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Dan Ariely: Why Humans Are Hard-Wired To Create Asset Bubbles

Our evolutionary programming often works against us
Saturday, February 15, 2014, 1:25 PM

Renown behavioral economist Dan Ariely explain why humans are biologically wired to make irrational decisions when money is involved. It's a case of our evolutionary wiring interfering with the decisions we face in a modern world very different from the one our ancestors adapted to.

For instance, he explains how one of the easiest phenomena to create in a lab are valuation "bubbles". Our vestigial herding instinct encourages us to imitate the actions of those around us (e.g. bidding for a particular asset), which then strengthens that signal for others (leading to even higher bidding), resulting in behavior not justified by the underlying fundamentals of reality (asset prices destined to crash).

In this podcast, Chris and Dan explore the human cognitive triggers that have led us to our third major bubble in 15 years (tech stocks, housing, credit) and why our natural programming often works against our best interests. In certain cases, like the banking sector, bad decision-making has become so ingrained in our institutions that Ariely thinks the "clean slate" approach is our best option should we have the courage to deploy it:

In very general brushstrokes I think that most bankers are in fact inherently decent people. We just put them in situation in which their conflict of interest is tremendously high and their social norms are incredibly dysfunctional.

When you hear bankers talking about their customers as Muppets, for example, they are forgetting who they are serving. They are hired by the rest of us to do a particular job; and they forget this. And then they have terrible conflicts of interest. 

Imagine that I give you a world in which, if you can adopt a particular perspective on life, you could get $5 Million as a bonus. Wouldn’t you start believing that world? And then everybody around you is doing the same thing, and you have some justification for it by talking about financial market theory and so on. All of a sudden you could see how you could take good people and you could put them in this distorted way -- in the same way that we talked about how global warming is probably the perfect storm for inaction -- I think Wall Street is the perfect storm for allowing people to rationalize their own selfish motivations as if they are serving other people.

It is really, really terrible because we have not done anything to change the way we pay bankers. And we have not changed anything in terms of the code of ethics and morality.

On the consumer side, there is a tremendous loss of faith. We have been screwed and we know that we have been screwed. And we know that we are not trusting other people. And I think loss of trust is a central issue for this financial crisis and sadly nobody is trying to do anything about that. Human beings are incredibly forgiving, but nobody has really stood up and said, "I am really sorry. I made all of these terrible mistakes. I want this particular bank to start fresh and caring about people," right? Nobody has admitted anything. So we as consumers feel that there are these other people on the other side who have behaved terribly, which is true, and that are smug about it, and that nothing is different. And why should we trust them? And we do not.

I don't think it is a generational thing. I think there is a tremendous feeling of lack of control, agency, and helplessness. And the sad realization -- this is one of the things that came out of financial crisis -- is that it is much harder to start a new bank now. So young people are actually quite idealistic and I think people would have started new banks where they behaved very, very differently. But what happened is that it is really, really tough to open a new bank now. But I am still hopeful: I think that this anger and frustration just needs to be channeled in a better way.

I am not a religious person but the story from the Bible is that God made the people of Israel walk around the desert for 40 years until the old generation that worshipped the golden calf passed away. I do think that we need a new generation of bankers. I think you cannot take the old generation of bankers and rehabilitate them.

Recent history is not showing us that this is something we should hope for. But there is a real question of, How do we create a new generation of bankers that are going to think of themselves as the caretakers of society, rather than the rapists?

Click the play button below to listen to Chris' interview with Dan Ariely (42m:54s):

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. Traditionally economics assumes much. It assumes that resources from the natural world are a function of demand and capital. Perhaps most bizarrely, considering the evidence, it assumes that people are rational and make rational decisions based on cold logic and calculated self-interest. But are they really? And if not, what does it mean that the major core assumptions of the models that drive monetary and economic policy are irretrievably flawed? And beyond economics, speaking very widely here, what motivates people and even entire cultures to accept one set of beliefs while rejecting others even when cold hard facts would strongly encourage the adoption of new beliefs and associated behaviors?

Fortunately there is an entire new branch of inquiry that has been opened up that assumes nothing about how people make choices and decisions, and uses scientific inquiry and the resulting data to develop a view on what actually drives human behavior. And today, to help us explore these ideas, we have back on the program one of the leading researchers of behavioral economics. Dan Ariely is a professor of psychology and behavioral economics at Duke University, my alma mater, and is the founder of the Center for Advanced Hindsight. Dr. Ariely’s talks on TED have been watched nearly five million times. He is the author of Predictably Irrational, which I have recommended heartily before, and The Upside of Irrationality, both best sellers.

