Why the vote of financial markets matters…and why this doesn’t really matter
‘Hopefully, the [policy] changes proposed will make India a more market-friendly investment destination’ – recent comments made in The Times of India by the former joint secretary to the Indian finance ministry.
These comments reflect a commonly held belief about the relationship between democracy and financial markets – markets are important, and policy-makers readily submit to their will, implementing ‘market-friendly‘ policies to encourage investment, marginalising (screwing) innocent voters in the process.
This belief makes assumptions of how government policy influences investor behaviour. The theory is, rational investors associate ‘Left’ governments with larger public spending programs and borrowing – resulting in higher levels of inflation, government spending, and default risk. Right governments, depicted as encouraging private investment and tighter fiscal budgets are deemed more ‘market-friendly’. The prognosis is, Leftist policies curtail economic growth by discouraging investment and the fear expressed by critics of free-market capitalism is market openness renders impossible public provision of education, health care, income redistribution, and active labor market policies— all hallmarks of the contemporary welfare state.
However, whilst commonly held, evidence to back up this truism is scant. For example, after voters in the United Kingdom and Australia had their say in recent elections – both returning hung parliaments, all eyes turned towards the other entity to which governments are allegedly held accountable – the financial markets, who were expected to strike with fury against voter indecisiveness.
A day before the UK elections, The Financial Times reported a leading investor’s comments as: ʻAny form of hung parliament is worse than almost anything I can think ofʼ. On the day after the election The Guardian reported a leading economistʼs confirmation: ʻYou probably couldn’t get a worse result for the market with no party gaining a mandateʼ.
The outlook for Australia was equally bleak. If you did a a search on Google News after the Australian elections you were confronted by news headlines such as ʻAustralian election: dollar falls at prospect of hung parliamentʼ and ʻHung parliament to hit Australian markets: analystsʼ.
However, both UK and Australian markets failed to suffer the meltdown predicted by analysts and pundits. Have we got the relationship between Financial Markets and Democracy wrong?
Two leading academics from the United States say yes. William Bernhard and David Leblang, in their book ‘Democratic Process and Financial Markets: Pricing Politics’ explain lack of evidence to support the ‘market-friendly’ argument is due to a fundamental misunderstanding of what drives investor behaviour: capital markets act as an intermediary for risk transfer – from those who create it, to those willing to bear it. Here, the primary currency is not outcomes, but predictability – the more predictable an outcome, the less a risk-bearer will be rewarded. Bernhand and Leblang’s studies have shown market movements are correlated with the level of uncertainty of political outcomes, not actual policies. According to Bernhand and Leblang’s theory, the reason there was no great sell-off after the hung parliaments was because they were the ‘predicted’ outcomes – well publicised in the media and by ʻexpertsʼ.
Conventional wisdom states politicians can increase investment with the implementation of ‘market-friendly’ policies. Bernhand and Leblang’s research turns this conventional wisdom on it’s head and they state: ‘ Interestingly, many of the political and economic factors—including inflation, partisanship, and fiscal policy— deemed highly salient to investors…are not statistically associated with stock market valuations’. Market’s simply do not care as much about actual policies (be they left or right of centre) as we think they do.
Critics argue this lack of statistical evidence provides the strongest evidence of the subversive influence of investors – due to the need to appease investors, Leftist governments can no longer afford to ‘act Left’, and global democracy has converged upon market-friendly policies. The consensus is – ‘whoever wins, the markets get in’.
There are some elements of truth to this ‘end of history’ argument as even with the dismantling of the New Labour machine, the UK Labour Party bares stark resemblance to Socialist ideals. However, another problem with the ‘market-friendly’ argument is the assumption investors are rational in their behaviour and intentionally control the political agenda.
The field of behavioural economics, made famous by celebrity authors such as Malcolm Gladwell and Dan Ariely, has developed a large body of research calling into question the rational behaviour of ‘homo-economicus‘ – the holiest tenet of neo-classical economics. According to behavioural economists, when confronted with uncertainty or information overload we often defer decision-making to rules of thumb and information shortcuts (known as heuristics). The problem with relying on heuristics is they can lead to irrational or biased behaviour – known as cognitive bias. As the financial historian and author Peter Bernstein wrote in ʻAgainst the Godsʼ, the evidence ‘reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty’.
Whilst the modern-day trader is likely to be more Oxbridge than East London barrow-boy, two essential characteristics still dominate the role – the ability to process large amounts of information quickly and the need for decisive acton amidst uncertainty – in today’s markets a moment’s hesitation or dithering can cost a trader his job, or his firm millions. These conditions are precisely those that encourage ‘fast and frugal’ decision-making and it should come as no surprise the depth of heuristic usage by investors has resulted in the creation of a discipline devoted to its study – behavioural finance. Far from being cold and calculating sharks, ready to bankrupt a country at the mere whiff of Socialist policies, behavioural finance has shown investors are prone to behave in inconsistent and irrational ways.
Consider for example, the current price of Greek Government bonds – trading at yields four times higher than UK Government debt – implying Greek debt is 4 times more risky than UK debt. However, is this an accurate picture? No, according to one leading economic journalist who recently wrote in The Telegraph: ʻUK house prices look likely to fall, or at least stagnate, for some years, while the outlook for Greek debt is in reality much better than generally appreciated: the chances of default, even in the form of an agreed restructuring, are a good deal more limited than the markets seem to imagineʼ.
So what is driving this price? Behavioural experts argue the current price is an irrational overreaction due to heuristics that affect our ability to predict future events – in this case, the likelihood of Greek Government default.
When trying to predict the future we look to past experience for guidance. The basic mechanism relies on how easily we recall previous occurrences of similar events – the greater the ease of recall, the greater we assume the frequency of occurrence. For example, if we easily recall times when it has rained in April, we increase our estimate of the probability of April Showers. Reasonable enough? It would be except for one problem – we do not remember things easily just because they occur more often. Research has shown our ability to recall events is based on factors such as how recent the event was – overweighting the probability of events recently experienced, how vivid the event was – overweighting the probability of descriptive and emotionally charged events, and finally how much the event makes sense – overweighting the probability of events explained easily. This bias (known as availability bias), explains why air-travel dropped following 9/11 despite increased security reducing the risk of another attack and explains why Adam Johnson is considered a goal-scorer extraordinaire despite scoring only two goals for Manchester City and England (at the time of writing) – because media stories of these events dominate our minds, increasing our perception of how often these events occur. As Warren Buffet once remarked: ‘People tend to underestimate low probability events when they haven’t happened recently, and overestimate them when they have’.
