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Money and Cognitive Bias has fantastic article entitled, "12 Hair-Raising Money Tales."  Some of the tales involve banker corruption, deceit ans so-called gotcha capitalism.  Many money mistakes involve decisions.  And thus there are problems with cognitive bias.  Take this example: 

In 1995, my husband's employer in Pensacola, Fla., sold to a company in Bowling Green, Ky. The economy was strong, and we were enjoying our Florida home and thinking about retirement. But my husband took a consulting position with the Kentucky company.

We took equity from our residence in Florida and bought a small home on a large lake in Kentucky. We planned to downsize, sell the Florida home and travel after my husband completed his work.

Isn't that typical?  That's optimism bias. "Optimism bias is the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. It is one of several kinds of positive illusion to which people are generally susceptible."  

Someone gets a promotion: Don't just celebrate with a nice dinner.  Buy a new car!  A new house!  Spend right up to your new salary.  Live as if that new salary is always going to be there.

Let's put aside the spiritually-draining concept of supersizing one's spending.  If you're mostly happy with your current salary, why buy more stuff just because you have more money?  Your lifestyle was fine before your raise.  Plus, money is freedom.  Save enough money that you can tell your boss to go to Hell.  Watch your job-related stress fall.  Oh, you thought it was a coincidence that your boss always tells you to buy a house or to upgrade your car?    

I see optimism bias with friends my age.  Why are you in such a hurry to get into a house?  Besides the fact that owning a house makes one a debt slave: Why do you think you'll be able to keep paying the mortgage?  Is there a guarantee that the money will always be there?  Unless your parents are rich, what's your safety net?  No one needs a safety net, though.  Optimism bias.

Most people, though, underestimate the likelihood of negative outcomes.  It can't happen to me.  Yet another aspect of our culture of narcissism.

On Getting the Democracy We Deserve

After giving Wall Street $2 trillion, there haven't been any reforms.  Even the derivatives "reform" bill is an industry-sponsored joke.  It's clear what is going on.   It's not the politicians' fault.  Instead, its our fault.  We're idiots who deserve the economic asteroid that is about to hit.

Politicians (that includes your favorite Congressperson) care only about one thing - being reelected.  Few in Congress will lose a seat because of the bailouts.  They will, however, get millions in campaign contributions from Wall Street.  Why then would they harm Wall Street, when you won't do anything to punish your Congressman or Congresswoman?

And, yes, that means you.  I love it when a person says, "I hate stupid people."  Everyone in the room nods - as if none of them are among the stupid.  Eventually you need to ask yourself, "Am I the idiot who won't change my vote?" 

If everyone voted against his or her incumbent, do you think there'd be another bailout?  Of course there wouldn't be.  Politicians would get the message.  Their interests would aligned with voters'.

Politicians have gotten the message.  You'll scream and rant, but you won't change your vote.  You have been brainwashed into partisan subservience. 

None of you will change your votes.  Few of you will even look at the facts.  The corruption is bipartisan.

Let's all just pretend that Barack Obama did not receive $1 million from Goldman Sachs.  Let's pretend that the Democrats did not receive more Wall Street money than the Republicans.  Let's all ignore the GOP's failure to capitalize on the populist rage.  Gee, could it be that the GOP hasn't killed the Democrats on Wall Street issues because the GOP is the party of Wall Street, too?  Nah.  Impossible!  There must be some deep strategy in not mercilessly going after Democrats, and reminding everyone that Goldman Sachs owns Barack Obama.  

If I ran the GOP, I'd run this ad for Christmas: [A Christmas tree with no presents underneath it; a disappointed child, who hugs his father.  Narrator says, "His father lost his job when the factory closed."  The child then hugs his father, who has wet eyes but is too salt of the Earth to cry: "It's not your fault, dad."  Juxtapose newspaper headlines announcing record Bonuses for Wall Street.  Announcer says, "Goldman Sachs was Barack Obama's number one source of private-sector campaign contributions.  Obama thanked them: Merry Christmas, Wall Street."  Insert smiling picture of Barack Obama.]  That ad won't run, because the GOP is controlled by Wall Street, too.

We'll all just keep doing what we've been doing.  When nothing changes, we'll blame The System.  We'll treat reform as something too complicated.  We'll do anything except accept responsibility for our votes.

When the United States collapses - despite our cultural narcissism, we are not greater than Rome, and Rome fell - it will be because of us.  That means you, me, and everyone other American who refused to demand change.

Will you change your vote? 

"This Time is Different: Eight Centuries of Financial Folly"

As we live in a culture of narcissism, few realize when we are re in a bubble.  Sure, there have been bubbles in most every other country; and all throughout history.  But we are special.  I am a special.  I would never get caught in a bubble.  Well, of course, this time wasn't different.

Oh, but the recession/depression is over, right?  Even though Japan lost a decade, and the Great Depression lasted years.  We are special.  This time is different.  Narcissism.  

The theme is explored in This Time is Different: Eight Centuries of Financial Folly.  Fantastic radio interview here.  

