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Could a Quirk in Human Brain Wind Up Costing Taxpayers $700 Billion Dollars?
By all accounts, Paulson's bailout plan is a stinker: no oversight, no fairness, and no serious analysis of whether it will actually work. You don't have to be an economist to see it as a welfare program for the greedy people who got us into this mess in the first place.
Unfortunately, the human mind being what it is, it's probably going to pass. Maybe not exactly as written -- some important alterations may be added. But the basic substance of the plan, dreadful as it is, is likely to make it through.
Not because it's good, but simply because all of us -- Senators included -- are vulnerable of a potent cognitive fallacy known as anchoring.
Anchoring got its name from experiments by Amos Tversky and Daniel Kahneman. In one of their famous studies, and an experimenter spun a wheel of fortune, with numbers from 1-100, and then asked people a question that had absolutely nothing to do with the wheel: "what percent of African countries are in the UN?" The outcome on the wheel should have been totally irrelevant, but instead people succumbed to a strategy known as "anchoring and adjustment", which is to say people started with the irrelevant number from the wheel, and adjusted their answers from there. When the wheel came up 10, a typical response to the UN question was 25 percent, whereas when the wheel came up 65, a typical response was 45 percent.
Shopkeepers take advantage of the same thing when they put up a sign saying "limit 12." Nobody really buys 12, but telling people that they can't buy more than 12 leads them to think that they might need several.
Anchoring is good business for grocery stores, but it's a terrible way for a nation to do business. But that's exactly what's happening. Almost all of the discussion has been about the Paulson proposal, and how we might tweak it -- not about whether there might be altogether better ways to spend such an enormous sum of cash.
When Paulson tells us (as he said in yesterday's testimony) that his plan "is much better than the alternative," the only real alternative he is considering is having no bailout plan at all.
But how about a plan in which a bipartisan commission (rather than Paulson and Bernanke) made all decisions? Or a plan in which banks could bid against one other for government funds? Or a plan in which relief for individuals in jeopardy of losing their homes was as substantial as relief for those who trafficked in dubious commodities like mortgage-backed securities and CDOs? If yesterday's hearings are typical of what's come, no alternative will ever be seriously considered.
Perhaps the biggest tragedy of all is the way in which the whole discussion has been anchored around a fallacious notion of time. Paulson says we need to decide in 7 days, but that number, too, is made up. Does it really matter if we take two weeks rather than one?
With so much at stake, it's well worth taking the time we need to make a good plan, not just the first thing that pops to mind.
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More than just a quirk, there seems to be a widespread epidemic of denial affecting a lot of people these days.
Greed has become a lifestyle to the point where now these folks have their own website: http://www.greedypeople.com. What's next?
Really interesting article. I learned something. Thank you. But I'm still not sure just how anchoring works. Or, if the human brain can even comprehend an amount like $700 billion to even begin the anchoring process. Maybe after hearing $700 billion, members of congress will reach a consensus on giving Paulson $36 dollars, a much more manageable and understandable figure. If they do, they should also stipulate that he, 'Not go crazy with it.' You have to make this clear to some people. Paulson seems awfully anxious to get this money and to give it away in a hurry. Does anyone have his email address. I'd like to get an early request in for a bailout.
I keep telling people that they need to read Naomi Klein's book; "The Shock Doctrine." She describes how crises is exploited to get things done that would not otherwise be even considered. Please read this book and soon. Bush and company are using this to the hilt with this bailout. The crisis serves as the anchor in this case. This is such an opportunity that it brought Bush and Cheney out of hiding. Look out people. We are in for another huge scr----------------wing.
observers of the news and market saw this in action just a few weeks ago. Friday afternoon, word got out bear stearns was to be under receivership with the govt and the stocks would take a hit - likely be only worth 10 dollars. the weekend discussions went on and monday morning - shock! The announcement was that it was being taken over and stock valued at 2 dollars. A few days of angry shareholders later resulted in stock being revalued at 10 dollars - surprise!. the angry shareholders then felt lawsuits were not worthwhile after getting 5x what they were previously told. the media played it up as a real "give and take" but others who know how psychology and "anchoring" works, know to arrive at a desired value, low ball and then let them think they got a deal when you up your "capitulation" price.
This was a very helpful "meta-analysis" of the issue; questioning our assumptions and the scope of our analysis going in, rather than staying within the limited analytical parameters presented by Paulson and company.
America has operated its markets only 2 times under total deregulation:
The first time was for 50,000 years under the American Indian -- the result was you got scalped.
The second time was 8 years under George Bush -- the result was you got scalped.
Too early to tell, but I see a pattern emerging here.