Over the past year, stories of the Greek financial tragedy have dominated the media. This has led to an availability bias – where recent and more salient information about Greek fiscal mis-management takes precedence over the fact Greece has never defaulted, lowering demand and the price investors are willing to pay.
Another reason for widespread use of heuristics is due to the difficulty in understanding political information. For an investor to act rationally they must be capable of correctly understanding information and anyone who has sifted through a Party Manifesto or watched Question Time will know attempting to draw concrete conclusions from the words of politicians is akin to catching hot air with a butterfly net. This challenge is amplified in the age of the Internet and 24/7 news, where it is practically impossible for investors to be fully cognisant. As a result, investors tend to rely on a few trusted sources for information – such as Bloomberg and Reuters.
Furthermore, the performance measurement and incentive structure governing the industry means investment professionals do not worry about absolute profits or losses, but how they perform relative to other fund managers. In a year characterised by poor market performance, a 3 percent return may place a manager in the top half of performers; but in a year characterised by good market performance, the same return will doom an investor to the bottom half. The philosophy is ‘better to be wrong in a group than wrong alone.’
The result of using the same news sources and penalties for going against the grain is investors are more likely to ‘follow the crowd’ and make similar investment decisions. This behaviour results in one of the most common market anomalies rationalists fail to explain – momentum.
Momentum is the tendency for prices to rise and fall in the same direction over extended periods of time. According to the rationalist view, prices ‘should’ only change when new information is available – such as company forecasts or interest rate changes, and price rises should not result in further rises in of themselves. However, in reality momentum is an observed phenomenon and the popularity of momentum investing has led Morningstar to begin providing stocks with a ʻmomentum ratingʼ and most rationalists accepting the behavioural explanation for momentum – a cognitive bias to follow the crowd, known as herding.
When investors all act the same, they move the market in the same direction. When investors act on the belief securitised sub-prime mortgages are risk-less investments offering superior returns or junk bonds not worth the paper they are written on (depending on which side of the financial crisis we sample opinion from), the impact on prices is amplified. As Jeremy Warner, The Telegraph’s Assistant Editor, recently commented ‘Markets frequently get it completely wrong, and both on the upside and the downside have a tendency to extreme overshooting’. These views reflect the theories of the American economist Hyman Minsky, who argued bubbles and shocks do not result from external factors, but are part and parcel of the normal life cycle of the markets. According to Minsky ‘Stability was unstable’.
The herding bias has been used to explain a number of financial crisis – including the Asian and Mexican crisis and the IMF recently acknowledged its impact on emerging markets, providing further support for the belief political parties actions to encourage investment may play second fiddle to the irrational biases of investors.
The problem with irrational behaviour is it often make the irrational beliefs they are based on come true. The Yale professor Robert Shiller, who, in his book Irrational Exuberance, was most prophetic of the recent financial crisis, coined the term ‘attention cascade’ to describe the behaviour of investors – an attention cascade is the herd instinct in action; when many people believe something the belief becomes exponentially attractive for no other reason than many people believe it. The problem is cascades – rational or otherwise create self-fulfilling prophecies and are supported by another cognitive bias known as confirmation bias – once a belief is in place, we look for information to support it, reinforcing convictions.
So, the warning for policy-makers is when investors all believe your policies are ‘market-friendly’ and increase investment, this may be great – but be careful, as when and how investors decide conditions are ‘unfriendly’ is beyond your control.
This should be where this article ends – the conclusion should be investors are an irrational bunch and ‘caveat emptor’ – buyer (policy-maker), beware. The advice to policy-makers should be to protect their positions from investor influence – and to a certain degree this has been the case. Politicians are in the business of power – as the American economist, Frank Knight once remarked ʻThe probability of the people in power being individuals who would dislike the possession and exercise of power is on a level with the probability that an extremely tender-hearted person would get the job of whipping master in a slave plantationʼ. The idea politicians would submissively hand over decision-making power to ‘the markets’ overlooks shared incentives – investors want greater predictability in policy decisions and politicians want less decisions judged by the markets.
These shared incentives have led to a number of institutional reforms. For example, as a result of the creation of an independent central bank, it is impossible for a UK political party to campaign on a low interest rate promise or be solely blamed for rate change decisions. In addition institutional reforms such as electoral reform and cross-border economic coordination (such as the formation of the Eurozone) further reduce political uncertainty and market judgement.
However, whilst critics of free-market capitalism argue markets exert too much and power should be in the hands of democratically elected politicians, the assumption policy-makers will exercise this power rationally and in the interests of voters is called into question by behavioural economists. For example, these same critics argue politicians must do more to ensure innocent voters are protected from ‘the markets’ through regulation. However, when it comes to regulation, decisions are influenced heavily by cognitive biases.
Consider the Enron scandal that helped set the stage for Sarbanes-Oxley (SOX). This seems reasonable enough, right? Enron highlighted a number of gaps in regulation – such as auditor conflicts of interest, which were patched up by SOX. However, was SOX the right move? Several observers have questioned the usefulness of SOX, arguing the costs in management time and shift in focus of boards of directors from business guidance to legal compliance have been far greater than expected. However, most people do not perceive the negative impact as the costs of disclosure regulation imposed by SOX upon general shareholders are much less vivid than poignant stories about families ruined by lies and cheating. In addition, the costs of SOX to shareholders is integrated into overall profits and hidden from shareholders.
The case of SOX highlights a common pattern in market regulation. Consider the history of US regulation. The US stock market climbed 200% between 1925 and 1928. In this euphoria, lawmakers passed a law in 1927 allowing commercial banking activities and investment banking activities to combine – as availability bias suggested given no market failures had occurred, the chances of one occurring was low. Then came the 1929 crash. By 1933, the market was down 90%! So the government passed a law separating commercial and investment banks. In the bull market run of the 1990s the market was up 125% between 1996 and 1999. So, the government allowed the commercial and investment activities to combine again in 1999. Following the recent financial crisis, the yo-yo trend is expected to continue, with calls to split up investment and retail banking functions, ensuring no single institution is ‘too big to fail’. The costs and inefficiencies resulting from these availability-bias led regulation moves demonstrate the level of irrationality in policy setting.
