Dear Science,
Why are Wall Street investor types such panicky little bitches?
Chill the fuck out! Oh yeah, and be sure to ammo up and plant a
garden.
CTM
Why wouldn’t they be? When I conjure up an image of a Wall Street
minion—and remember, it’s the minions who actually make these
trades—all that can come up is the George W. Bush archetype, the
consummate Harvard Business School graduate. The men and women
who make the trades on Wall Street, and control these vast fortunes,
are human. And as humans, they’re anything but the masters of
wisdom and foresight they claim to be.
Let’s dispense with the notion that even professional investors act
in a manner that remotely resembles rationality. This idea is
the crux of modern economic theory, and it’s been disproven in one
experiment after another.
Let’s do one such experiment together right now! We’ll call it the
ultimatum bailout. The government is offering us $1,000. All we
have to do is agree on the split. And, according to the rules of
the bailout, I get to decide how much each of us receives. (Why me? I’m
the one answering questions here! Go read some Ayn Rand if this doesn’t
make sense to you.) So long as you agree, we both get our share of the
cash. If you disagree, neither of us receives money; you have the right
to sink it for both of us.
If I offer to split it evenly, $500 each, you’d say yes, right? What
if I offered you only $100? You (and most other people, as per many
studies on the subject, done in countries around the world) would say
no. It’s unfair. That’s irrational, from an economics perspective. If
you said yes, you’d still have $100 more than you have now; who cares
how much I get? The emotion-processing centers of your brain
care. In fact, the more unfair the split is, the more the emotion
centers of the brain become active, drowning out the reason centers.
The activation of the bilateral anterior insula is of particular
importance; it becomes active during strongly negative
states—like disgust and anger.
Panic, at least from one point of view, is the takeover of the brain
by such emotion-processing centers. Our brains are particularly prone
to this sort of takeover when it comes to thinking about gains or
losses, fairness and unfairness when dealing with money and material
goods. Faced with the possibility of a loss, our reason is
killed by our fear, anger, and distress. Combine this with the fact
that so much of what happened on Wall Street resembled gambling rather
than investment, and you have the perfect recipe for the sort of
magnifying boom and bust cycles that buffet us regularly in the
post-financial-
regulation world.
Repugnantly Yours,
Science
Send your science questions to
dearscience@thestranger.com.
@CTM
I think you need to chill the fuck out- what’s with your panic about the panicky bitches of Wall Street. Your panicked involvement in this nasty cycle of panic-strewn afterbirthing is enough to make me sick from eating my own fecal-laden hair, which would be a bitch to swallow and nearly possible to digest, therefore leaving me choking and clogged, unavailable to hear the panic in your voice when you are screaming at me to put down the goddamn knife. Fuck you and your bullshit attitude towards life and the liberties that each shithead trader has and will always have, you commie bastard.
I just thought that I’d point out that rejecting the $100/$900 split isn’t actually irrational if its possible to renegotiate.
This also goes to show that unilateral power is bad, in either case, because it means the most ‘rational’ decision is the one that screws the other guy the most. (For instance, if we can renegotiate forever, the veto-holder can just veto until he’s offered the $900/$100 split the other way.)
Our disgust reflex for unfairness works to discourage this type of behavior, since the person making the split in this case knows that he might get a rejection if he’s too unfair and likewise end up with nothing. If he assumed his target was ‘rational’ there would be no reason not to propose the $100/$900 split.
jfljoe —
Aw, shucks, yer such a sweet-heart
::blush::
Now go over and stand in the corner with the pointy hat on and try to be a good boy; the adults are talking.
— CTM
It’s unfortunate that CTM can’t see past the end of her own survivalist nose to see that her panic is also a contributing factor to this whole mess. Airing your worries about the panic is indeed a pathway to perpetuation, and, although secondary, it is itself panic. Maybe it is you who should be the wearer of the pointy hat. And Ross, why would you bring rationality into this discussion? The rational thing to do in quicksand is to stay calm, but what percentage of the population actually would? Irrational people rule the world, and thus, are quite awesome.
jfljoe, CTM —
You kids should play nice. The financial crisis facing our nation is dire indeed, with millions of starving American familes now facing job losses, housing forclosures and repossession of their ATV’s and RV’s from their driveways, you should consider the less fortunate people who can’t afford the internet or newspapers that you people choose to pollute with your disgusting words.
FUCK YOU ALL!!!
–beezettha
As Ross points out, rejecting the ‘unfair’ split IS rational behavior. The problem is that the economic model fails to include the value of socieal consequences.
In other words, a rational player can decide that saying “Fuck you” to an offer of a 90/10 split is worth the opportunity cost of 10%. As the opportunity cost of rejecting the offer increases – 20%, 30%, etc. – we expect to see a shift in behavior towards accepting the offer, which is exactly what happens.
Simply improve your model, and rationality reappears.