Dan publishes widely in leading scholarly journals in economics, psychology, and business. His work has been featured pretty much everywhere: New York Times, Wall Street Journal, Washington Post, Boston Globe, Scientific American, you name it. Dan, I am really excited to have you back on the program today.

Dan Ariely: I will try to keep you excited throughout and not just in the beginning.

Chris Martenson: Excellent. Well, as a starting point for this conversation I would like to talk about bubbles, specifically the idea that once upon a time a financial bubble happened, at most, maybe once a generation because the painful memories literally had to die away before the mistakes could be repeated. But in the US we went from a stock bubble in the '90s, a housing bubble in the 2000s, and today I think we might have something of a faith bubble, if I can call it that, in the ability of the Fed to get things right this time even though there is nothing in the historical data to support that view, quite the opposite in fact. So what is it in the human psyche that allows selective amnesia to arise?

Dan Ariely: So a couple of things are actually interesting. So first of all the creation of bubbles turns out to be one of the easiest things to do in a lab setting. So you put people in the lab and you kind of create an experiment in which they all trade some fictitious product and the most common behavior that you observe are bubbles. Because if you think about it the natural inclination is to see what other people are doing and to try and follow other people. In psychology this is what is called "social proof." It is about our herding instinct. It is about the fact that you see lots of people waiting in the line to a restaurant and you think to yourself this must be a great restaurant; let me stand in line as well.

Chris Martenson: Yes.

Dan Ariely: So it is almost instinctual that we look at the behavior of others and infer something about the value of the different options. And then of course it keeps on and on and on until there is not enough power to sustain it and then there is drop. And then you see the opposite result, which is people get very depressed and frightened when things go down and they sell at the worst possible time. So bubbles, sadly, are just a part of human nature. And it is all about the ability to see what other people are doing, right? The moment we can see what other people are doing we succumb to bubbles. And in this world today visibility is just much better. If you think about the internet, you think about amount of information out there, if you think about the news—so the temptation for bubbles is just much, much higher. So that is on one side.

On the other side the question is: What causes this amnesia? And I don't think—of course lack of memory is part of it, but I think the other part of it is that when we live in a particular reality, we come up with stories that explain this reality. And these stories for our own sanity are not stories about randomness and they are not stories about bubbles. They are stories about this time it is real value. When somebody comes to our face and tells us something, we have a very hard time disbelieving it. Our initial instinct is to believe in what they are saying. And we are experiencing the reality that we are experiencing. And we have a sense that this time everything is going to be different. We have a feeling that this time whatever we are experiencing is much more real.

So there is this disassociation between what we know about history and the intensity and realism of our current experience. And because of that we just do not think that those are relevant cases.

Chris Martenson: So this is a case of herding then, and this is normal human behavior. I assume the Federal Reserve must be aware of this sort of material or do you think—does traditional economics completely ignore—it just sounds like a feedback loop and one that is pretty well understood, I guess, at this point. Is that correct?

Dan Ariely: So behavior economists understand very much bubbles and we understand people’s belief about the world in all kinds of ways. By the way, one of the nicest experiments ever was about our need to find reason and logic and structure even in random things. So you show people patterns of clouds in the sky, right, and initially, immediately, somebody says "Oh this dog was chasing somebody here." You show people shapes on computers and they immediately tell stories about it. You show people random fluctuation in the stock market and they immediately come up with a theory about what is really going on. We really have a very deep need to have a story that describes what it is that we are seeing.

And the stories that we like are stories about causal relationship. This is causing that. And like a lot of things in behavior economics, these things have good things and bad things. So think about how quickly we learn causal relationship. You turn a switch when you come to a room and you learn that it's a causal relationship to the light coming up. So we are basically looking for those relationships everywhere around us. And the experiment I was referring to was an experiment in which they gave people a machine, a ball machine, that would basically they would press on all kinds of buttons and balls would come out at different speeds and different rates. And then they asked people to what extent have they figured out how to control the machine. What levels would get more balls out and less balls out and so on.