At the heart of this behaviour is the overconfidence of policy-makers in their ability to control the markets and identify cause and effect. For example, a correlation between short-selling and market downturns led a number of governments to believe short-selling causes crashes and banning the practise during the recent financial crisis (albeit temporarily). The European Union tried to pin all the blame of the financial crisis on ‘the markets’. First, they said it was the fault of hedge funds (all evidence to the contrary). Then they blamed sovereign wealth funds – although what they had to do with the crisis was a mystery to everyone outside Europe! Perhaps the best example of this type of over-simplified causal analysis came from the former UK Labour cabinet member Hazel Blears, who conjectured as Iceland, which suffered a particularly severe collapse during the financial crisis had only one senior female baker (who quit in 2006), ‘maybe if we had some more women in the boardrooms, we may not have seen as much risk-taking behaviour’. However, markets are a little more complicated than that. As Frederich Hayek once said ‘the economy‘s capital structure is a complex and delicate, one that cannot be mashed and pushed like putty’.
If Government officials really want to understand some of the contributing factors to the financial crisis, perhaps they should look a little closer to home – and the implementation of loose monetary and fiscal policies following 9/11. Unfortunately, another heuristic – self-serving bias – the belief when things go well it is due to our own endeavours, but when things go wrong it is due of external factors, means it is far more likely for politicians to blame the markets and increase regulation than take personal responsibility for the crisis.
For example, the US Treasury Secretary Tim Geithner seemed to go from zero to hero in one day when the stock market soared on 23rd March 2010, apparently because of his latest plan to help banks unload illiquid securities of uncertain worth. The Wall Street Journal headline shouted, ‘Toxic-Asset Plan Sends Stocks Soaring’. However, homebuilder stocks jumped as much as bank stocks, suggesting the same day’s news about a 5.1% jump in existing-home sales deserves much of the credit. Or consider Gordon Brown, the former UK Prime Minister and Chancellor of the Exchequer and perhaps the poster-boy for self-affirming bias – who argued the financial crisis and spiralling UK fiscal debt had absolutely nothing to do with his poor economic policies and failure to save during the ‘good times’, but due to ‘global cash flows’ – or ‘someone else’, in plain English.
Rationalists often argue poor policy decisions are due to the misalignment of politician and voter incentives. But do policy-makers do any better when agency risk is eliminated? In a recent study, three researchers from the University of Jerusalem – Momi Dahan, Tehlia Kogut and Moshe Shalem found economic policymakers who had implemented major policy reforms to pension systems made consistently bad choices when selecting their own pension fund – not only spending less time researching, but being less well-informed than the average lay-person! Behavioural economists suggest the nature of pension decision, which raise unpleasant thoughts such as death and ageing mean people prefer to avoid them. The point is some poor policy decisions cannot be ‘fixed’ just be increasing democratic accountability.
The recent financial crisis left voters up in arms as tax-payers funded bail-outs for fat cat bankers. But what about the cognitive biases which led to the bail-outs costing even more they should have? In a study by Linus Wilson from the University of Louisiana, the cognitive bias of anchoring – the inability to move away from an initial value, was shown to have influenced how much money the Government recouped once the banks were ‘sold’ back to private investors. The researchers found banks that started out offering lower prices in negotiations with the U.S. Treasury to buy back their stock, ultimately paid lower prices. As Wilson states ʻThe U.S. Treasuryʼs apparent susceptibility to anchoring bias could cost U.S. taxpayers hundreds of millions—if not billions—of dollars’.
The common perception of politicians is often split across diverging opinions. One camp view democratically-elected politicians as the protectors of the people, safeguarding the common interest from nefarious capitalist exploitation. The opposing view is one of the capitalist politician selling-out to business and wilfully working with ‘the market’s to screw over the people. However, as the above examples show the reality is not quite so good vs evil and even the well-intentioned can unconsciously be led to act irrationally.
What about the people? When discussing the relationship between democracy and financial markets, the electorate are often depicted as the innocent bystanders – at the mercy of the Davos ʻmasters of the universeʼ. However, the idea markets undermine democracy overlooks one fact – voters often undermine their own interests due to cognitive biases. As the economist Joseph Schumpter wrote in Capitalism, Socialism, and Democracy ʻThus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognise as infantile within the sphere of his real interests. He becomes a primitive again’.
For example, when assessing politicians, voters suffer from a bias known as ʻaffectʼ – the influence of initial emotional evaluations on decisions. Jack Glaser and Peter Salovey, psychologists from Yale University, describe the political fate of Edmund Muskie as an example of affect in action. Munskie was a dead cert to be the Democratic candidate for the 1978 Presidency elections. However, Muskie did not become President. In fact, Muskie did not even win the candidacy from the Democratic Party. How did Muskie go from hero to zero? By weeping in Public. Senator Muskie, overwhelmed by emotion at a speech in New Hampshire, wept in public – this resulted in an instant reaction, causing voters to develop negative affect and costing Muskie the candidacy. In another study, it was shown political election results were correlated to the number of times a particular candidate was mentioned in the media – the more mentions, the more likely a win. The reality of voting behaviour is ʻfirst impressions countʼ and once initial affect is established actual policies matter very little.
The mix of affect and confirmation bias leads to counter-intuitive patterns of behaviour. Once an affect has formed and we positively associate ourselves to a party or candidate, we do not just ignore negative information, but when confronted with it, it actually strengthens resolve and support. For example, following the aftermath of Hurricane Katrina and the Bush governmentʼs heavily criticised relief effort response, Leaf Van Bowen, a researcher from the University of Colorado found Republicans support for Bush did not decrease, but strongly increased! As one researcher points out ʻIf voters strengthen their support for a preferred candidate even in the face of negative information about that candidate, what is the likely result in an election context? Such voters might well be led astray by their affect, ultimately voting for a suboptimal candidate simply because they start out liking that candidate based on early information.ʼ
If we are irrational in political decision-making, could we also be irrational in the way we evaluate the relationship between markets and democracy? In his book ʻThe myth of the rational voterʼ, the American academic, Bryan Caplan highlights an anti-market bias – a ‘tendency to underestimate the benefits of the market mechanism’. According to Caplan, the populace tend to view themselves as victims of the market, rather than participants of it.
