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.

Comments

[Greygolla]

In a well run Japanese company they would hand Paulson his broom and put him to work sweeping up all that bad paper. Some of these lame ducks have a lot of gall. Unlike a stock split, this dollar correction makes my future here in the USA worth about a third as much. Maybe that's Bush's idea, the dollar is worthless, time to cash out. The country really ought to fund a special memorial retirement place for Bush and his ilk, with bars on the window. Congress would be sure to make it comfy and plush being as how a good many of them belong there also.
What is the big deal with the government underwriting the mortgage industry? They have been doing it for years. My neighborhood is rife with HUD housing. For $13 a month the poor homeless folks have a place to stay and the balance of the rent is subsidized by the government. Instead of building new, the construction people need to scale back to refurbishing existing housing.

[baba2nde]

It seems that $700B is a fuzzy number too, an anchor. To make sure it does not balloon to gazillion, one might consider inserting the phrase "up to $700B". Of course an issue then arises: what to do if the funds are exhausted before the problem is solved!

Which begs the question: what is the problem, again, anyone? Can it be tackled one bite at time?

[Antifascist-08]

exactly!

No one has proven to me that this is what they say it is.

Build from the bottom. Trim the tree from the top.

For once in our lifetimes, we need to call the bluff of these criminals. They have raped us enough.

[picard922]

In ancient India, when a Raj received a gift of the white elephant from his enemy, he knew he was ruined. Such a "gift" was a sacred trust. It could not be refused, yet it was ruinously expensive to maintain.

The Bush Administration has just given us a white elephant.

Borrow another TRILLION DOLLARS to our national debt, we'll be like Zimbabwe. It will take a wheelbarrow full of dollars to buy a loaf of bread.

Call their bluff. No way. No how. No bailout.

[blue meanie]

Yeah. Why not put together a minimal stop-gap plan to tide us over until after the November election? Let the new administration find an equitable resolution to the crisis, not the folks who presided over the current mess. And what about the concept of windfall profits? Some people made inordinate sums of money under questionable circumstances. Can't some of that be tapped to help redress some of the imbalances? At bottom, I believe this is really a question of what kind of country we want to be.

[deliriousgod]

they didn't ask; someone has been telling you what kind of country you are going to be, and they have a whole plan with several more steps that you know nothing about

[pc51]

One thing is for sure- Pelosi and Reed will do a lot of yip yip barking, but in the end , they will roll over and play dead again - just like they have done every other time BushCo demands yet more and more power.

[JennyJay]

Let me see here - - - the words "knee jerk reaction" - - - come to mind.
Everybody is running around yelling "the sky is falling, the sky is falling".
Paulson sat on this information for a whole month so the legislators (and us who pay the tab)
would all panic and starting running around in hysteria, and not take the time to question
or think anything through.
Paulson and his ilk are conning us, it's what they do to get their way.
They overwhelm us with FREAKING FEAR, so we can't think straigjht, while they stay calm and
manipulate our poor brains.
WE ARE BEING HAD - FOLKS.

[deliriousgod]

isn't that a lot of money? $2300 per person (including babies) If you all put that kind of money together you could build a manufacturing industry or something. Probably enough money to bring every American up to the level of a college graduate. Enough money to establsih a Universal healthcare system. But launching it into the Sun is good, too.

[majorteddy]

I think this whole thing needs to go slow. Obama is right to question it and want to find out more details. Bush just wants to rush it and snow everybody before they can find out the details.Re­miniscient of the Patruiot act and the organization of the giant conglomerate Department of Homeland Security brought to you by the people of smaller government, the GOP, (spells gop, which is about what their plans are). Reagan did the same thing, called for smaller government and ballooned the deficit, so did Bush 41.

[Clairvaux]

I occurs to me that cognitive scientists should make an extensive study of the Republican Party, particularly the Republican Party as it relates to the reptilian brain.

[deliriousgod]

Reptilican Party

[ebanks84]

I say let's don't make a plan at all. Let's just see what happens. Nothing may happen and then what would everybody say?

Let the people who will lose money, lose it! Let them suffer their losses and take their medicine. Let us concentrate on helping those who REALLY NEED IT. Forget the "fat cats" who will finally be getting what they deserve.

[ballerina]

This whole thing was a ponzi scheme from the beginning. It's just that the managers had planned to be rid of all the junk before the you-know-what hit the fan. They mis-calculated. They should be rewarded for their fraud with prison sentences, not a bailout of any sort. Let the government take the money (that we don't even have in the first place) and capitalize new banks to buy up the distressed loans and then renegotiate them with the homeowners who want to stay in their homes, not the flippers. Also make pension funds which have been hurt by this scam whole at least to a benchmark back before all this fraud started.

This is actually an issue of framing. The options are limited to what the perpetrators want and nothing else. We are only allowed to discuss the details, not the major premise.

[Ciganka]

Seems to me that our representatives are actually fighting for the first time and we should just keep pressing them to stay in the battle rather than caving in. In some way, I feel that this is our last chance to actually get the House and Senate to represent the voters rather than artificial creations.

On the mortgage crisis, I do not understand why the homeowners can't just have the original monthly payment that they signed up for instead of the adjusted rate? Wouldn't that stop the foreclosures for many people? If the crisis is as drastic as we are being told, this solution looks like a quick fix that would immediately help home owners, while those who played the markets like they were in Vegas would just have to get in the back of the line? After all the market players assumed the risk.

[Tokhtamish]

Why does this all feel like boiler room penny stock hard sell ?

[bogey12]

Why not use the money to fund, oh say, 50 million new small businesses across America.

[LeftRight]

Because that would actually WORK, but it wouldn't help out the leaders of these fine, upstanding corporations who OBVIOUSLY only have our best interests at heart!

[DuganS1]

How fund? Fund to do what?

[HansB]

The people who caused this mess have a huge interest in making the problem so urgent that Congress will sign Paulson's blank check. How much of the urgency is real and how much is hype? It's a scam so huge that people will find it hard to believe that it is what it is, a scam.