Book here: 

Psychopaths Can't See Your Fear

From the latest issue of Scientific American Mind:  

Marsh relayed a chilling anecdote about a colleague of hers, University College London psychologist Essi Viding, who was going through a task with a psychopathic murderer in which a series of faces with different emotional expressions were laid out before the woman. When the murderer saw the picture of the fearful face, she scratched her head and said: “I don’t know what that expression is called, but I know it’s what people look like right before I stab them.”

 "The problem with psychopaths: a fearful face doesn't deter them."

Bear Stearns and Dunning-Kruger

Some guys at Bear Stearns ran a hedge fund.  They bet that subprime mortgages would pay off big time.  During the bubble, they were right.  They and their investors made a lot of money.  

Last year everything changed.  The market started tanking.  How did the hedge fund managers respond?

They sent each other some e-mails: "I think the subprime market is completely collapsing."  Because the hedge fund managers didn't immediately pull out of the market, federal prosecutors indicted them for fraud.  Anyone who sent those e-mails must have intended to cheat investors!

The prosecution is collapsing:

As we’ve written before, only two Wall Street executives have been charged with securities fraud stemming from the credit crisis. The two, former Bear Stearns execs, Ralph Cioffi and Matthew Tannin (pictured), are currently on trial now, in Brooklyn federal court....

So what’s happened? According to Slater, government witnesses keep coming unleashed, providing testimony that seems if not exculpatory, at least helpful to the defense. As Slater puts it: “a case built on provocative e-mail excerpts, bereft of context, can teeter when witnesses appear in court to provide a backdrop, for example, or the surrounding context of a seemingly damning e-mail message excerpt is read before a jury.”

Gee; you think?  Who here has never written an e-mail saying something that wasn't a full representation of your beliefs?  Who has never written, "This is an impossible case," before winning the case?   


You know who lacks doubt?  Stupid people, that's whom.  Yes, really.  This stuff has been studied, and the answer is that the stupider you are, the more confident you are:

The Dunning–Kruger effect is an example of cognitive bias in which "people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it."  The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than actuality; by contrast the highly skilled underrate their abilities, suffering from illusory inferiority.

When it seems like the entire stock market is going to go to zero, who wouldn't have doubts about her hedge fund?  Stupid people wouldn't.  They'd be too stupid to have doubts.  That's the curse of humanity.  The smarter you are, the less confident you are.  Stupid people elbow their way into leadership roles while the smartest people in the room sit quietly and in self-doubt.

In fact, try it: Talk to some lawyers about their cases.  The dumb ones only have fantastic cases.  They are surely going to win the upcoming motion, trial, or appeal.  When possible, avoid working with such people.  There will be immediate IQ and competency barriers that usually aren't worth the effort to break down.  There are few things more frustrating than a stupid person who considers himself brilliant.  Your game suffers when you suffer fools.

At some point a lawyer must put aside doubts.  Live in denial.  You're the man, 'G.  Law is performance art.  Yet the dumbest lawyers never seem to have any doubts.  The smartest lawyers, by contrast, agonize. 

Do you think that the Department of Justice lawyers who are prosecuting the Bear Stearns case are agonizers?


Probably most human behavior would not be surprising if a person understood: social classes; sociopathy; and especially narcissism.  Humans really can be stereotyped.  People are interesting, persons are boring. 

A great place to start is: Narcissism: Denial of the True Self (here). The book's cover is purple, and indicates that an M.D. wrote it - either of which should disqualify it from purchase.  It's good, if you think of it like The Sociopath Next Door - an introduction to the issues and psychopathology.  Once you're done with Narcissism, check out The Culture of Narcissism: American Life in an Age of Diminishing Expectations (here).  

The Culture of Narcissism was first published in 1979.  Three decades have not altered the themes.  Books like The Culture of Narcissism reminds one why it's pointless to watch "the news."  Most news is transitory.  Would anyone who has read Extraordinary Popular Delusions and The Madness of Crowds be surprised to learn about the housing bubble?  Tulips or houses; bubbles are bubbles.  Would anyone who has read Extraordinary Popular Delusions (here) be surprised to learn that we are currently in a higher education bubble; or that we're still in a housing bubble?  No.  

But books take a long time to read.  If it's a good book, closing the covers reminds you that you're now ignorant of 99% of a subject.  And if you only know 1% about something after reading a book: What does that say about your fluency in everything else?  

Reading headlines, though, makes you feel like an informed citizen.  "Did you see the news today?!"  No.  Should I have?

Reading books makes you question everything that a lifetime of headlines have indoctrinated you to believe.  It's better to feel informed than have the ignorance of your true self revealed.  Indeed, that's the curse of narcissism.  

Lacking a true self, you construct the Informed (Wo)Man.  In reality, you're empty.  You know nothing.  You have no wisdom or knowledge.  Reading news is an easy way to protect yourself: How dare you?!  I know stuff!

Of course, learning stuff is a process of manipulation.  Protecting your empty self allows mass media to create an additional self - the Easily Manipulated Consumer.  No.  Not me.  I choose to buy this new car.  That's what they want you to think.

"Because everything I was ever told was a lie..."