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Why Main Street hates Wall Street

People rallying in front of the NY Stock Exchange on Thursday.

TEXT OF INTERVIEW

KAI RYSSDAL: Maybe you disagree, but I think there's something visceral going on here in this debate about the bailout bill. There've been dire warnings from people who know pretty much all there is to know about the workings of high finance that if we don't do something, bad things are going to happen.

Politicians have been saying the same thing. Worth noting because polticians don't like to deliver bad news. Still, a majority in the House voted against a bailout on Monday, in large part because they were swamped by complaints from their constituents. Those are constituents who, it stands to reason, would be harmed by whatever bad things happen, but who seem to really want to stick it to Wall Street.

Dan Ariely's a behavioral economist at Duke University and an occasional contributor to this program. Dan, good to talk to you.

DAN ARIELY: Thank you. Nice to be here.

RYSSDAL: What is it about the human condition that just wants revenge out of a scenario like this?

ARIELY: Well, there's actually quite a few things, but let me first describe to you a little experiment that we and other people have done. It's called the trust game. Now, imagine that you and I each get $10, and you're the first mover and you decide whether to give your $10 to me or to keep it. If you keep it, we both go home. If you pass it to me, that $10 quadruples. So now I have your $10, it became $40, plus my $10, I have $50. I can split it in two and give you half and I get half and we both go home happy. Or, I can take the whole $50 and go home.

RYSSDAL: And I have nothing.

ARIELY: And you have nothing. Now, here's the kink. What happens after we do this game and I take the $50 and go home, you have a chance to take revenge against me. What if I tell you, "Look, for every dollar you spend, I will lose $2." Would you take revenge against me?

RYSSDAL: Well, yeah, 'cause you're leaving with 50 bucks and I have nothing.

ARIELY: That's right. So when you do this experiment in a PET machine, in a machine that scans people's brains, what we see happening is that the same area of the brain that reacts to rewards -- things like food and sex and heroin, to good things -- also reacts to planning revenge. Which basically means that revenge is actually rewarding.

RYSSDAL: But let me ask you this in the present circumstance with the bailout bill. Arguably, the thing was designed to make everybody's life a little bit better -- whether or not they believed that, I suppose, is a relevant question -- but by calling their congressman and saying, Vote no because we want to punish -- under your theory -- the Wall Street people, don't they sort of hurt themselves?

ARIELY: That's right. But right now what we're doing is we're willing to sacrifice money -- the same way that you were willing to sacrifice $3 or $7 to punish me -- people are willing to suffer to get this (you know, I don't know what's a polite way to call this) . . . . people on Wall Street. . . . But people are willing to lose money to get those people to suffer more. In fact, I've asked people about this. Everybody feels this anger. They have violated, in a very important way, a social contract in the same way that I would have violated the social contract of you giving me your $10 and me walking away with $50.

RYSSDAL: Given our motives for revenge, is there a way that Congress can shape a bill that's going to make it acceptable to people whose constituents really want to punish Wall Street?

ARIELY: Yes. So I think we need to include revenge in the bill. There was discussion about capping CEO salaries, which I think went a small way into revenge. But I think there are two ways to include revenge in the bill. One way is to say every time we are going to nationalize something, we are going to take the stock option of these people in these banks, right? We will make them pay for nationalizing it. That's one approach. The second approach is to build into the system future revenge. So another thing we can do is we can decide that the bill will actually force us to create a new code of punishment for people on Wall Street. And we have an opportunity here, with a meltdown that's so dramatic, that we feel that there is a need to go back and try and reshape the whole system. And that might actually be very, very useful in the long term.

RYSSDAL: Dan Ariely is a professor of behavioral economics at Duke University. His book on these sorts of things is called "Predictably Irrational." Dan, thanks a lot.

ARIELY: My pleasure. Thank you.

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Kai Ryssdal insults listeners who disagree with the bailout by assuming their irrationality and by psychoanalysing them. The motivation is not revenge but concerns with the plan itself. 231 mostly Ivy League economists expressed concerns over the plan’s efficacy in an open letter to Congress which Kai has studiously avoided mentioning in favor of selectively telling us only about those who think it should be implemented. http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_pro...

