance industry’s share of US wages and salaries has likewise been rising from 3 percent in the early 1950s to 7 percent in the current decade.

Clearly, this is a failure of the economy and the economists to track the capital absorbed “up front” by the financial industry, which has euphemistically represented its cut as “the costs allocating that capital.”

It is no accident that our best brains have moved to Wall Street where the money has been siphoned off over the last several decades at will before being distributed. Few gave this much attention until the economic meltdown. What’s more, it was perfectly legal.

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In their book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” (2009), Akerlof and Shiller consider genuine loses of the economy, credit default swaps (CDSs), losers and winners in the capital betting game, but, mainly, the psychology behind the whole dramaturgic play.

They argue people psychology is missing in macroeconomics today, what John Maynard Keynes called the “animal spirits” in his 1936 book, “The General Theory of Employment, Interest and Money.” The original “animal spirits” passage by Keynes reads:

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decision to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighed average of quantitative benefits multiplied by quantitative probabilities.” (pp. 161 – 162)

AKERLOF AND SHILLER’S “FIVE ELEMENTS OF ANIMAL SPIRITS”

The authors argue economists have limited macroeconomics to statistical models to predict economic trends, and track large economic entities such as financial systems with mainly mathematical algorithms while failing to see the problem as being equally intellectual. The “animal spirits,” by which they mean the psychological and even irrational elements that figure importantly in personal choices and personal behavior, are missing.

They have identified five elements in what they call “animal spirits”:

(1) CONFIDENCE or the lack of confidence has telling consequences as to the choices people make or fail to make. I have written a great deal about confidence over the years in several books and articles. It is nice to see men of this distinction giving confidence its just due. Confidence is not driven by rationality but the irrational belief in oneself and one’s choices. It is also driven by self-worth and self-trust, which are also irrational indices. They imply you have the confidence and capacity to manage your life and make choices beneficial to yourself.

This is a major theme in CONFIDENT THINKING (not yet published). Critical to confident behavior, economic or otherwise, is for people to trust the system to be honest and forthwith in dealing with them.

(2) CONCERN FOR FAIRNESS, that is, how people treat them against how they think they and others should behave. That dovetails with the first element. In terms of fairness, a person does not expect to be exploited although he may confuse what he needs with what he wants. In that sense, he expects to be treated fairly and honestly in guiding him to what is in his best interest.

This is also a major theme of CREATIVE SELLING (not yet published) in which I argue that the job of the seller is to persuade the buyer to want what he needs rather than to exploit need to the seller’s advantage by selling what is wanted but cannot be afforded

(3) CORRUPTION and other tendencies towards antisocial behavior. The authors point out that, relatively speaking, there has been little corruption, but it is the taint of corruption, the toxic attitude, which it generates, that has led to massive paranoia and suspicious behavior. This includes distrusting banks, postponing investments, or major purchases seeing the shadow of corruption everywhere. The shrinkage of the world economy has been more a matter of delayed spending than skimming at the top. Yet the perception of corruption, the belief banks, insurance companies and Wall Street are corrupt, with little evidence in support of such beliefs, has crippled the economy.

(4) “MONEY ILLUSION,” meaning susceptibility to being misled by purely nominal price movement that, because of inflation or deflation, do not correspond to real values. Money, per se, has been equated with value when often how much you pay for a thing may have little to do with either its quality or value. It is the status, prestige, or current faddism of the thing that generates the money illusion.

(5) OUR RELIANCE ON “STORIES,” for example, that all Jews are rich, that a Harvard or Princeton education insures economic independence, that the Internet led to a “new era” in productivity, that electronic gadgets have improved the quality of performance. It could be argued that workers spend far too much time emailing, texting, checking their BlackBerrys, and taking and downloading pictures when they should be otherwise employed with the tasks at hand for which they are being paid. That said, “stories” as myths are turning into fictive facts, which influence behavior. Earlier, this was called “self-fulfilling prophecies.” Now, it is the repetition of lies being reified into truths.

Other topics they cover are joblessness, savings, the volatile prices of financial assets and real estate, and the prevalence of poverty among African Americans. They see systemic limitations on today’s conventional macroeconomics. To wit:

“The theories economists typically put forth about how the economy works are too simplistic. That means we should fire the weather forecaster, and firing the forecaster means giving up the myth that capitalism is purely good.”

CRISIS IN CONFIDENCE

The element of “animal spirits” on which they place the most emphasis is the current crisis in confidence. It is, they say, “The first and most crucial of our animal spirits.” It displays itself when we ask ourselves: Is it rational or not for me to put my money in a bank in which I have confidence, or to buy a stock if I have confidence in the company’s business prospects? According to Akerlof and Shiller, this kind of behavior, by definition, is irrational since “confidence” for them is a kind of faith, not a matter of rational analysis. They write:

“The very term confidence implies behavior that goes beyond a rational approach to decision making. When confidence is explained in terms of trust, the very meaning of trust is that we go beyond the rational.”