And people thought that they had quite good control aside from the fact that the ball machine was perfectly random. So we have a sense of that. And what kind of people do you think had the best understanding that in fact they did not have much control over the machine? These were depressed people. And the question that arised from this in psychology was whether depressed people are depressed because they understand that they do not have much control over the world, or is the lack of control causes them to be depressed? And we do not have an answer for that.

Chris Martenson: So we do not know cause or effect on that one?

Dan Ariely: No we do not. But if you go back and say, "Does the Fed understand all of these effects?" I do not think so. I do not think when they think about policy those are the things that are driving them. I think it is really very, very sad. But I think that when people think about the behavior of masses, even when people understand irrational behavior, they still go with the standard models way too frequently.

Chris Martenson: It is interesting this part about where the Fed is getting their decision from or even anybody in any policy position. I am thinking about your machine with the random balls coming out. I was really taken by a piece of work, a study in a book that came out, called The Origin of Wealth, by this guy Eric Beinhocker. And he very convincingly proved that the economy is a complex system. And because it is complex it inherently is unpredictable. And we cannot—all sorts of complex systems defy us, earthquake fault zones are complex systems. All we can do is sort of categorize what the risks are: If this fault has not given way, and it is supposed to give way, we might predict an earthquake would come sooner and it might be larger. But that is as close as we can get.

And so the critique he has of economics is that it is still based on the idea that it is a deterministic model: You pull lever A, you get result B. And so I can imagine the Fed, if they have flawed models and they are pulling on lever A and the balls come out randomly, sometimes unemployment does what it wants it to do. I can see them falling into the same trap as well, they are humans, right? So what do we do with this idea that if the world is essentially random in some important respects, what is it in your work that tells us how we might improve our ability to navigate in such a world?

Dan Ariely: Yes, so again you can think about these questions about the need for simple models, a little bit similar to the people who need to feel that they can predict the world. And I think economics in some sense, the reason that standard economics is so tempting is because it gives people the illusion that they understand the world, right? So here is a two-period, two-player model of how the world would react and you basically—it is an oversimplification, and you know it is an oversimplification, but you have a temptation to think of it as a model for the world because it gives you a sense that you understand the world.

And I think the challenge of really understanding stochastic, large scale, complex systems—it is not just about understanding them. It is also about being willing to give decision control to a model that we do not understand very well. And that is really the challenge. So imagine I gave you a big equation and I said this equation should predict how much money you should save for retirement, right? I mean, the question of how much money you should save for retirement is really, really very tough to figure out. Here is a model; we do not understand it exactly. It has been calibrated on lots of other people, and so on. Would you trust it, right? And it is very, very tough.

Again, in economic language, you see all these people on TV at the end of each day telling you what happened today in the stock market and telling you a story about why this is the rational thing to do. But of course they explain it to you backwards: What happened today. And we are just suckers for simple stories. And when the stories are not so simple it is very hard to believe them. And it is very hard to give them power over our decisions.

Chris Martenson: So let me talk about something that came up before that relates to that. You mentioned beliefs, this idea that we are all holding beliefs, and I know that I do. And when I do I have noticed something. My belief systems, they really are very good at adroitly selecting some data for inclusion, I will accept this piece of data I see but I will reject competing data that is unsupportive. This data selectivity, is this something that you see often and contest in the lab?

Dan Ariely: Yes, there is no question about it. We see it in the lab. We see it in life.

Chris Martenson: Yes.

Dan Ariely: It is really quite incredible. Now, there is a vicious cycle in which if you have a particular belief now, you can choose to listen to a news channel that would just give you the beliefs that you believe in, right? So, it would be one thing if we all listen to the same news show, all Americans with all particular opinions and then we had to rationalize our behavior and justify some decisions. But now the people who watch Fox News and the people who listen to NPR are very different people and they basically choose to get exposed only to their opinions, which actually makes the problem much, much higher.

For me this was the toughest, but more interesting case. Together with Mike Norton, we wrote a paper on trying to figure out what is the wealth inequality that Americans would like? So if you remember the philosopher John Rawls he basically had the very nice definition of a just society. And he said a just society is a society that if you knew everything about it you would be willing to enter it in a random place. And if you think about it is a very beautiful definition because it means if you are very rich you do not just think about your own state you think about all possible states. And if you are very poor you do not just think about where you are you think about all possible states.

