Why We Consent to Market Intervention-Minyanville

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Why We Consent to Market Intervention

Matt Ford Sep 29, 2008 9:45 am


		When threat emanates from markets, people are more likely to yield to intervention programs.

The change, it had to come
We know it all along
We were liberated from the fold, that’s all
--The Who

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Support behind the government’s bank bailout package or recent efforts to prop up firms like Fannie Mae (FNM), Freddie Mac (FRE) and American International Group (AIG) leaves some free market proponents scratching their heads. In a country founded on principles of individual freedom and liberty, how can majority support be marshaled for programs that interfere with market mechanisms?

Research by Staw, Sandelands, and Dutton (1981) helps explain why we yield to interventionist measures during times of threat. Their ‘threat-rigidity’ theory considers the problem of maladaptive response to environmental change. Synthesizing multi-level findings from previous studies, the researchers posited that people predictably respond to threatening situations in a ‘rigid’ manner and that these rigidities are expressed in two groups of behavior.

First, threat may result in a restriction of information processing, such as a narrowing of fields of attention, simplified information codes and language, or a reduction in information channels. Such behavior is rigid because it restricts search to a narrow set of possible responses to the threat. This helps explain, for instance, collective focus on the current bailout choice rather than seeking other well-reasoned alternatives such as the designs discussed by Mr. Practical or John Hussman last week.

Second, threat encourages consolidation of power and influence and decision-making authority that is concentrated at high levels of a hierarchy. Rigidities result from granting unilateral authority to a small coalition for determining appropriate response to the threat. Through this lens, we can readily explain collective willingness to replace democratic principles with a reliance on the judgment of a Treasury secretary or Federal Reserve chairman to speedily navigate the country through an intractable situation.

Rigid behaviors encourage less varied, inflexible responses to threats. When threats emanate from environmental change that is similar to past episodes, then these rigidities may be fully functional, since they encourage efficiency in enacting learned patterns of cause-and-effect responses that may have been effective in the past.

However, when the threat emanates from major environmental change, then rigidities promote dysfunctional pathologies of maladaptive behavior. When the environment has changed radically, flexibility and diversity of response have survival value (Staw et al., 1981: 502). Conversely, restriction of information processing and centralization of decision-making authority decrease the likelihood that novel solutions will be developed to cope with unique threats.

What to conclude from threat-rigidity theory in light of our present situation? If the current credit crunch is merely a different flavor of past crises, then our rigid behavior improves chances of effective threat resolution. However, if the present situation emanates from a historically unique confluence of factors, then probabilities of deriving effective coping mechanisms from our rigidities are reduced.

The longer-term implications concerning the sustainability of a society grounded in individual freedom and liberty are also interesting to ponder in the context of this theory.

References

Staw, B.M., Sandelands, L.E., & Dutton, J.E. 1981. Threat-rigidity effects in organizational behavior: A multi-level analysis. Administrative Science Quarterly, 26: 501-524.


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Isidore Bale

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09-29-2008, 10:05 am
In buying a business, the first thing done in valuing a prospect is to take an inventory of ALL assets. This means, that the Feds should have, before a bailout was suggested inventoried all assets that are expected to be bought from each institution Read More

David Fitzsimmons

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09-29-2008, 10:33 am
Hi, Professor. Is Edwin Lefevre's "Reminiscences of a Stock Operator" on your reading list ? I find myself re-reading bits of it every couple of months... today's reading is from Chapter Nine, in which the crisis in short-ter Read More


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