This perception of victimisation is fuelled by availability bias – as events with a compelling and emotionally charged story are more easily believed. So when, in his first inaugural address in 1933, Franklin D. Roosevelt attacked ‘unscrupulous money changers,’ and called for ‘…two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money…’ this resonated with voters. This attack on financial intermediaries is nothing new. Aristotle argued money was ʻbarrenʼ (it does not reproduce like an animal or crop) and Shakespeareʼs Shylock immortalised the perception of the villainous financial intermediary, ready to claim his ʻpound of fleshʼ.
Moralistic interpretation feels good as it provides a satisfying narrative. Conspiracy theories provide simple, easily understood explanations, and allow the adopter of such theories to feel perceptive and special. Unfortunately just because they feel good, does not make them right.
The truth is, there is a villain in this story. However, it is not the ‘masters of the universe’ investors who undermine democracy – far from being the seductive mistress who ended the happy marriage between voters and politicians, markets create positive side-effects and increase the checks and balances to which political actors are held to account. Nor is the villain of this piece sycophant politicians who will do anything to stay in power – even sell-out the voters who elected them.
Our deep desire to understand causality and find meaning makes it easier to see the hubris of investors and ineptness or corruption of politicians as this enables us to apportion blame and because if we understand why, we can control the how.
The truth is, the real villain of this piece is human nature, or more specifically, human nature’s ultimate frailty – the propensity to control. We live in a complex world where causality is difficult to understand. However, no-one wants to hire the trader who is not certain she knows where the FTSE 100 will be trading at the end of the year, or vote in the politician who is not absolutely certain he knows how to fix the fiscal deficit. This control propensity amplifies the desire to prescribe causal links – if you understand what causes something you can control it.
So when it comes to the relationship between markets and democracy, we seem to prefer the illusion of conspiracies and simplistic causality than the reality of a complex world operating outside of our control. In fact, the control propensity is so deep we prefer to believe in politicians and voters who screw us over – because at least then someone is in control and we do not have to confront the uncomfortable and painful reality succinctly described by the Greek historian Herodotus: ‘Of all men’s miseries the bitterest is this: to know so much and to have control over nothing.’
Changing Perfections: Where do we go from here?
Most of us hate change.
It is hard, often painful and seldom simple. Whether it be at an individual or organisational level, change forces us to confront an ugly truth, one most of us would prefer to overlook – that we are not perfect and there is ‘room for improvement’.
Whilst this uncomfortable truth makes change difficult for most, it is an especially acute challenge for religious institutions – organisations founded on eternal and ‘perfect’ truths.
Be it same-sex marriages, female priests or birth control, calls for religious institutions to change practises and doctrines held sacred for millennia, are manifold – and ISKCON is no different. Recently, the GBC offered their ‘thoughts’ on homosexuality, debate over whether same-sex blessings should take place in temples have begun to spread across the Internet, and commentators are beginning to openly discuss changing attitudes on sex.
However, the challenge in essence, is no different to the one faced by other organisations and individuals – what changes should be accepted, and which rejected. And in this regard, ISKCON can benefit from the body of knowledge and experiences of other organisations who have successfully implemented change.
Before we move on, it is important to address the fallacy ‘all change should be rejected’. The fact is, changes have taken place within our lineage – be they the initiation of women, changes to regulatory principles and minimum standards or other points of practise. Adaptation has been a constant theme – even the basis of our movement (the Hare Krishna maha-mantra) was adapted to make it accessible to the masses.
The question is not ‘why change?’, but ‘what change?’.
So, how do we decide? Firstly, there must be a reference point – a North Star, to help guide what direction to take.
For corporations this often relates to a mission statement and/or set of values. This guide, like the North Star must be unambiguous, non-transient, clear and succinct. What is ISKCON’s guide? Srila Prabhupada’s books (unedited or otherwise) and words, may hold some answers. However, they do not fully meet the criterion – the sheer volume overrides the succinctness criteria, furthermore, the number of ‘Prabhupada said’ debates that take place demonstrate how difficult it is to derive unambiguous directives. So, what else? The GBC? Putting aside the disconnect between the Governing Body and the general community of devotees, or the perceived lack of credibility, a bigger issue appears to be the inability to provide unambiguous guidance (Is chocolate bona-fide?!). Even the ultimate safety net – ‘Guru, Sadhu and Shastra’ fails to close the debate. Which Guru? Who is Sadhu? And which Shastra?
This lack of agreed and unambiguous reference point (such as ‘self-effulgent’ Guru, or mission statement that can ‘fit on a t-shirt’) creates a dangerous paradigm. Firstly, without a collective focus, each centre, temple, mini-movement or Guru-group can go off on a tangent, claiming to be the true ‘heir’ of Srila Prabhupada’s mission, whilst paying lip service to ISKCON, the institution. Secondly, it can lead to changes being accepted, simply on the basis of the (self-interested or well intentioned) protagonist’s expertise (and status) to argue their case. Without a clearly defined mission how do we decide on strategic direction and which projects to take up? Do we focus limited funds on more Harinamas or building a new Resource Centre? Building Schools or University Preaching? The point is that, whilst there may be no harm in any of the choices we make, without a clear and contextualised aim, we may choose sub-optimal projects, and worse fail to implement or measure projects by the correct goals. At present, it appears we are hedging our bets and have our ‘fingers in many pies’. As Michael Porter, the father of Corporate Strategy, said ‘The company without a strategy is willing to try anything’.
However, until the day the institution addresses the issue the best advice can be found in The Serenity Prayer, and the words of Mahatma Gandhi – rather than trying to reform the institution, one must heal thyself and ‘be the change’.
Behavioural Economics Rulez, Ok?
If you needed further evidence behavioural economics is beginning to dominate the intellectual playing field, you need look no further than last weekend’s Financial Times, where you will find a short (but salient) piece by the FT’s Managing Editor, Robert Shrimsley, criticising the field. Yes, that’s right – criticising behavioural economics.
Mahatma Gandhi once famously said ‘First they ignore you, then they ridicule you, then they fight you, then you win.’. Schopenhauer (yes, that German bloke with the cat) argued ‘All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident’. Shrimsley’s piece, full of ridicule and opposition, reflects the sea-change taking place within the establishment’s psyche – the understanding that human beings do not mirror the fully rational, profit-maximising, self-interested ‘homo-economicus’ of neo-classical theory, is firmly on it’s way to becoming self-evident truth.