So we asked tens of thousands of Americans to basically tell us what they think is the wealth distribution that they would be willing to join a society like this in a random place. And if you think about it the way we did it was, we asked people to imagine the top 20% of Americans, the next, the third, the fourth, the fifth bucket. And we said how much money—how much of the wealth do you want to be owned by each of these buckets? And that will create the Gini coefficient or the rate of inequality. And there were two main results that emerged. First of all, it turns out that Americans want a much more equitable society than what we have right now. But most interesting, there was no differences between Republicans and Democrats, almost no differences.

So for example, in one question we showed them a distribution of wealth that was slightly more equal than Sweden and a distribution of wealth based in the US, and 92% of Americans on average chose the Swedish distribution. But for Democrats it was 93%, for Republicans it was 91%. So, different but not that different. So we showed this result and we said basically, when you think about wealth and equality in abstract under the veil of ignorance, kind of Rawls’ definition, the reality is that all sides of politics seem to be very similar. We do not have that many differences. And we thought it is a great result basically showing that we are not as different as we think we are. And perhaps politicians are making us think we are more different than what we really are.

The amount of hate mail we got over this [laughter] piece of research was amazing. What happened was, I mean, there is lots of flavors of it. But the one that was the most interesting was a guy who told me that we have not calculated wealth correctly because the wealthy people, their wealth could be taken away by the government at any moment to pay for more social programs. So he basically said that we have not taken the liability of the wealthy people correctly into our model. And I saw lots of those things where people basically were trying very hard—rather than focusing on the result that we are actually much more similar than we think, people were just looking for all kinds of ways to discount the results. And I am perfectly happy with discounting the results. But the thing I was trying to tell these people, I said, even if we overestimated or underestimated by three times, by a factor of four, wouldn’t the results still suggest that we have a more inequitable society than what we want? And wouldn’t we still have the result that we are much more similar to each other than we think?

But I have not been able to convince them. So it was a very interesting, kind of personal case, about the power of desire to see reality in a certain way.

Chris Martenson: Well, it is fascinating because what you are describing is that there is a cultural narrative that we have, something about how we are a free and fair and just society and that when you ask people about that narrative in the abstract they come up with a set of results that are out of comportment with the actual reality of the world they live in. Is that not the definition of cognitive dissonance?

Dan Ariely: So, first of all, when we asked this question, of course the issue is—when we asked the question in the abstract, the question is: "Which answer is correct?" And I actually like the Rawls version of it because—think about tasting wine. When you taste wine you are influenced by the price, you are influenced by the label, you are influenced by your preconceived notions. But when you are doing the Rawls constraint and you say, what society would I like to join, in principle? All of a sudden you are not married to your own position. You are not thinking about your own particular issue and how much you want to pay taxes and do not want to pay taxes. So I think that the correct version is the abstract Rawls version. I think that when we vote on politics we should vote thinking about abstract, long-term ideas rather than what will happen next year.

Now in terms of cognitive dissonance, there are lots of versions of what people refer to as "cognitive dissonance." But the general approach is a difference between a behavior and a belief. So Festinger’s original experiments—he would get people to the lab and he would get them to do something really boring for a long time. And some people he paid a lot and some people he paid very little. And then he asked them to recommend how much they enjoyed the task and would they recommend it to a friend and so on. Now the people who worked on this task and got paid a lot had no dissonance. They basically said, "This was a boring task. I got paid a lot, okay that is fine." The people who did not get paid a lot, they got paid a dollar, they had a dissonance. They basically said, "Oh, I worked on this for a long time, I got paid very little, how does this work?"

And the way they resolved that, they could not have said to themselves, "Oh it must mean that I am stingy or something else." They basically said, "It must been that I actually enjoyed that task more," and then they recommended it more to others. So the idea is that when behavior is one way and our belief is another way, it is very hard to change our behavior. We remember what we did, so we change our belief to coincide with that. That is why, for example, it is really good to play hard to get in romantic adventures. Because somebody would say, "Oh I worked so hard to get this person. Why did I do that? It must mean I really love them." Or another romantic example is why big weddings are actually useful. You could say to yourself, "Why did I spend so much money on this wedding? It must mean that I really love this person."

So cognitive dissonance, this idea that we can get people to act and once we get them to act in a certain way we can get them to adjust their beliefs to fit with that, is a very important, powerful notion.

