The Death of Homo Economicus
By Rob Roy Apr 06, 2009 12:20 pm
Mass psychology necessary to understanding the market.
The only way to teach economics in a semester or 2 is to simplify it beyond recognition. But the beauty of life is often in the details. Bennet Sedacca used to say that understanding markets didn't require an MBA, but degrees in history, psychology, sociology and macroeconomics.
The concept of a rational human who makes economic decisions with a full set of data and pursues enlightened self-interest is personified by Homo economicus. It's just such a mythical economic figure that allows us to simplify our models of the economic world.
As a model, it's enticing because it contains a hint of emotion (self-interest). And yet it completely fails to describe reality, because that emotion is masked by a false stability. Homo economicus has no way to adjust its emotions - to modulate from greed to fear and back again. But those mood swings are precisely what moves markets comprised of real humans (rather than economic models of humans) - just think of truisms like, “Buy from the fearful and sell to the greedy," or “The crowd is always wrong at extremes.”
Changes in Behavior
Simple: When you were young and learning how to use a hammer, you swung with abandon at that nail until you hit your finger for the first time. Suddenly, your method of hammering changed forever.
Not so simple: When you were young, you may have been afraid of roller coasters. But then you tried them, and surprisingly, it was fun. But then roller coasters started to make you feel queasy as you got older, and your bones rattled, and your neck hurt afterwards. By now, you've probably made up your mind whether you like them or not, and changed your behavior accordingly.
Complex: Flipping that string of condos sure was sweet. Making money without doing any real work sure is fun, and thank goodness the loss you took on the last one only wiped out all of your previous profits and didn’t really put you under. Now, how will you decide to take risk in the future? Are you chomping at the bit, what with all these new “cheap” prices, or have you changed forever?
Changes in behavior typically occur after consequences are revealed and absorbed. The amount of change in behavior and the permanence of the change is a function of the amount of pain felt and the length of the pain endured during the learning process.
Trying to get us to go back to our previous behavior is nearly impossible if the consequences suffered are severe enough.
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Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
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2009-04-06 18:43:16
darkest part of night is before dawn
markets on crack
but the main thing is to be happy whether in advance or decline and to say
Na Nach Nachma Nachman MeUman!
but the main thing is to be happy whether in advance or decline and to say
Na Nach Nachma Nachman MeUman!
2009-04-06 22:00:55
Homo Consumpticus
Good article. Covered pretty much the basics very well.
Perhaps another is Homo Petroleumus who evolved into homo consumpticus, and who is soon to be homo homelesshespends.
The market is a merely an accessory item on the greedmobile of expansionism. Sooner or later, you gotta have some chickens before they can come home to roost. If everyone is eating McNuggets and nobody is growing chickens because it doesn't make any money, then something has got to give.
Probably homo kids-r-hungri-and-cuss.
Perhaps another is Homo Petroleumus who evolved into homo consumpticus, and who is soon to be homo homelesshespends.
The market is a merely an accessory item on the greedmobile of expansionism. Sooner or later, you gotta have some chickens before they can come home to roost. If everyone is eating McNuggets and nobody is growing chickens because it doesn't make any money, then something has got to give.
Probably homo kids-r-hungri-and-cuss.
2009-04-07 09:54:37
Organizational Behavior
I would present that the behavior of the organization (consumer) was rife with groupthink. And that on the way up, people were bulletproof. Given the complete opposite of that, we are facing deflation over a long period of time.
While some lessons are being learned now, not enough risk takers are feeling the heat and that means we are probably still early in this cycle. And that will ultimately be depressing the longer it rolls. The administration can cheerlead and artificially inflate only for so long.
While some lessons are being learned now, not enough risk takers are feeling the heat and that means we are probably still early in this cycle. And that will ultimately be depressing the longer it rolls. The administration can cheerlead and artificially inflate only for so long.
2009-04-07 20:47:16
Nice article
Nice review of excess discretionary spending and its consequences.
What I am concerned with is this, there is a sources of over half the bankruptcies that meet or exceeds those of the profligate spending spree. Many frugal and deliberate people have been caught by it and had their savings yes SAVINGS completely wiped out and houses lost.
Try having your spouse have a heart attack and be entered into the medical industrial complex. They may come out alive but I guarantee your view of the state of medicine will never be the same with or without insurance. The ride to the hospital , alone, can cost upwards of two grand.
If that lesson is factored into the equation, maybe living for today on any value one can extract from the monopoly money all governments are currently printing does not look like such a bad way to go. If you can't take it with you and they will keep you alive only as long as you have money in the bank, maybe the best bet is to take the money, enjoy the ride, and leave a mess behind. I recall a line from a song a number of years ago that went "Live fast die young and leave a good looking corpse".
If this factor exists in any quantity, beneath the surface of the current arguments, I believe it will be relatively easy to restart at least some of the profligate spending the government seems to desire.
Now I know this is not a responsible position and am not advocating it. I am however, trying to point out one of the elephants in the room that always seems to get lost in the on the path to understanding complex behaviors.
What I am concerned with is this, there is a sources of over half the bankruptcies that meet or exceeds those of the profligate spending spree. Many frugal and deliberate people have been caught by it and had their savings yes SAVINGS completely wiped out and houses lost.
Try having your spouse have a heart attack and be entered into the medical industrial complex. They may come out alive but I guarantee your view of the state of medicine will never be the same with or without insurance. The ride to the hospital , alone, can cost upwards of two grand.
If that lesson is factored into the equation, maybe living for today on any value one can extract from the monopoly money all governments are currently printing does not look like such a bad way to go. If you can't take it with you and they will keep you alive only as long as you have money in the bank, maybe the best bet is to take the money, enjoy the ride, and leave a mess behind. I recall a line from a song a number of years ago that went "Live fast die young and leave a good looking corpse".
If this factor exists in any quantity, beneath the surface of the current arguments, I believe it will be relatively easy to restart at least some of the profligate spending the government seems to desire.
Now I know this is not a responsible position and am not advocating it. I am however, trying to point out one of the elephants in the room that always seems to get lost in the on the path to understanding complex behaviors.
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