Supporters of the ‘irrational’ field will argue recent moves by the Obama and Cameron administrations to introduce recommendations from behavioural economics into policy decisions, serve as a better illustration of growing acceptance and influence. However, critiques use the same examples to highlight the ineffectuality of the discipline – relevant only where ‘hot air’ theorising and pontificating think-tanks are the norm.
Although this criticism may be unfair, the fact is, despite the first major findings within behavioural economics being made nearly 30 years ago, the field has failed to live up to the hype or expectations – other than perhaps through book sales (as Shrimsley is quick to point out).
Perhaps, these shortcomings are no more evident than in behavioural finance – the intersection of behavioural theory and investment management. For decades, researchers have demonstrated irrational investment decision-making by consumers, professional investors and regulators, and the recent financial crisis has spawned hundreds of new academic papers ‘explaining’ the crisis through a ‘behavioural’ lens. However, whilst behavioural economists are quick to ‘explain’ why things go wrong, investment management is still dominated by the Efficient Market Hypothesis (EMH) and Capital Asset Pricing Model (CAPM) – theories based upon neo-classical rationalism. The inability of behavioural economists to offer functional, applicable and concise replacement models is seen as it’s greatest failing – behavioural economics is great in theory, but useless in practise.
However, this criticism misses the point of what behavioural economics is (and is not). Whilst it is human nature to take sides and reduce complexity to simplistic paradigms, such as good vs evil (or rational vs irrational), behavioural economics is not (and was never conceived to be) the antithesis of neo-classical theory. Daniel Kahnenman, the nobel-prize winning father of behavioural economics views his findings as ‘deviations from the standard model’, not an outright replacement for rational choice – behavioural economics was never meant to replace neo-classical theories, but enrich them.
Furthermore, the application of behavioural models has (and continues) to provide valuable contributions across a number of areas. Climate change policy is benefiting from the implementation recommendations to reduce energy usage, and hedge funds (who never do anything unless there is money in it for them) have begun to implement behavioural models within the investment decision-making process.
The monopoly of ‘homo-economicus’ had ended, but not in the way we think. Human beings are complicated and conflicted, neither fully rational nor irrational, and both rational and irrational theories and tools must be used in conjunction to deliver value and insights. It will take a little while to adjust to this brave new world. But as Schopenhauer and Gandhi suggest, all the signs show we are making progress.
As for Shrimsley’s article? An out of context and sensationalist piece, by a journalist well known for his satirical musings? It does not take a behavioural economist to see what’s going on there…
Why five referees may be worse than one.
This week’s European fixtures drew almost as much media attention due to the men standing pitch-side, as those playing. This week’s fixtures witnessed the introduction of new UEFA measures to improve officiating and decision making – the introduction of goal-line officials.
UEFA have acted to address criticism, enhancing focus where it matters – in the penalty box, adding two new officials on each goal-line, bringing the total number of officials to five (1 referee, 2 touch-line officials, the 4th official and 2 new goal-line officials). The implicit rationale is more is better and as referees cannot be expected to be every where or see every event on the pitch, increasing the number of officials will enhance officiating and improve decisions.
Unfortunately, whilst the idea may be sound in principal, research from the field of social psychology challenges the notion – suggesting more officials may degrade, not improve decision making.
Two American psychologists – John Darley and Bibb Latane, carried out a series of classic experiments in the 1960‘s to determine how decision-making is affected by the number of people involved. The experiments were influenced by the rape and violent murder of Kitty Genovese in New York, which was witnessed by a number of bystanders – all of whom failed to assist Ms Genovese. The incident was highly publicised in the mass media and was reported as a damning indictment of modern society. Darley and Latane felt the reason no-one helped Genovese may not necessarily be due to declining moral standards, but due to a quirk in human decision making under pressure to reach a rapid conclusion. To investigate their hypothesis, the academics set-up a number of staged events in public places. These events involved a ‘stooge’ suffering from an emergency such as a seizure or injury, and seeing how members of the public reacted. The results were surprising – the chances of the stooge receiving help was not related to the seriousness of the ailment, how much effort was required or whether the perceived any personal risk. Darley and Latane found the number of witnesses was the key differentiator – the more witnesses (or bystanders), the LESS likely the emergency-stricken stooge would be to receive help. The effect was far from trivial – when one person witnessed the seizure, there was an 85% assistance rate. This rate dropped to 30% with just five witnesses present!
Since Darley and Latane’s experiments, a number of further studies have consistently demonstrated the same phenomenon – known as bystander effect – in situations where rapid decision-making is required (such as someone suffering a seizure or determining whether a penalty-box tackle was clean or a foul), the more active witnesses (those in a position to make a decision), the lower likelihood of positive action.
Why would this phenomenon be so prevalent? The answer lies in the need for a rapid decision and response. Behavioural psychologists explain when faced with a situation requiring a quick decision, where time to fully analyse a situation is unavailable, we tend to defer to ‘shortcuts’ or cognitive ‘rules of thumb’ to make a decision. These shortcuts (known as heuristics) provide an effective mechanism to make a rapid judgement, but like any rule of thumb, they are not always accurate, and can lead to flawed decision making. One such shortcut is to ‘follow the crowd’, the assumption is when people all act in the same way, they must have a good (rational) reason for doing so, and therefore this behaviour can be safely emulated. By following the crowd we can ‘free-ride’ on the rational analysis of others to make a quick decision. Sometimes this type of decision-making results in good outcomes – for example, going to watch a movie ranked highly in the charts or buying a ‘popular’ car can be the ‘good’ decision.
However, there are two problems with this approach. Firstly, in sequential decisions (where we make a decision after others), basing our action on the assumption those who preceded us made a rational analysis in choosing a movie or car, or even that their tastes and needs align with ours, can lead to poor choices. Secondly, when multiple people are expected to make a decision in real-time, each decision-maker looks to others for a signal on how to respond, and our innate reluctance to stand out from the crowd means there is danger of ‘paralysis by observation’ – as we all look to one another for signs on how to react, and collectively do nothing. In the sad case of Kitty Genovese, researchers have argued the bystanders were not selfish or uncaring – there was just too many of them, and due to each of them looking to the other for a social cue on how to respond, they ended up doing nothing. As time went by this silence bound each of them with greater and greater force.