Chris Martenson: So I want to get back to that in just a minute because that is exactly where I wanted to go with this conversation. But right before then there is a step and it is this—and this is one of the most burning questions we have on our site, and it goes like this: Suppose that someone had some really important information. It has been vetted. It is data. It is as good as they can get. And they want to share this with friends, families, colleagues, maybe even strangers. But that information runs counter to the narrative or the belief structure that that person is holding individually or it runs counter to maybe the collective narrative. What can behavioral economics tell us about how to go about that process of sharing, knowing that the subtext of this is people find this to be an incredibly frustrating position to be in?

Dan Ariely: So this is really about my life as a teacher, right. [laughter] That is what I do all the time. And I will tell you what I do is, I start by showing people visual illusions. And visual illusions are something that people just get wrong, it is easy to show people that they are getting wrong this visual illusion. It is not threatening. It is clear that everybody is doing it and it just clear that it is something very basic about being human. So I start with that as a starting point and I basically said, "Let us agree that there are some things that we are all going to be wrong about. It is not about being smart. It is not about knowing anything. This is just how we function." So that is kind of step one, and I try to get people prepared for that.

And then as step two, I do not talk to people about themselves because that would immediately increase their defense system, right?

Chris Martenson: Yes.

Dan Ariely: So talking about other people is always good. I have an amazing mother-in-law but if I did not I think that would be a good category to try. But you basically try to tell about other people. And another thing that I try and do is, I do not try to say that anything is definitive—which is always the case, right? We just have this big data. And I say, "Look, this is what we have right now; it is truly kind of an amazing data. And rather than trying to push it down, let us think, what if this was correct, what would it tell us?" So that is when they kind of – okay, so let us think about what does that mean, which changes people’s perspective, hopefully, from attacking to thinking about the implications. And then at the end, I tell people, "Look, if you saw a piece of data that contradicts your set of beliefs, I do not think you should abandon your set of beliefs immediately, right? No data should be used to change you completely."

"But you should take it into account to some degree," right? This is what we call "Bayesian Updating." Think about it, right? So here is what you thought before, here is what you know now; what should you potentially do differently? And then finally I encourage people to do experiments. Because I think that once people understand data with their own hands, with their own clients, with their own workplace and so on, their belief changes quite dramatically. So in my case here is an effect, let us say it is the context effect where you add another very expensive item to a list and all of a sudden people buy something differently. I said, "Try it on your colleagues, try it on your customers, see what happens." And the first time people do an experiment and see the results for themselves, it is a very different process.

Chris Martenson: So this is kind of a go-gently approach, right? So you start out with a visual thing, "Hey look, we are all subject to having—being human, which means we can interpret things in a variety of ways, some of which may be correct or not." And then secondarily saying, "If this were the case, then what might the implication of this actually be?" Which sort of abstracts it a little bit, gets people to think about it. But fundamentally we are talking about belief structures and positions people might hold as defended fortifications that you are saying it would be better to be a sort of, come in gently, more like a spy than a battalion.

Dan Ariely: Yes and I think it is a combination of going gently and also trying to make it their own. So the moment that people kind of think about the data as their own, say, "Okay, here is a hypothesis, test it out," those things are very hard to do about macroeconomics questions, right? Like levels of inequality and so on. But in my little world this is actually possible and relatively easy to do. So I think that it is a combination of go gently, try it for yourself, consider the possibility, and then kind of try to own that.

Chris Martenson: Yes. You really shifted my views a number of years ago when I was thinking about climate change and that climate change is a difficult motivating topic because it lacks some features. It lacks a face, or worse, the face that we might associate with it is staring at us in the mirror. It is abstract. It is distant. It is not near and immediate. That there are a variety of things around that story that would require transforming it out of just the strict statistical data into a more human accessible compelling sort of an argument. And what I am wondering then is to get back to this idea is, what are the best ways of motivating people towards taking new actions? That is the work I care about, but marketers would care about it the same or doctors. We could be talking about—we want to try and motivate somebody towards maybe weight loss or saving more money for retirement, reducing excessive consumption, whatever that new action is. What does behavioral economics tell us about the best ways of motivating people to new actions?