Instead of running an advocacy program, perhaps Kai should get back to being a reporter. Spare us the opinions, and get below the surface to report on the facts. Intelligent coverage which could inform our future actions might include:
1) Collusion between Freddie Mac and Fannie Mae and certain members of Congress – the lobbying and purchasing of support
2) The connection between trying to implement a social policy to increase home ownership and more recently to sustain home prices, and high-risk loans to those with poor or no credit which fed high-risk derivatives (see below)
3) The loose monetary policy and subsequent credit squeeze that precipitated the Great Depression, and how trade restrictions, the Hoover-FDR Reconstruction Finance Corporation which perpetuated bad investments, and other interventions by the government resulted in the longest and deepest recession in US history
4) The rescue of banks and why that practice led to the longest depression in modern Japanese history, and any similarities and differences with the current bailout plan.

Some interesting information follows:
"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
-- Representative Barney Frank, 2003

A 1999 NYT article foretold all our problem today Fannie Mae Eases Credit To Aid Mortgage Lending http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A...

Extracts:
By STEVEN A. HOLMES
Published: September 30, 1999

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Why on earth would you go out of your way to characterize everyone who opposes this bad legislation as uninformed, angry people who want revenge?

I oppose this plan because I don't trust the people to whom it would it give an unprecedented amount of power. I oppose this plan because, despite the earmarks recently added to the bill, there is still no provision for significant oversight from Congress. I oppose this plan for many more reasons, but your character limits don't allow for lengthy explanations.

I am truly tired of the media portraying me as a smug and ignorant fool who is about to bring down the American (and potentially global) economy because I am unwilling to do what the Administration is telling me to, without asking further questions.

I expected better from you. It will be a long time before I make that particular mistake again.

I listened to the interview with Dan Ariely with great amusement. The idea that vengence gratifies the same part of the brain as heroin is something I’ve never considered but wholely agree with. I find nothing more pleasing than seeing a parasite get his/her comeupance.

“Behavioral Economics”...I didn’t even know that job existed. Fortunately somebody is getting paid to study Tulipmania, the Soth Sea Bubble, Ponzi Schemes, the Florida Land Boom of the ‘20s, etc...maybe if such knowledge was more widely studied, “crices” such as the current one would be more infrequent.

Take a quick look at a chart showing the value of the Dow since it’s inception. Growth appears rational up until shortly before the “correction” of ‘87. In ‘94 the irrationality got balls out. Fuck those fuckin’ fucks. Never earned an honest dollar in their lives.

My wife and I moved back to her family farm last year because I saw the coming economic collapse. After seeing September 11 and Katrina, I came to the conclusion that our government cannot save us, but they can get us killed. Now we’re gardening and raising livestock and eagerly awaiting the opening of bow season for whitetail deer October 15th. “Burn Baby Burn” bitches.

I actually like and respect the show and I think the show provides an important perspective in these difficult economic times. I can't believe that this ridiculous spin on complaints from constituents. Revenge? Give me a break.

Capitalism, free enterprise, what happened to the principals of the American way? We are supposed to make decisions in fear now? Because we are all so rich? This "bail-out" sends the message to big corporations that they can be as risky and irresponsible in their quest for extreme wealth. Our government and this current administration has clearly done enough for big corporations, after this where do we draw the line? What happens when the government buys up all the bad debt for all corporations in the future? Are we then communists?

This plan will only stop the bleeding for a bit, and in the long run it will weaken our economy.

It has nothing to do with revenge. Wall Street is just viewed as a bad investment because Wall Street hasn't done anything to share the wealth with the vast majority of people in this country. Wealth is more concentrated within the top ten percent than at anytime since the last time the markets collapsed. The rest of the population hasn't got huge investments to lose or even $100,000 in the bank, much less $250,000. The fall just isn't that scary for them. Maybe misery would like some company.

