Global Economic Crisis: In Need of a Theory?

The US housing bubble, the packaging of questionable loans and resulting credit crunch had to originate somewhere, one would think.  Surely, it couldn’t be a matter of “Surprise, surprise!”  One day everything was motoring along smoothly, tickers were ticking as they should, capital was marching effortessly across the globe, as require, and then the next…. its ’financial armageddon’.  I mean really.

On the Hunt for a Theory with Dan Ariely

So, in an effort to ignore expert analysis and hysterical media commentary, the hunt began for a theory, which may explain what classical economists with their reliance on rational market forces did not see this coming. 

The first book to be read was Dan Ariely’s, Predictably Irrational.  Ariely is a behavioural economist at Duke University in the US.   The title was the main drawcard.  Already, he seemed to be on to something.  If even the reactions to the GFC back in January were irrational with the classical economists doing the theoretical splits, anything that pinpointed the disorder in the title seemed a place to start. 

Basically, Ariely says, people are in the main irrational and this irrationality is pervasive.  According to the author, we don’t automatically don a hat of sensibility when making financial decisions.  So, the idea of the human being as a creature of advanced analytical ability, careful consideration and an outstanding capacity for logic was dead.  Ariely killed it.  Thank you very much. 

Human Beings are Irrational, Even the Really, Really Smart Ones

Books like Predictably Irrational and the behavioural economists who write them, such as Ariely, must really get up the nose of those who place faith in the notion that all markets, including the property market, will right themselves before too much damage is done.  Hell-bent on the theory that there will only be a small proportion of people who buy houses they may not be able to afford; that prices will have a natural and sensible ceiling and basically humans aren’t stupid, it now made sense that those apparently in the know were gob-smacked. 

A False Premise

When you think about it, if the theory is flawed, it follows that all actions and means of monitoring which were derived from said ‘theory’ would carry the same flaw.  In short, while everybody was looking the other way, bad stuff happened.  It’s a bit like parenting.  Parents are permanently shocked by their children’s shenannigans  when usually everyone else can see it coming!  And while on the subject of parenting, the next book in the hunt for a viable theory has a bit to say about that.  Stay tuned.

[Via http://thenonfictionreview.wordpress.com]