At the Bottom of Every Financial Crisis Lies a Human Being
Funny that this article should land in my lap today. Perfect timing.
Let us not forget that there is a very human, very psychological element to financial breakdown which should not be ignored. The feelings which arise from what has essentially amounted to a withdrawal from money no less violent nor painful than a heroin addict being cut from their habit are just as real as the events which cause them.
Via Knowledge@Wharton (through the Wharton School of the University of Pennsylvania), a reminder that there is much more to this mess than a few trillion in funny money:
To explain the current economic crisis, the world of finance has a particular lexicon -- including, for example, credit default swaps, mark-to-market and securitized subprime mortgages. Psychologists, on the other hand, might use very different terms: hope, greed and fear.
The language of psychology helps to address the fact that behind every cut-and-dried statistic about falling home prices and other indicators of economic decline, lies an ever-shifting horde of homeowners, bankers, business owners, unwitting investors -- in short, people. And people often pay no heed to fine-tuned economic models by doing things that are not rational, are not in their best interest, and are justified not by numbers -- but by emotion.
"There are spreadsheets and financial statements and models and rules and regulations," said Carolyn Marvin, a professor at the University of Pennsylvania's Annenberg School for Communications. "On the other hand, there are these feelings we have."
Emotion, it can be argued, not only helped to lead America into the current economic crisis but may also be helping to keep it there. At a recent conference called, "Crisis of Confidence: The Recession and the Economy of Fear," sponsored by the University of Pennsylvania's Department of Psychiatry and the Psychoanalytic Center of Philadelphia, an interdisciplinary panel explored the psychological elements behind today's economy.
"Is there a systematic way to think about our feelings when it comes to the economy?" asked Marvin, the panel moderator. The word "confidence" itself has a double edge to it, encompassing optimism on the one hand and delusion on the other. And could there be a psychological tinge to economic vocabulary itself? "The powers that be are avoiding the word 'depression,'" Marvin pointed out, "which describes not only a state of the market but certainly a clinical condition."
Psychological factors are at work behind the crisis, the panel agreed, although each focused on a different element: mania and over-optimism behind the housing bubble, a lack of self-control by consumers hooked on debt, and the shock and feelings of betrayal of many Americans who thought they were making safe investments, but now find themselves facing a frightening and uncertain future.
I highly recommend the article in its entirety.