How business and society are shaped by our irrational and unpredictable behaviour
By Jonathan Gifford
Marshall Cavendish Business, 2012
Human beings, it seems safe to say, are irredeemably selfish, greedy, short-sighted and prone to mass delusion. Time and again throughout history, business and society have been blindsided by people’s irrational and unpredictable behaviour. More often than we would care to admit, we look back on a disastrous set of events and think: How could that happen? How could we have been so stupid? Why, for goodness sake, didn’t we see that coming?
Blindsided takes a compelling look at the outbreak of some of the most dramatic crises of recent times: from the dot-com Bubble to the Credit Crunch, from the Spanish Flu epidemic to the Dust Bowl, from the collapse of Enron to countless rushes, riots and revolutions. In every case, what we believed to be rational decisions made by us — supposedly enlightened investors, consumers, planners and citizens — turned out to be flawed and gravely mistaken.
1. Sooners, Boomers and Boo
From the Oklahoma Land Rush to dot.com mania – and to Boo.com in particular: the internet start-up that burned off $135 million in 18 months in a desperate and ultimately failed attempt to launch the company on the New York stock market while dot-com fever lasted. From panic-shopping to stock market frenzies, we are very prone to getting caught up in rushes: we find it very hard not to want our share of some good thing that everybody else seems to be getting. There is a good evolutionary reason for this – if you were not getting your share of some sudden abundance of food, for example, then it might be your neighbour who survived to pass on his or her genes, and not you. This is not, however – and as you may have noticed – a good basis for making financial decisions, to choose one example amongst many.
2. Bubbles and Crashes
We’ve had bubbles and crashes for as long as we’ve had markets. Nobody in modern times would be foolish enough to say, ‘No more boom and bust’ . . . surely? This chapter looks at a few of our more memorable bubbles and crashes – from eighteenth century France to twentieth-century Japan – and examines that curious recent economic phenomenon: an apparently blind faith in the efficiency of markets. Sophisticated markets are, according to the followers of this faith, so clever that the price of anything quoted on such markets reflects all of the available information about that item: if there was any new information, some clever arbitrageur would have used it to make money, thereby adjusting the price to reflect the new information. The market price, by definition, is right. All of which rather sidesteps the observable fact that many market prices do not reflect all of the information available, that markets can be swayed by sentiment and that many people lose large amounts of money when the market decides, without warning, that the price was not right after all.
3. The Science of Desire
Americans in the mid twentieth-century feared that they were being manipulated by advertising that exploited the latest psychological techniques of Motivational Research, Symbol Manipulation and Psychological Conditioning. Consumers feared that they were being manipulated rather than persuaded. The same advertising agency executives who were exploiting these new psychological insights into human behaviour – the original ‘Madmen’ – helped Dwight D. Eisenhower to achieve a landslide victory in the USA Presidential elections of 1951 by means of saturation-level TV advertising – the first time that television had been used for political advertising. The commercials homed in repetitively on the core current concerns of the American people: the rising cost of living in particular. Eisenhower appeared on television giving responses that had been written for him by a copywriter to questions posed by apparently ordinary citizens whom he had never actually met: the ‘ordinary citizens’ were carefully selected and filmed in separate studio sessions. As political advertising in particular becomes ever more intense and sophisticated, perhaps it’s time to be worried once again about being blindsided by advertising.
4. New Lamps for Old
We were all blindsided by Enron – America’s biggest corporate fraud. One of the things that persuaded us that Enron’s unbelievable earnings might be true was that the company’s executives claimed they had found a whole new way of doing business – the ‘virtually integrated, new economy’ way. We seem to be prone to believing that some new way of doing things will make us rich without having to work so hard: that Enron could generate huge shareholder value by trading in gas, as opposed to being dull and old-fashioned and merely discovering, extracting andsupplyingthe stuff. Other factors that combined in a dangerous way to prevent us from seeing that the Emperor had no clothes were the facts that even the ‘experts’ – stock analysts, bankers, auditors – had a vested interest in sustaining belief in the money-making machine that was Enron, and the sad fact that we tend to trust senior corporate executives when they address shareholder meetings and tell what turn out to be barefaced lies.
