Dealing With Scary Mr. Market
Tuesday, September 16, 2008
A rough beast prowled yesterday. If you read the business press, the market woke up with "jitters" after playing "a game of chicken." It wound up suffering from "dizziness," recoiling from a "campfire" possibly turning into a "forest fire," or a destructive "tsunami."
The market has a personality? Intentionality? A psychology? It can save us with transcendent behavior or ruin us like a demon?
What's up with the way we anthropomorphize markets -- the way we tell stories about them as if they are creatures with minds of their own?
"We do it for everything. We see clouds in skies and we can't help but see patterns," says Dan Ariely, a professor of behavioral economics at Duke and the author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions."
"We did a study in which we had random shapes on a computer screen bouncing around. Within two minutes, people had stories. The circle was evil and was chasing the little triangle, eating him up. Some other shape was protecting him. It's incredibly natural for us to do it," Ariely says. "We want to see causality. We want to understand the world. We want to see order. If things are just random, it's not comfortable. We find patterns when there are no patterns. We're really, really good at this. It's important to our psychological well-being. If we thought we had no control and no understanding of what's happening, it would be very tough."
Making amorphous forces into characters we can grapple with has a long history. The Greeks made the idea of wisdom into the goddess Athena. To this day, we name our storms: Hanna, Ike.
Our markets, in turn, have invisible hands, bulls and bears, even "animal spirits," as John Maynard Keynes in 1936 called the optimism or pessimism that can drive economics. On Oct. 30, 1929, Variety's famous banner read: "Wall St. Lays an Egg."
"To understand a market as an aggregation rather than a creature doesn't come naturally to people," says Cass R. Sunstein, who researches behavioral economics at Harvard Law School. "When we think about actors or institutions in our world, they normally are agents. They have minds. But a collection of widely dispersed judgments -- the human mind doesn't incorporate that easily."
"Anthropomorphizing does have the advantage of making a market a little more intelligible," says Grant McCracken, a cultural anthropologist at MIT. "If the market has the jitters, it's less unpredictable. It now has a mood, which mood can be imagined to have origins, duration and outcome."
The greater the unpredictability of a system, the more likely people are to ascribe volitional qualities to it, says Nicholas Epley, a professor of behavioral science at the University of Chicago.
Rocks or billiard balls don't move unpredictably. But if a billiard ball were suddenly to move on its own, we no longer would have an explanation for what we are seeing and would ascribe intentionality to the ball.