So why may one referee be better than five? With multiple officials, any single official may be reluctant to stand out from the crowd and make a unilateral decision (such as call a penalty or offside). For example, in the Spurs vs Tvente game this week – goal-line officials failed to call Goalkeeper movement during a penalty kick, possibly due to the fact no other official reacted to the offence.
A single referee may make mistakes, however as he (or she) has exclusive responsibility for officiating, they are more likely to take an action – rightly or wrongly. The fact is, due to the way in which we make decisions, simply increasing the number of officials does not guarantee an improvement in decision-making, and can have a counter effect to that desired. However, whether a single referee may rely on other shortcuts or socials cues, such as an aggressive capacity crowd, players protesting or feigning injury or simply a dislike of a particular player, well, that is a different story all together. Did someone say ‘goal-line technology’…?
On Pocket Money and Wages for Sages.
Devotee remuneration is a divisive topic. On one side, detractors immediately reach for a copy of Nectar of Devotion to explain what devotional service is (and is not), or conjure up a ‘Prabhupada says’ moment, to highlight Srila Prabhupada’s (explicit) instructions against salaried positions at temples. Supporter of salaries take a more liberal approach, arguing either that part of ISKCON’s role is to provide support and protection for devotees, or that it is better devotees work within the movement than outside.
Whilst both sides focus on the underlying issue – impact of salaried positions on development of devotees and society as a whole, they often get bogged down in simplistic good vs evil paradigms. In this short piece, the question of devotee remuneration is revisited, using research from the fields of social psychology and organisational behaviour. The focus is to understand the individual and societal impact of remunerating devotees for activities undertaken in ISKCON, rather than attempting to address whether paid service constitutes devotional service – which inherently misses the point.
The qualification for this non-scriptural approach is based on the fact that at an organisational level (the level at which devotee remuneration functions), ISKCON is an institution and is subject to institutional forces when it comes to growth and development – an area where a broad body of knowledge exists. As Kadamba Kanana Swami writes in ‘The Faith Book’, when referring to ISKCON ‘the institution’: ‘This part of ISKCON is its external form, it has facilities (the temples), authority structure (spiritual and managerial), history (glories and scandals), facts and figures (devotees made, books distributed, plates of Prasadam, and the like)’.
1. The impact of remuneration on decision-making
The Pulitzer Prize-winning American author, Upton Sinclair once famously quipped ‘It is difficult to get a man to understand something, when his salary depends upon his not understanding it’. This insight into human behaviour has been demonstrated by a number of studies. For example, academics who have conducted interviews with employees on topics such as climate change and tobacco addiction, find that people working in industries associated with pollution or cigarette manufacture, consistently underweight the seriousness of climate change and tobacco-related illnesses.
This bias alone would be enough to cause concern – for example, how do you convince a devotee Srila Prabhupada wanted only initiated devotees to be married in a temple room, when his (or her) job is that of wedding coordinator. However, more worrisome, research has shown we are almost always oblivious to the influence of biases, and in hindsight when asked to explain or justify a decision, we will almost always provide a rationalisation.
The societal impact of remuneration means (even the most well-intentioned) devotees will sometimes be unconsciously moved to make decisions – such as minimalist Sunday feasts or trying to implement a mandatory patronage as the price of initiation, which not only reflect underlying biases counter to Vaishnava teachings or be at odds with the development of the movement, but may be perceived to be rational by those with vested interests.
2. The impact of money as a measure.
Researchers have shown that to feel valued, make progress and understand our position in society are amongst the most basic of human needs, and one of the most basic qualities of money – quantification, makes this an alluring metric for answering these questions. Money is often used to determine how much an employer values us, how much progress we are making (how much did my salary go up this year), or to determine how successful we are, compared to our peers and family members.
The problem is that just because money is a natural measure, it does not mean it is always the right measure. Whilst it is easy to measure how many pizzas were sold on Janmasthami, or the number of ‘Lakshmi points’ accumulated during a book distribution marathon, it is much harder to measure how many lives were touched, or the number of people inspired to advance in their spiritual lives. And the problem with salaries is it subconsciously reinforces the primacy of money as ‘The’ metric, which can spread to the way in which we measure other activities. As the American psychologist, Edward Thorndike explained – behaviours that are rewarded are reinforced.
The effect of using money as a metric is we risk making our activities more impersonal (money made, not lives affected) and when it comes to making decisions – ‘how much’ overrules other factors – an attitude which can be counter to the successful growth of the movement.
3. The impact of remuneration on the devotee
Supporters of devotee remuneration often take the position it is better to work within the movement than take jobs externally (which often involve activities that poorly align to Vaishnava practise and lead to time spent in the absence of devotee association). Whilst some people highlight the dangers of money, which can engender greed and other vices, the argument from supporters is that enabling people to earn a livelihood, whilst facilitating devotee association and activities that help one remember Krishna is surely a win-win situation? In the long-term, this association and work in a devotional setting, should help the devotee in their spiritual development. Ultimately, what harm can this do? Not only is this a conceptually powerful argument, it is also the one that leads to the strongest case against devotee remuneration.
A multitude of academic studies have sought to understand the role of money in motivation. The author Daniel Pink, in his book ‘Driven’ explains how parents often use pocket money as a motivator to encourage children to carry out basic chores. The rational is children will learn at an early age you do not get something for nothing and you have to work hard to be successful (wealthy). Furthermore, the hope is constant and regular practise of performing chores will become a habit and enable children to grow up with a strong work ethic. Unfortunately, whilst the intentions and theory may be good, academics have shown in practise, linking pocket money to chores causes a dangerous association within the mindset of children. As Pink highlights, by linking chores to money, what we are saying is only a ‘chump’ would lay the table, or tidy their room for free. This link therefore neuters character development and discourages the very behaviour we are trying to encourage – where children help their families or perform household jobs, simply because this is the right things to do.
But this is children, what about adults? The Psychologist Richard Wiseman in his recent book ‘59 Seconds’ describes an experiment he carried out to answer the question. In the study, a group of adults were asked to pick up litter in a park. One group were paid well to perform the task, whereas the other were not. After the tedious task had been completed, both groups were asked individually, to rate how much they enjoyed the task – surely, the well rewarded group ‘enjoyed’ the day more? In fact, exactly the opposite was reported. The average enjoyment rating of the well paid group was 2 out of 10, compared to 8.5 out of 10 for other group. Wiseman explains, as people associate the fact that if they are paid to do something, it must be something they would not voluntarily do (or enjoy) – therefore the act of being paid to clean up the litter must not have been enjoyed. And what about the other group? Again, Wiseman explains the thinking – if I was not well paid to do this, it must be something I enjoy!