But there is a downside to the “animal spirits” as well. The authors point out that when people have too much of irrational confidence, they behave in ways that cause the economy to become overheated.

In any case, the authors insist confidence is the critical index to behavior and has been largely ignored by economists. They have instead been preoccupied with data collection and evaluation while disregarding irrational aspects because they cannot be so easily quantified. This is another instance of the focus being on “things” at the expense people.

“Confident Thinking” and “Creative Selling” are consistent with these five elements of Akerlof and Schiller, authors who have brought their analysis down to ordinary people having ordinary lives making ordinary decisions that have direct impact on the economy. They understand how critical behavior is as a factor in a world of growing complexity.

Benjamin Freedland, Professor of Political Economy at Harvard in the “New York Review” (May 28, 2009) questions the efficacy of Akerlof and Shiller’s five elements while applauding the authors enlisting the behavior of people into the economic equation of the current crisis. It remains to be seen how seriously other economists take these five elements.

CONFIDENT THINKING, THE WISDOM OF INSECURITY

I am not an economist, but an organizational development (OD) psychologist who has written widely on these five elements, as they are fundamental to the efficacy of OD interventions.

Akerlof and Shiller demonstrate a fundamentally OD perspective. These five elements, expressed in a different context, are evident in A LOOK BACK TO SEE AHEAD (2007) as well.

“Confident Thinking” and “Creative Selling” are natural complements to Akerlof and Shiller’s “Animal Spirits.” Economics are not only involved in the buying and selling of commodities, but in intellectual capital as well, something these authors feel has been neglected in an economic sense. Intellectual capital considered on a most down-to-earth, intimate and fundamental basis has been my OD view from the trenches.

Macroeconomics has failed to give appropriate attention to excessive risk-taking, systematic mispricing of assets, and, often, plain reckless behavior. In the psychological world of OD, there has been inadequate attention given to the impact of confidence, trust, and the perception of paranoia. These irrational indices do not lend themselves easily to statistical verification, but do reflect the way people behave.

It was the reason forty years ago I wrote CONFIDENT SELLING (1970). No one could explain my success nor could I. So, I had to reexamine what I did, why I did it, and how I triggered behaviors that sparked significant sales. The key was a verification of Akerlof and Shiller’s “Five Elements.”

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Akerlof and Shiller have departed from the conventional wisdom of economists. They have put people first before profits. It remains to be seen the level of their influence. Reading yet another profile of “Einstein” (“Einstein,” Discover, Spring 2009), I was reminded how difficult it is to depart from convention. The profile was a reminder of what confidence it takes to step out of the pack.

Einstein was a man of such unshakable confidence. He was a loner and self-absorbed, and let very few people into his inner sanctum, and that included his own family. In retrospect, colleagues have written he wasn’t a polished mathematician or a profound physicist. He not only stayed with problems longer than others but also asked the right questions; questions that were often thought to be heretical. Going against the grain was natural to him. Nor was he afraid to embarrass or be in conflict with his colleagues.

Einstein discovered relativity and quantum mechanics, but in his stubbornness deserted the later, which has become the voice of physics today. He stayed in that stubborn mindset never retreating the rest of his life.

It bothered him for naught that he was out of sync with his colleagues while chasing a unified theory he never discovered.

He got it wrong, not once, not twice, but countless times. He made subtle blunders, outright goofs, and his oversights were glaring. Error infiltrated every aspect of his thinking. For example, he was wrong about the universe – he saw in a state of stasis and not an expanding universe. He was wrong about its content, wrong about the workings of atoms. His mistakes could be compelling and instructive, and some were even essential to the progress of modern physics.

He was an intuitive thinker whose discoveries were eminently logical, only his errors preserve the doubts, quirks and prejudices that fed his intuitions. He imagined himself chasing a beam of light. He focused passionately and painfully on a few simple ideas, looking for the truth of nature God had designed. He preferred to see that truth as stable, orderly, deterministic and knowable to the most intimate detail. “That God would choose to play dice with the world,” he once said, “is something that I cannot believe for a single moment.” His friend, physicist Niels Bohr replied, “Stop telling God what to do.”

He was a pantheist in the same sense as Spinoza and kept to that constant all of his life, which explains why he did not believe in religions, but believed in religion. He was as much an aesthete as a scientist with an instinct for beauty as would an artist.

The iconic Einstein is not the man. We sometimes forget he was as stubborn as a mule, a man who had the temerity, fortitude, stick-to-it-to-ness, and the luck to change our idea of the physical world. And for that we have made him that iconic figure.

Akerlof and Shiller have brought the individual into the economic equation. Very few ever step out from the crowd because most of us buy into ideas of things as they are, only a few display the confidence to challenge those ideas. That has been a central theme to my many missives, articles and books. Confident thinking is not founded in the absence of insecurity or befuddlement, something that plagued Einstein throughout his career, but in the wisdom of insecurity.

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