I recently wrote two brief articles outlining the psychology of irrational financial decisions made by individuals in developed societies, or "fish", and their disproportionately negative reactions to financial loss (as opposed to financial gain). The analogy to "fish" in poker was used to highlight the general mass psychology underlying a decades-long credit bubble and persistently stubborn expectations of never-ending growth, while the second concept of "myopic loss aversion" illustrated the frightening scale of systemic frustration and displeasure most likely to result from the bubble's implosion. Yet, both of these concepts seem to beg a more profound question about the underlying psychological states they reflect:
Why do individuals in the developed world find it so difficult to, first, understand that these psychological states exist and, second, take some degree of personal control over them before it's too late to make a difference?
The general answer to this question may be simple, but its supporting framework is anything but and requires a sharp detour through the looking glass, away from our personal perspectives and into the arena of systemic, "big picture" analysis. The thought patterns and reactions associated with financial investment and loss may occur within the minds of specific individuals, but they are broadly structured and re-enforced by the human systems in which these individuals exist (economic, social, cultural, political). These evolved systems exhibit an emergent psychology that may not necessarily manifest itself within the minds of isolated individuals, or even small groups.
In that sense, we are living in an environment where the traits most critical for maintaining a healthy financial psychology, one detached from desires to "win every pot" or "chase every loss" and capable of emotionally handling short-term loss, are nowhere to be found. These traits include patience, discipline and self-confidence, and more specifically, an ability to sacrifice personal pleasure or egoistic pride in the short-term for long-term stability and prosperity. Those values may resonate with first-world, middle-class citizens in the abstract or in a work of fiction, but practically we are no more familiar with them than we are with ideals of loyalty, selflessness and courage.
Every aspect of our lives, from our days as young children playing games in elementary school to those as young professionals investing money in an asset market, has been conditioned on the premise that faster is not only better, but it is absolutely necessary for any degree of material success. We cannot afford to have patience or discipline, because we will miss out on all of the phenomenal returns casually tossed forth from the new hot thing in the technology sector or the new guaranteed play in the commodity space. Objective research and analysis is tolerated only to the extent that it does not stray too far from the conventional wisdom - growth and greed are always good.
If, somehow, we do actually lose a bit of money in our speculative investments, then we surely cannot afford to let that prevent us from watching our favorite daily line-up of mindless 30-minute prime time television shows, as they comfortably numb the pain of our loss. As long as we can hold on to our investment assets for dear life while the markets chaotically gyrate upwards, they will eventually regain their former value and it will be as if nothing ever happened in the first place. There is no apparent sensible reason for the average financial consumer to acquire and maintain discipline in their financial decisions, when investors with no such discipline continually stack their hands on top of their fists and watch truck loads of money materialize in the space between.
If your goal is to become materially wealthy and successful in a matter of months or years, then you had better not fold any potential winners. No, you must listen to a few short clips on CNBC, in which Jim Cramer spouts off buy/sell recommendations at madhouse velocity, and then immediately turn your money over to a brokerage firm which can allocate it (- commissions) towards the recommended equities and high-yield bonds. Personally, I recommend sub-prime mortgage-backed securities, because even though they may walk, talk, act and smell like human excrement, they have been officially rated AAA. If you get "scared" and end up selling these assets to cut your losses, then you will no longer be a loser on a piece of paper, but an officially-confirmed one in real life.
The human brain is a highly efficient machine (not to be confused with rational), and it will not adapt itself to incentives that simply do not exist. Policymakers and authority figures at every level of society would not have dared to incentivize values of patience or short-term sacrifice, because these traits did not help maintain the financial system of perpetual growth which effortlessly kept them in power. They immediately recognized the new financial reality that was rapidly spreading like cancer throughout much of the world, and they jumped on board before it left them behind. Our world had been defined by networked systems of material and intellectual production that communicate information within and between themselves at break-neck speed - our minds could not help but thoroughly condition themselves to desperately try and keep pace. That is, at least, until the "lactic acid" builds up and it's no longer physically possible for them to do so.
Josh Harris, a notorious pioneer of the Internet Age, ran a surprisingly little-known experiment in Manhattan at the end of the 1990s, ironically called "Quiet: We Live in Public". It consisted of 100 artists living in a basement "hotel" that was outfitted with pod rooms, and it lasted for one month before being shut down on the first day of the new millennium. The hotel offered "free" food, drinks and entertainment for the duration of a person's stay, but it charged an extremely hefty price in return. Each pod contained a video camera and monitor system that was networked to those in every other pod, so that each person could observe what any other person was doing when he/she was no longer in one of the communal areas. The artists could not eat, shower, sleep, use the bathroom or engage in sexual activity without someone potentially watching them do it.
Harris designed the experiment to showcase the Orwellian future he envisioned for our technocratic network society, and the ways in which people will react to this new reality. As one may expect, many of the self-proclaimed "open-minded" artists, who initially jumped at the opportunity to "live in public", quickly devolved into little more than territorial animals. The situation would have most likely resulted in deadly violence if it had not been stopped by the police and fire department, especially since the hotel contained a shooting range and a cadre of guns. It was not really the loss of privacy that spurred this rapid social deterioration, but the loss of any meaningful control over one's ability to remain private. Harris himself had a partial "mental breakdown" after he continued the panoptic experiment for six more months with his girlfriend in their loft apartment.
"Quiet" has become both symbolic and a literal representation of developed societies, where people lack any control over the material conditions of their existence and relations with others. The ability to control such conditions was almost always illusory, but the illusion had worked extremely well for many years. Now, our expectations of privacy have exponentially diminished since the turn of the millennium, just as Harris predicted, but so have our expectations of financial stability and prosperity. Networked computers determine just how quickly our private lives become discrete packets of public information, and our financial portfolios become electronic heaps of worthless rubble. We "volunteered" to participate in this grand experiment, allured by promises of cheap food (energy) and unique entertainment, and so we will follow its dictated psychology to the bittersweet end, when it is finally shut down and our minds are left with scattered memories of a dark and regrettable time in the collective history of mankind.
*For a detailed look into Josh Harris' "Quiet" experiment and other aspects of his life, I highly recommend the award-winning documentary, We Live in Public.