There are those who argue the difference between devotee maintenance (approved by Srila Prabhupada) and salaries is one of semantics. However, even overlooking the discretionary spending that salaries affords, the academic findings highlighted here (and in many other studies) show there is a clear psychological difference and in the long-term salaries diminish enthusiasm and performance.
Paying devotees for undertaking activities in ISKCON (be they classified as devotional service or otherwise) is not the innocent win-win it is made out to be. It creates a sub-conscious association that makes it difficult for us to learn to enjoy activities in this environment (what to speak of doing them selflessly), and perhaps more worryingly may even make us feel that we should NOT be enjoying this kind of ‘work’! As Wiseman points out ‘over the long haul rewards tend to destroy the very behaviour they are designed to encourage’.
Even the most ardent supporters of ‘wages for sages’, when pressed, concede it is not the ideal solution. However, the final argument is the lack of viable alternative. Supporters state that whilst salaries may not be ideal, they help temples operate successfully, enabling many people to come into contact with Krishna – a small blemish outweighed by this ‘ultimate benefit’.
However, is this really the only viable solution? Temples tend to require three functions to be addressed – administration (management and coordination), specialist skills (such as accountants and lawyers), operations (day-to-day functions). One model that could enable a salary-free model could be:
Administration: Experienced Grhastas (living and working outside of the temple) could provide part-time management. Trained Bramacharis, who live at the temple and who are provided sanctuary in the form of shelter and sustenance, could support the Grhastas.
Specialist skills: Grhastras or paid external services – such as legal advice – if the skills cannot be sourced within the congregation.
Operations: Combination of Grhastas, Bramacharis and the wider congregation (youth volunteers etc)
Whilst this is a simplistic ‘back of the envelope’ model, the matter is not trivial. The issue is not that there is some underhand collective conspiracy within the movement to usurp funds – the fact is the vast majority of devotees are sincere people, and as Srila Prabhupada once remarked – devotees should have money, as they know precisely how it should be used – in Krishna’s service. But as this article has shown, even well intentioned devotees can be captured by subconscious biases, which may be hard to identify and overcome, and there may be more at stake than just our livelihood – our spiritual development and success of our society, which is after all, our primary focus.
Self-control and Suppression: A new chapter
Example 1
You have done so well. You have been to the gym five times this week. You have avoided eating any of those ‘no-no’s’ and you are feeling pretty damn good. Now, it’s Sunday evening and you are about to watch the game. You know it’s a bad move – after all the hard work you have done this week, and yet you are overcome. A couple of cans of coke, crisps and some chocolate later – you feel bad and wonder how on earth you have ended up back at square one
Example 2
You are trying hard. Really hard. The nicotine patches are close to hand. You have been extra careful to avoid those places and people that instinctively make you reach for a cigarette and you feel that the hard work will soon pay off. And then a momentary lapse – ‘just one’ you think, and before you know it you are smoking more than you ever did before.
Do either of these situations sound familiar. Whilst the specifics may differ, the two examples above describe familiar challenges in our lives – those of self-control and trying to avoid thoughts of things that are bad for us, in the hope that repression will help us overcome temptation.
Both of these challenges are about to befall the intrepid hero in my book and to try to understand the dynamics a little better, I have been doing some research. Here’s what I found:
Firstly, on self-control the research may surprise you. In his book, ‘Switch: How to Change Things When Change Is Hard’, Dan Heath describes an experiment where a group of students were asked to sit in front of a table in a lab. In front of the group were two bowls – one with freshly baked cookies and another with raw radishes. Some of the group were told to eat cookies and no radishes, the other to eat radishes and no cookies.
In the study, the radish-eaters showed great self-control: they did not touch the cookies! Great – go radish!
After the exercise was complete, the two groups were asked to do a second task – a logic puzzle. Unknown to the group, the puzzle was unsolvable. So who do you think tried longer? Well, the study reported that the cookie-eaters tried for an average of 19 minutes to solve the puzzle, but the group who were told to eat no cookies (but munch down on some radish!) only lasted 8 minutes on average! Wow – the group who were ‘better’ in the first experiment, were worse in the second! What’s going on here…?
According to Heath, the reason the radish-eaters gave up easier was because they simply ran out of self-control. According to social psychologists – self-control is like a muscle and after we use it, it gets tired. Consider trying to run for a bus after spending an hour on the treadmill in the gym – the legs feel a little jelly-like and we just don’t move as quickly as we normally would.
So, sometimes when we succumb – it’s not that we are being bad, it’s just that we have quite literally run out of self-control!
But, here’s the good news – like any other muscle, we can train ourselves to develop stronger self-control. Here, the spiritual teachings of the Bhagavad Gita are poignant. In one verse, Krishna addresses Arjuna’s lamentation that it is hard to control the mind and says:
“The Blessed Lord said: O mighty-armed son of Kunti, it is undoubtedly very difficult to curb the restless mind, but it is possible by constant practice and by detachment.”
So, on self-control the research seems clear: it’s not easy, but if you persevere, you will improve. Good Luck!
Now, on to a familiar technique used to avoid temptation – that of avoiding our vices and repressing thoughts of them. So does this approach bear fruit?
Again, a recent study provides some surprising insights. In the experiment, 85 smokers (average age 31), none of whom were trying to quit, were divided into three groups for three weeks. One group was instructed to spend the middle week avoiding and suppressing all smoking-related thoughts. The second group were to think about smoking as much as they could during that second week; the third group acted as a control and didn’t suppress or encourage smoking-related thoughts.
The main finding of the study was that the group who were asked to suppress thoughts of smoking in the second week, also smoked less in the second week. Great! I hear you say.
But here’s the rub – whilst the ‘suppression’ group smoked less in the second week, they actually ended up smoking significantly more than the other two groups in the last week.
Furthermore, the researchers found smoker’s who spent more time trying to give up smoking through suppression techniques actually had a history of more failed attempts to quit.
Interestingly, the Bhagavad Gita also argues against suppression:
“Even a man of knowledge acts according to his own nature, for everyone follows his nature. What can repression accomplish?”
