Debate about Irrationality and the Economic Crisis

I recently chimed in on a healthy debate on the Harvard Business School website about the role that irrationality played in creating our current economic crisis. I’m including my comment here, but you can click below to see the entire debate.

“Two cents from a primary care physician:
I am a physician at the University of Michigan and an expert on how people make decisions, having conducted decision-making research for a decade and a half. Politically speaking, I’m a flaming moderate — I marvel at the wonders of capitalism, but at the same time I’m painfully aware of the limits of free markets.
We human beings are imperfect decision-makers. We have a limited ability to hold complex information in our heads, even when this information is relevant to important decisions we face. We are often harmed by our own worst instincts, prey to limited willpower and susceptible to manipulation by people who know more about the things that influence our own behavior than we do.
Unlike commentor number one, then, I don’t believe that limiting temptation is an insult, nor that it is an unjustified tampering with human nature. Instead, I think the right kind of policies, which reduce the chance we will harm ourselves, are an intelligent response to the scientific recognition that our willpower and our decision-making ability are often quite limited.
And unlike commentor number 11, who says that “the real culprit is not the free market,” I would say — there is no single culprit. This mess is big enough to blame on plenty of things: on a government hooked on promoting homeownership, on a regulatory system that allowed people to take out loans that were beyond their means, and on consumers who often didn’t understand the terms of their own mortgages and who were too often unrealistically optimistic that their home prices or their take-home pay would rise fast enough that their unaffordable houses would become affordable.
The free market works best when all people behave rationally. Policies work best when they acknowledge that human nature is a complicated mix of rational and irrational behaviors, and that the free market needs to be tweaked accordingly.”

Click HERE to go to the original blog. I chimed in at position #35.

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