Dan Ariely: So a couple of things. First of all what you said about global warming is absolutely the case. In fact if you kind of search the whole globe for the one problem that would maximize human apathy you would come up with global warming, right? It is, as you said, it is long in the future, it will happen to other people first, we do not see it progressing, it does not have a face. And anything we would do is a drop in the bucket, right. And you could contrast it with, what happens when one guy gets on one plane with a small bomb in his shoe, right? It is clearly terrible, but since then we all take our shoes off every time we go on a flight, right? Clearly taking an action. Global warming, if you believe the science, is a much bigger risk than one person going on the plane with a small bomb in his shoe, but we do not react to it. It does not have the same emotional reaction.

And the issue there really is that, knowing, even the people who are environmentalists, right, so people who are environmentalists are trying to convince the non-environmentalists. But even the people who are environmentalists are not behaving that well. So the issue really is, and this is a deep problem, is that we think that we are motivated by goals and by high order aspirations, and so on. The reality is that we are not. And one of the saddest results I think ever in social science is a recent paper by John Lynch and his colleagues. And in this paper they looked at all the literature of financial education, financial literacy and tried to estimate how much can we hope that financial literacy would help people do better. So how much is knowing something about financial literacy can help people achieve better outcomes?

And the result is that the best we can hope for is an improvement of about 6%. And even that is lower for people from lower economic status, and it goes down over time. So in the history of mankind we have tried lots and lots of things. We have not yet been able to show any success on teaching about financial literacy and have that impact people. And the reason is actually quite easy to understand when you think about it. So here is a situation: You need to think about something, you need to learn about it, and then every time you walk in the street you have to think about that. Every time you buy coffee, every time you go to pay rent, every time you go to do something, you have to think about that piece of knowledge. Really, really hard to do, right? I mean, everybody knows that texting and driving is dangerous and stupid. Does it change our daily behavior? Not so much. You find lots of cases in which this general knowledge just does not penetrate your daily behavior.

So the notion from behavioral economics kind of boils down to this notion of choice architecture, which is the idea that our decisions are partly a function of what we know, they are partly a function of our preferences, but to a large degree they are a function of the environment in which we are in. If I came to your office every morning and layered your desk with donuts, fresh donuts, what are the odds that at the end of the year you would not weigh more? Right, very, very low. Now, no matter what you know about donuts and health and so on, this temptation every morning would just be too much. Now I am not saying you will eat all of them but you will eat enough to make your life worse off. So the question that we want to ask is, "What kind of world do we want to create?" Right? If you think that people are an outcome of the world that they are being given, the question is, "What world do we create?"

And the world right now is all about tempting us to do things that are in the world’s short interest and not in our long term interest. So Dunkin’ Donuts, what are they trying to optimize? They want you to buy another donut today. It is not about your health in thirty years from now. What is Facebook trying to optimize? For you to check Facebook one more time today, not your productivity thirty years from now. What are banks trying to get you to do? Use your credit card a couple of more times today. If you think about it, we are in a world where all of the other players are determining our environment, and all of the other players want us to do something now that is good for them. And, what are the forces that are focusing on long term? You would hope it would be the government, but with elections every two years that is very hard to imagine. You would hope it would be your significant other and your family members, and maybe that is the case, maybe religion to some degree, if we had preventative health that might be it as well.

But really our environment is one that just wants to take, take, take from us all the time and we have to fight with this ongoing temptation in a very, very tough way.

Chris Martenson: Well, this idea of choice architecture then, one of the more vexing aspects of our current environment for a lot of people at my site and elsewhere obviously is the choice architecture that our leaders both monetary and fiscal have set up around this whole banking disaster. So what you are talking about, if you put those donuts on my desk top, that is my personal hazard. But this idea of moral hazard that exists when bad decisions get bailed out, when individual losses at the big banks get spread across a larger society, that creates an environment that is very different for the bankers than for everybody else—I will put myself in the "everybody else" bucket. I look at that and I get demotivated by it because I say, "These are people, they behaved badly, they did not suffer any consequences for their actions. In fact I am the one who is going to shoulder this at some point either now or in the future with a dilution of money. And there seems to be no corrective behavior."

The environment—people respond very quickly to incentives, don’t they? And if they do, how do you read everything that has transpired in, sort of, the macro lack of—in the macro environment -- lack of, what shall I call it, accountability or any sort of responses?

Dan Ariely: So, in very general brushstrokes I think that most bankers are in fact inherently decent people. We just put them in situation in which their conflict of interest is tremendously high and their social norms are incredibly dysfunctional, right? When you hear bankers talking about their customers as Muppets, for example.

Chris Martenson: Right.