So, the research again seems pretty unambiguous – repression is a false economy and whilst there may be a short-term benefit, in the long-term it leads to a greater risk of failing and increased addiction.
So, what options do we have to overcome our vices. The Bhagavad Gita suggests one answer. In one verse, Krishna explains how we can become ‘fixed’ in our efforts:
“The embodied soul may be restricted from sense enjoyment, though the taste for sense objects remains. But, ceasing such engagements by experiencing a higher taste, he is fixed in consciousness.”
So, repression is not the answer – we need to replace our vice e.g. smoking, with something positive – What that may be? That, I leave to you…and the hero of my story to decide.
If you are interested in learning more about the topics in this entry, please see the links below:
Using OmniOutliner and OmniFocus…a short history of my use of productivity software.
There are tons of applications out there claiming to improve your general productivity and more specifically, help budding writers.
As a believer in the GTD system (a couple of years ago someone leant me David Allen’s book and it completely changed the way I thought about managing my time), I have tried a few solutions over the years – Toodledo, Things etc…and have been left a little disenchanted.
Admittedly, it is not that the aforementioned offerings are bad, I just never found it easy to use them properly, and ultimately I was always left with disorganised brain-dumps of tasks that periodically got sifted through – a far cry from the regularity that epitomises the GTD system (even when you can print out a pretty booklet of your disorganised thoughts with Toodeldo).
Recently I came across the Omni Group and their suite of applications, which includes a self-planning app call OmniFocus and decided it was time to heal the wounds and try to believe again – I have been using OmniFocus for a couple of weeks and while it may be a little earlier to claim to be a born-again believer, the signs are promising.
At the heart of the application and what sets OmniFocus apart in my opinion is the Inbox and critically the depth of functionality behind it. The purpose of the Inbox, in-line with the GTD system, is an area meant to dump any item that pops in to your head. What sets OmniFocus apart is what happens next – rather than trying to sort and categorise these Inbox items at the time of entry, the system makes it much easier to periodically review the Inbox and action, categorise and create projects for all Inbox entries.
For me, this is key, whereas with Toodledo I was just left with an organised (and often disorganised) brain-dump of ‘thoughts’, the segregation of Inbox and area where actual ‘actionable’ items are managed, makes the workflow of OmniFocus much more valuable and intuitive to use. Add to this, the scheduling, project (sequential and parallel), notes, ability to send emails, clippings and the text selections straight from other applications straight to OmniFocus and the GPS functionality of the corollary iPhone app have made the application a joy to use. Hopefully this one’s here to stay.
After using OmniFocus for a couple of weeks, I have very recently taken the plunge with another one of their applications – OmniOutliner. There are a couple of cool articles out on the Interweb that discuss its uses from a novel-writing perspective and I am currently in the process of migrating my semi-finished book to the application. Again, the simplicity of the application is key, as is the ability to write in a random fashion – I often jump from thrashing out plot ideas to writing sub-sections of many different chapters in one sitting – OmniOutliner makes it much easier to do this and keep the book coherent and tightly coupled and is rapidly becoming another one of those applications that I wonder how I ever lived without!
Day and Night.
Call it epiphany, call it stating the bleeding obvious, but today I have come to realise the way I have worked my entire professional career has, to put it bluntly, been screwed up.
I, perhaps like many of you, have gone about my working day in a predictable manner: After the morning ritual (shower, shave, the occasional chocolate croissant), I begin work – the day’s real business. In the evenings, if I am fortunate I get the opportunity to recharge my batteries and spend a little time on personal development – reading, research or active relaxation (a dying art!).
I now believe this approach is completely counter-intuitive – akin to driving a car on empty all day, with a note on the dashboard reminding you to fill up in the evening. It is completely counter-productive, and brining the analogy back to the subject in hand, can lead to a breakdown.
If you want to get good stuff out – you have to put good stuff in first. This point is particularly poignant for me as I work on my book(s). At present, I spend the first half of my day writing (often struggling) in order to complete my daily quota and spend the remainder of the day on research, chores or other activities. Stephen King writes in his book ‘On Writing’: ‘If you want to be a writer, you must do two things above all others; read a lot and write a lot.’. I now believe this is not an abstract statement – the order matters, in order to write, you have to FIRST read.
So from today, I am going to alter my modus operandi and begin the day by spending at least an hour reading – anything: the newspaper, a book, whatever; the point is, only after reading, will I attempt to begin ‘work’ on writing.
Will keep you posted on how this goes…
An update
So, keeping a blog like so many things in my life – started with a bang and went out with a whimper.
But, nonetheless I feel that there is benefit in perseverance and as I am in the process of writing two books at present, a fiction novel and (ironically) a book on how to stick to things, I thought that it was time to give the blog another go.
Over the coming months I will be updating the blog as I progress with the books, with general progress updates and hopefully some interesting insights and the occasional content update.
Take care,
Writer108
Marketing 108
A short-ish post…
I am currently studying marketing for my MBA, and made a connection with Krishna Consciousness, and the clearest marketing strategy I have ever come across, explained by Srila Prabhupada -‘Be impressive, not repressive’. Its genius, and demonstrates a perfect understanding of theory underpinning marketing.
Marketing is based on three concepts – needs, wants and demands. Needs are basic and tied to human nature, e.g. food, shelter etc. Wants are desires for specific products, perceived to fill a particular need, e.g. I need to eat, but I want to eat chill-paneer! Demands are wants supported by the ability and willingness to acquire, e.g. I want a Porsche, but I can afford a Honda.
Srila Prabhupada’s statement -‘Be impressive, not repressive’ perfectly explains the only successful marketing strategy for spirituality. How….?
Firstly, what is the need that spirituality aims to address? Self-actualisation – the ability to understand who we are and to be free from material limitations. For a spiritual organisation to be repressive is at direct odds with the basic need that spirituality aims to meet – freedom.
Secondly, the only way to communicate (or impress upon) people the value of spirituality is through its own example – the production of happy complete people. Coming in to contact with genuinely spiritual people, is worth more than any preaching program, book bashing or course. By their own example, spiritually enlightened people make the case for Krishna consciousness.
If you can be impressive and not repressive, then the demand will overflow…and the beauty of spirituality is that it is available to everyone, not constrained by supply and demand limitations of material offerings.
Writer108's thoughts... 