5. The gunfight at the OK corral
People in extreme situations – like the pioneers embarking on a perilous journey across the American Desert in wagon trains, or those setting up makeshift mining camps during the Gold Rush – tend to create their own ad hoc but highly effective systems of law. Citizens in oppressive regimes follow the law until some indiscernible tipping-point pushes them into open rebellion. Citizens in open and democratic societies suddenly erupt in bouts of frenzied lawlessness, for little apparent reason. We are constantly blindsided by riots and revolutions but must remind ourselves that it is our instinct to bond together in social groups: if we were solitary by nature, civilisation could not have emerged and thrived. The outbreak of riots and revolutions is a sign that something in the process of coming together has gone wrong: that tyrants have hijacked the process of government, or that some groups within society no longer feel bound by a common vision. We almost never see this process at work until it is too late and we have been blindsided by a sudden eruption of violence – or, occasionally, by a calm but irresistible process of regime change.
6. Weapons of Mass Financial Destruction
Over the Counter derivatives were deregulated by people who believed that derivatives contracts between ‘sophisticated parties’ (such as banks and pension fund managers, for example) did not need to be regulated in the reassuring way that futures markets are regulated. Any number of exciting derivatives could be created to cover for every eventuality, and the financial world would be a better and safer place – ‘the market’ after all, would prove which of these products were useful and which were not. Unfortunately, Wall Street took the opportunity to sell financial instruments of bewildering complexity built, in fact, on very shaky foundations. By the time ‘the market’ (in practice, an alarmingly small number of people) realised that these products were toxic, they had found their way into most corners of the global financial system, causing a global credit crunch from which we are still struggling to emerge.
7. Dust Bowl and the Dirty Thirties
In the 1930s in America’s mid-West, a combination of misguided government policy and a short spell of higher than average rainfall persuaded homesteaders that they should plough up the prairie – an ancient and sustainable ecosystem – and turn it into a factory for growing wheat. Then the rains failed and the topsoil blew away in dust clouds that blackened the skies. The clouds reached New York; dust fell on ships off Americas east coast. People in the mid-West died trying to find their way back to their houses through the darkness and the choking dust; it was America’s worst ecological disaster. Agriculture returned to the Great Plains, made possible by electric pumps that could extract water from deeper levels of the massive underground Ogallala Aquifer. The problem is that the aquifer is not replenished by rain water at a rate that comes anywhere near to matching the amounts being extracted each year. We are draining the Ogallala dry for short-term gains. The Tragedy of the Commons continues to blindside us all.
8. The Black Death
We are incapable, and understandably so, of living our lives in the expectation of calamity. As an inevitable result we are always, in effect, blindsided by major disasters. The most terrifying natural disaster faced by us as a species is a global pandemic. The Black Death of the Middles Ages is believed to have killed 50% of the populations that it struck. The fabric of society was changed forever: the shortage of labour hastened the end to the feudal system. We tend to choose not to remember that another global pandemic brought parts of the civilised world close to disaster as recently as 1918, when an outbreak of an astonishingly virulent virus popularly known as ‘Spanish Flu’ killed between 50 and 100 million people worldwide – between three and six times the number of people killed in the First World War. In towns across America, people starved to death because neighbours were too frightened of infection to take food to them. Municipal workers drove trucks down suburban streets crying, ‘Bring out your dead!’ When the next pandemic strikes, we will face hard choices about who is protected by limited stocks of vaccine: the most vulnerable, or the most productive?
9. The Blindsided Brain
Psychology and neuroscience are beginning to throw light on our decision making processes. Recent research demonstrates conclusively that very few of our decisions are made in the way that we like to believe – as a result of careful deliberation and a weighing up of the available evidence. In fact, we jump to conclusions based on our previous experience and are heavily influenced by emotional drives of which we are essentially unconscious. These decision making stratagems were extremely effective in ensuring our survival when we were a young species, struggling for survival (if they were not successful strategies, then we would not be here), but they are poor stratagems for dealing with a great deal of modern life. Our default position is to make decisions within fractions of a second, and to rationalise those decisions at our leisure, creating what are almost always false but reassuring narratives as to why he have acted in a particular way. We persuade ourselves that our decisions are the result of meticulous, conscious thought processes, when they are in fact the result of lightning-quick hunches or emotional and instinctive knee-jerk reactions: fight or flight; friend or foe. As a result, we are constantly blindsided: condemned to look back in frustration at what are revealed to have been poor decisions and to wondering what we had been thinking of at the time. The best that we can do, to avoid being blindsided at every turn in the future, is to become more self-aware of the systematic faults and biases in our decision making. Our instincts, after all, are very good at telling us who to like, who not to trust and when to be afraid. They are, sadly, not so good at assessing the likely outcome of a complex situation or at resisting the call of the crowd. We would do well to revisit constantly the important decisions that we have taken, and to reassess their wisdom.