Dan Ariely: So, they forget who they are serving, right? That they are basically—they are hired by the rest of us to do a particular job. And so they forget this. And then they have terrible conflicts of interest. So, I wrote a lot about conflicts of interest. It is a topic that I worry a lot about. But imagine again this rationalization story that we talked about throughout this discussion. Imagine that I give you a world in which if you can adopt a particular perspective on life you could get $5 Million as a bonus. Wouldn’t you start believing that world? And then everybody around you is doing the same thing and you have some justification for it by talking about the financial market theory and so on. All of a sudden you could see how you could take good people and you could put them in this distorted way, in the same way that we talked about how global warming is probably the perfect storm for inaction, I think Wall Street is the perfect storm for allowing people to rationalize their own selfish motivations as if they are serving other people.

And so I think that is terrible on that side and it is really, really terrible because we have not done anything to change the way we pay bankers. And we have not changed anything in terms of the code of ethics and morality. On the consumer side I think the issue that you describe is absolutely correct. I think there is a tremendous loss of faith. So we have been screwed and we know that we have been screwed. And we know that we are not trusting other people. And I think loss of trust is a central issue for this financial crisis and sadly nobody is trying to do anything about that. Human beings are incredibly forgiving, but nobody has really stood up and said, "I am really sorry. I made all of these terrible mistakes. I want this particular bank to start fresh and caring about people," right? Nobody has admitted anything. So we as consumers feel that there are these other people on the other side who have behaved terribly, which is true, and that are smug about it, and that nothing is different. And why should we trust them? And we do not.

And it has been really sad because lots of people have basically taken their money out of the market. They are putting it aside. And now they will never be able to retire. And I saw some report on this yesterday that shows that young people do not want to put money in the stock market.

Chris Martenson: Well, I talk with a lot of young people, millennials and whatnot, and the conversation for those who are really paying attention, it comes down to this idea that occupy Wall Street was sort of a signature moment for some of them. And they felt the way that the system responded to them was to take relatively peaceful, in fact entirely peaceful people in most respects, and surround them with the arms of the state. I mean, I was at Zuccotti Park and it was absolutely surrounded with the latest DHS hardware. There was obvious weird cameras going on all over the place. There were riot police literally ringing the entire place. So their sense of agency, that sense of control that you found lacking in the global warming story, I think the young people feel that loss of—they feel they do not have a voice and they do not have a way of remedying that lack of voice.

And so that sense of—that is maybe the opposite of conflict of interest or related topic is that sense of, How do we feel that we have a sense of control or a narrative that has us as part of the storyline? That is something, when I talk with young people, they are not just opting out of the stock market. Many of them are opting out of much of what they see around them. And maybe that is a typical generational thing to happen. I do not know.

Dan Ariely: I do not think it is a generational thing. I think there is a tremendous feeling of lack of control, agency, and helplessness. And the sad realization, and this is one of the things that came out of financial crisis, is that it is much harder to start a new bank now. So young people are actually quite idealistic and I think people would have started new banks where they behaved very, very differently. But what happened is that it is really, really tough to open now a new bank. So that is making it less likely. But I am still hopeful. I think that this anger and frustration just need to be channeled in a better way. And I think that eventually there will be some—I am not a religious person but the story from the Bible is that God made the people of Israel walk around the desert for 40 years until the old generation that worshipped the golden calf passed away. I do think that we need a new generation of bankers. I think you cannot take the old generation of bankers and rehabilitate them.

Recent history is not showing us that this is something we should hope for. But there is a real question of, How do we create a new generation of bankers that are going to be—think of themselves as the caretakers of society rather than the rapists.

Chris Martenson: Yes. And it is that idea of bringing that idealism and having that coalesce into a vision that people can believe in. You have seen the studies. Most—a large majority of people, I think 68% last study I saw, or poll, said that the country is on the wrong track. And so, to have a sense of what the right track is you need a leadership that is willing to articulate what is clearly a new and different vision. Not just the bankers are lacking that. It seems to be lacking at a number of levels. But I think it is out of that vacuum that, obviously, that people will step into those roles and start to articulate a vision. And so maybe that is the interregnum we are in is, we are kind of between visions. We have the '50s and '60s that sort of morphed into '80s and '90s and now we are sort of wondering what comes next, and by my judgment I do not see a good articulation of that yet.