It matters tremendously if it takes two weeks rather than one. Have you looked at the credit default swaps, LIBOR, or the S&P,.. or noticed that many very credit worthy companies are having trouble obtaining loans? If this political propaganda charade lasts much longer we're in serious trouble.
"If this political propaganda charade lasts much longer we're in serious trouble."
That is precisely the anchor the author is warning us about.
The Republican backed special interest criminals see the writing on the wall. Obama is the next President, and their freedom to defraud the American people is coming to an end. Therefore, they are making one last ditched grab for the cash cow.
Yeah . . . there aren't any Democratic based special interests . . .
If you honestly can't realize this is a failure of government on the federal level from all parties involved you are a fool.
It's funny that the citizenry is enormously opposed to the Wall Street bailout, and yet we're probably going to get it anyway. At the citizen's expense.
Anyway, I liked your article. We (the US) really, really need to start paying attention to issues like anchoring, the confirmation bias, and so on. We need to be able to spot a straw man argument, or know when something is an irrelevant ad hominem attack.
Since most of us do not possess even basic logic and rhetorical skills, and since (more shocking to me) most of us don't even know how much we're being swindled as a RESULT of not possessing those skills, it seems to me like, if you want to make America relevant in the 21st century, the first step would be teaching our children, from day one, how to think. Until then, we're just... well... screwed.
Citizens also don't know that if we don't do it their pay checks will stop coming because credit lines will be haulted and businesses won't be able to meet payroll. Add that on to the ability to get a loan of any sort and a run on the banks . . .
At the place I work, if the job ain't done, you stay until it is, and you don't half-ass it just because you want to go home. This country, by our politician's own admission, is in it's worst crisis since the Great Depression. I think some overtime is in order.
If they can't work out a plan that will truly work this year, then wait for an Obama administration. Even though it might cause some short term pain while we get it right, it might avert serious pain in the long run if they screw it up. Panic is never a good way to approach a problem. Especially one this huge.
No deal unless the following:
If the Government buys your mortgages--they get an equity stake in the business.
Congressional oversight.
$200 Million authorized with the ability to reauthorize down the road.
Concrete program in writing to restructure mortgages so the homeowner or renter stays in the property.
Reduced executive compensation for any entity that gets government cash.
What is most ridiculous is the notion of buying these assets at a "hold to maturity price" That presumes that these assets have an inherint value that will ultimately materialize. The reality is that these assets are crap, probably have little or no market value and no guarantee that an ultimate "hold to maturity value" will materialize.
If you really feel there is a need to subsidize these jerks, do it under the terms listed above, pay market prices plus a stated subsidy for the assets, that way there is no gaming the system. In fact the institution can get an infusion with the government without having any bad loans--just under the terms listed above.
Anything less is a sellout. Any congresscritter who agrees to anything less than this will lose in 2008 if they are in a competitive seat or 2010 if they have a safe seat. In 2010 The Club for Growth will nail that legislator on the Republican side and the netroots will nail the legislator on the Dem side.
The PATRIOT Bailout Plan - You must act now. Limited time offer. This deal won't last.
I agree with the overall thrust of the article; there is a reason for a 7-day timeframe: Congress adjourns (barring getting held over by Pelosi and Reid) at the end of the week to go home and campaign.
It's unlikely they'd hold the session open longer given the election; so if they want to do something, they need to do it this week. Of course, they could say "screw you Paulson", pass what they think is good, and let Bush veto it if he dares. That's major fire to play with, though.
If they want to keep their seats they'll keep the session open as long as it takes to get the job done to the satisfaction of their constituents. Isn't that how its supposed to work? Seriously, I will be voting against my congressional / senate reps if they vote for anything that is even a shadow of the Bush plan.
Perhaps its a bit petulant of me, but i believe that at this point Bush should be given absolutely no quarter whatsoever. Anything that somes out of the White House, regardless of any merits it may contain, should be roundly rejected by congress, as a means to both demonstrate their constituent's frustration with and mistrust of the Bush administration, and to simply punish the administration for... well pretty much everything over the past 8 years.
Why do you suppose that this whole thing happened and the plan was presented a week before the Congress was to leave? Its a setup.
This plan was written months ago according to inside sources.
The feds or Bush or anyone else should not be able to demand anything.
Thanks for this article - I learned something! 'Anchoring' reminds me of the way people respond to speed limits - so many go beyond what's been posted.
Shock doctrine indeed - this is a chance for these guys to push through their agenda - PLEASE! Have our lawmakers learned nothing from the past behaviour of these guys?
Will definitely be sharing this....
Does anyone else think that Bail Out plan has been ready and waiting for some time? I never used to be a conspiracy theorist, Bush has converted me.
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