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

[GrainOSand]

I tell you Mr. Marcus, lying has many forms or connotations. This anchoring sounds like another. Provide partial information to anchor the unsuspecting to an untruth and maintain plausible deniability in case pressed for more information. We were anchoring in the fifth grade.

I am glad to see so many are on top of the fact that these people are not to be trusted and that there are alternative approaches to saying goodbye to Bush and none of them involve bending over as he leaves. I am already dreading his pardon list and I see no reason to allow him to free some of his criminal friends while rewarding others with a shiny new $750,000,000 spigot.

Thanks Mr. Marcus I found your observations to be reasonable and sensible.

[GrainOSand]

**Correction:$700,000,000,000

[21stCenturyMan]

There is a great deal at stake indeed. The Bush admin intends to get this $700 billion. Remember, these are the guys who started a war on false info to get what they wanted. We cannot make the mistake of thinking they would not be willing to trigger financial panic to get what they want now. What's a few soup lines to the people responsible for thousands dead and millions homeless in Iraq?

[JonRaymond]

I have a plan for you.

Suppose I, as a borrower, decide I want to sell my debt to someone else so that I don't have to worry about paying it back, leaving me free to run up more debt? I'll sell it to a secondary borrower who will of course get a new lower interest rate at lower monthly payments. Makes perfect sense to me. Maybe we should try this with homeowners in trouble. Create a new secondary borrowing market. Call it trickle-you economics.

What we should do is tax the failed companies. Have the IRS give them a nice long-term loan, like a mortgage, so that they can take their time to pay it off.

[Herrington]

The only psychology involved here of any import is panic. The bailout is designed to accomplish one thing. It is to establish a price for the distressed securities in question where the vaunted invisible hand of the market has not been able to. It will work because the securities are not valuless.

The terms of the program put out by the bush administration are unacceptable, but the concept is sound.

Curriously, the price of oil is as disconnected from reality as are the values of problem mortgages. So in a larger view, rich folks and 401Ks are poised to lose a great deal of their net worth regardless.

[drec1500Madrid]

I tuned into the proceedings yesterday on C span. Paulson seems to be negotiating for the wall street CEO's rather than the taxpayer. He was rejecting the notion of limiting executive pay because they may not like it and not participate in the program...WHAT? Then don't participate, simple.

This whole thing stinks to high heaven.

[LeftRight]

Wait..... He claimed that it would be bad because they wouldn't like to participate if they had to cap their income?????? Okay, let's see how long that income lasts when you DON'T HAVE A COMPANY ANYMORE!!

[anifromid]

Anyone else remember when Clarence Thomas was having his confirmation hearings? The original complaints about him all had to do with his lack of qualifications. Then Anita Hill was trotted out, and the focus shifted entirely to the sexual harassment claims. Once he beat those, he was confirmed and the questions about his abilities vanished. I think we're being Clarence Thomas'd. The administration made this "request" for funds so absurd, especially the paragraph prohibiting any oversight or recourse, that no one is bothering to ask if we need the bailout at all, just how we tweak it to make it bearable. Last time we got stuck with Clarence Thomas for life, this time we'll pay for golden parachutes for executives that ran their companies into the ground. Hard to say which is worse, actually.

[DickTater]

Why are we rushing AT ALL to fix something that can't be fixed?
If we have proven anything in the last 6 months, it is that Bernanke and Paulson and Greenspan are playing for the crooks, and the Repub ideology and economic smoke and mirrors is toxic.
Why are we letting these same people realign the board, and set out all the same, lame, unworkable pieces again?

This is like dropping 700 billion so we can buy a new Lead to Gold alchemy set....cuz the old one got knocked off the mantle and broke. But no-one seems to be able to bring up the salient fact.....that Lead to Gold Kit was a hoax, a fraud, a myth. Who cares if it is broken, and why should we empty the People's treasury to buy a new one?

[jan4insight]

Sen. Bernie Sanders has a petition going. I signed it, you can too:

http://sanders.senate.gov/petitions/?petition=Financial_Crisis_1

[LeftRight]

And THIS is why I answer people who claim that the POTUS doesn't make the budget, that his is a basis FOR the budget. Even though the Congress controls the purse-strings, they use the President's budget as a template. And THAT is why the POTUS has such a huge influence on the US (and the world's) economy!

[RPLinNYC]

Chutzpah, thy name is Paulson.

[proreality]

Excellent, can we send you to Washington? They got everybody thinking like Hoover when they should be thinking like FDR.

[plebeianswillrevolt]

Interesting...

I can see how Wall Street got into such a mess of lemmings running off the cliff with CEO's like Paulson running all the firms....

Board meeting: Ok guys, here's the plan, and by the way, we gotta do it now, today, this minute, cause it's the only way. All in favor? Remember, in three months Paulson crawls back into his billionaire's hope and disappears, along with all the other terminated ex-CEO's. I am completely against everyone associated with the Bush administration.

[OneLiberalLady]

The time question oerokexed me as well. Why this huge rush?