I had just the opposite reaction than did the preceding two reader responses. Then again, I teach industrial organization to doctoral students.
The application of behavioral economics to this particular problem is instructive and accurate. This economist's explanation of why people do not support the bailout shows exactly why we need to regulate the behavior that underlies market transactions.
I would argue, however, that people are not "irrational" (the inference from the title of his book) but they do not follow the assumptions of economic rationality on which the standard neoclassical model is based. In other words, they are not profit maximizers. They are rational, but behaviorally so; they choose to exact revenge on those who violate social norms. That is why we pay so much to put cheaters in prison; not (as the Quakers claimed) to reform them but to punish them and set an example of others who might violate social norms.
Wall Street financiers have enriched themselves at the expense of "Main Street" and people are angry and will pay to punish them. Professor Ariely's suggestion that we build future retribution (for these and future greedy charlatans) is absolutely rational for two reasons. It satisfies our behaviorally rational need to punish transgressors, and it builds punishment designed to discourage them from doing more of the same. Up to now, with a deregulated environment, it has not made economic sense for them to act prudently, and their imprudence led us to the abyss. We need to build rational disincentives into the system and certain punishment for violations of social norms.
Indeed, it might get us back on the road to being a nation of laws, rather than a nation of men without respect for law and without social responsibility.

I too was offended by this segment which seemed to imply that a US taxpayer who is against the bailout plan is nothing but a back-biting, petty, big corporation ‘hater’ bent on revenge. If you and your behavioral economist guest, Dan Ariely, really believe this – you are sorely mistaken.
Not quantifying and understanding the real problem of this ‘financial crisis’ and suggesting throwing good money after bad is the real issue that should be studied by your behavioral economist. Behavioral psychologists would term this ‘panic’ or a fight or flight reaction.
What has happened in this economy is nothing more than a behavior of excess and has been experienced before whether it be reflected by buying stock on margin (as had happened prior to the 1929 crash) or buying real estate ‘on margin’ as has happened in this latest debacle as well as the late 1980’s.
Perhaps instead of looking for scapegoats and excuses for why your portfolio is in the dumpster and not rebounding fast enough because pathetic stupid ol’Main Street dweller is not voting for the ‘blind’ bailout plan, I suggest you make more sensible investments from now on.
As far as “Marketplace” goes, how about some ‘real’ facts instead of the conjecture that is driving our congressmen to vote for a $700B Wallstreet Welfare Plan? Oh, right…your listeners may be too dumb and petty to understand.

This segment was ridiculous and deeply offended me. I do not oppose this bill becuase am angry at Wall Street; I am angry at my fellow citizens who are to damn stupid to pay attention to what is going on. Perhaps action needs to take place to shore up confidence, but this plan concentrates to much power in unelected, compromised, and corrupt officials and it is apparent that other plans may be more effective and economical.

Yeah, lets give the ex-CEO of Goldman Sachs a blank check; thats about as ridiculous as making John Rowe the future Secretary of Energy. Lets just declare the Fed the new government and get on with the show...

Kal - I have never been much of a fan of your show. It is so simple minded, and jingoistic.

I actually called a local NPR call in show today and mentioned how you hyperventilate about the coming Super Duper Depression and how I sometimes think you are joking, and then realize you are not.

You clearly know nothing about this Bailout Plan or how it is expected to work. Or, you would not be so glib.

The question you should be asking, but apparently are not bright enough to ask, is how does this plan assist the economy?

The key is will the US be buying assets at, above, or below market prices. Bernanke and Paulson have both said they expect to pay above market.

So, if the plan is to pay above market, it increases the cost of the Plan. If it is at or below market, as Buffett has described it, it is hard to understand why investors would sell at that price, and how it would help them.

A simple minded alternative, one that might appeal to simpletons like you who think something just has to happen this week or life will end, would be to buy preferred stock in companies which "need" to be shored up, as Buffett has done with Goldman and GE.

A thinking person might suggest we spend $700 billion on fixing the nation's infrastructure, and let Main Street revive Wall Street.

A free spirit might realize the world won't end even if we don't spend $700 billion at all.

Even your comment box is stupid, too small to write a coherent message.

Cheers! Hate your show!

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