Market rationality and hormonal logic

Studying economics in college at the dawn of the Reagan presidency, I learned about the wonders of free-markets. The invisible hand of the market, I read, guarantees that thousands upon thousands of people–each with unique desires, abilities and values–mesh together, thereby able to achieve the balance of work and leisure, and of material and spiritual wealth, that they strive for in their lives.
In the long run, I was told, market imperfections correct themselves- eventually risky speculation is punished, foolish commercial enterprises fail, and the stock market sets the right price for company shares.
Unfortunately, to paraphrase John Maynard Keynes, in the long run we’re all dead, and some of us don’t want to wait that long for the market to correct itself.
Belief in free-markets has long been tied to unjustified faith in human rationality. But human nature is a surprising mixture of rationality and irrationality, and policies that don’t recognize the fullness of human nature are doomed to fail.
Consider the “rational” lenders who become so enthusiastic about risky mortgages. At the same time that the mathematical parts of their brains were calculating the risks of sub prime mortgages, more primitive parts of their brains were at work. Behavioral scientists, for instance, have discovered that testosterone fuels risky decision making. What happens when you mix testosterone with a young Wall Street investment banker, striving for dominance in his field and pursuing a huge year-end bonus? Is it any surprise that this male dominated industry made such poor decisions?
To make matters worse, when men win at things, like basketball games or risky investments, their testosterone levels rise even further. Not hard to imagine a vicious cycle here, a culture of risk fueled in part by hormones and reinforced when early risks are rewarded.
People can’t stop being human. We humans can’t ignore that our advanced centers of reasoning lie on top of primitive brain structures, ones we share with reptiles and chimpanzees.
To reduce the chance of future economic crises, we need sensible and careful government regulations that temper our more animal instincts. If such regulations had been in place in the last decade, we might have dissuaded more people from taking out unnecessarily risky mortgages, and we might have avoided our current economic crisis.
To read more of my blogs, and to learn more about my new book, Free Market Madness, check out my personal website: https://www.peterubel.com
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