So with that, I really want to thank you for your time and most importantly your work. I think your work is just fantastic. It has changed how I think about the world. And it is just fantastic. So Dan, how can people follow your work more closely if they are inspired?

Dan Ariely: So, I have a website. It is DanAriely.com. D-A-N-A-R-I-E-L-Y. And actually, in the middle of March, we are starting a free online course on behavioral economics.

Chris Martenson: Great!

Dan Ariely: This would be on the website called Coursera, coursera.org. And our website is called A Beginner's Guide to Irrational Behavior. I will also post information on my website. But it is going to be a time consuming class. So, every week there will be video lectures and discussion groups and some readings. But if people want to, kind of, delve a bit more seriously about behavior economics that is, I think, one good way to do it.

Chris Martenson: Oh that will be fantastic. I am sure we will have people signing up for that. We will put links right below this podcast so people can follow all of that nice and easily. And I am looking forward to it. So again Dan, thank you so much for your time.

Dan Ariely: My pleasure, and nice talking to you again and looking forward to next time.

Chris Martenson: Fantastic.

About the guest

Dan Ariely

Dan is the James B. Duke Professor of Psychology & Behavioral Economics at Duke University, where he holds appointments at the Fuqua School of Business, the Center for Cognitive Neuroscience, the School of Medicine, and the Department of Economics. He is also a founding member of the Center for Advanced Hindsight.

Using simple experiments, Dan studies how people actually act in the marketplace, as opposed to how they should or would perform if they were completely rational. His interests span a wide range of daily behaviors and his experiments are consistently interesting, amusing, and informative, demonstrating profound ideas that fly in the face of common wisdom.

He is the author of the New York Times Bestseller Predictably Irrational: The Hidden Forces that Shape Our Decisions and The Upside of Irrationality: The Unexpected Ways We Defy Logic at Work and at Home. His research has been published in leading psychology, economics, and business journals, and is featured occasionally in the popular press.

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27 Comments

Mark_BC's picture
Mark_BC
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Posts: 391
Great interview. I would

Great interview. I would suggest that some people know they are participating in bubbles but do it anyways to go along for the ride, and hope to get out before it bursts.

For me personally, the biggest change in outlook came when I abandoned the belief that humanity would follow a trend of continual advancement and improvement. From the point onwards after I accepted that the data does not support this view, and that humanity will peak and decline to some as-yet unknown stage at “the bottom”, it became much easier to interpret and accept information.

I do have one disagreement with the interview, however, and I’m going to challenge one of Dan’s “beliefs”. And that is his suggestion that we need a new generation of bankers that are better at taking care of society.

The analogy I like to use from ecology is the parasitic isopods that often live on various tropical coral reef fish, most noticeably when they latch onto the forehead of a squirrelfish. The isopod stays there its whole life and sucks the blood of its host, but doesn’t kill it. The fish suffers from low red blood cell counts, and basically everything else you’d expect from a constant draining of your blood.

Is that parasite bad? “Evil”? No, it’s just consuming resources no differently than the squirrelfish is when it eats other free swimming isopods; it’s just that the squirrelfish’s food dies as soon as it hits his mouth. Does the squirrelfish need the parasite? Obviously not. Does the squirrelfish realize he is being parasitized? How would he? He’s never known anything different. “Oh that thing’s always been on my head, that’s the way it must be. It’s not bad, is it? It helps me swim straight right?”

I ask: why do we need banks? To give us credit? And credit is what we need to get things done? To grow? Why do we need credit to grow? Why does our economic health depend on getting credit from insolvent institutions that have assets of only a fraction of what they are lending out? Because the average person has a net worth of zero and must go into debt to actually do anything or build capital, that’s why. In other words, because we are debt slaves.

If we weren’t debt slaves and actually owned assets, then people would just pool their money together to get new things done – no banks needed. Formalized credit emerged when the rapidly growing economies of Europe a few hundred years ago were conquering the world and rapidly industrializing with the industrial revolution. Gold production could not keep pace with the growth of the real economy and credit was required to expand the money supply and avoid deflation. Credit facilitated growth in the absence of enough gold; credit is not necessary for healthy economic activity. Since then, the twin belief has been carried down through the centuries that economic growth is necessary, and that credit is what creates growth. But that’s simply a result of the last 300 years of our financial system.

Bankers never were and never will be caretakers of society. They are parasites, and nothing more. As noted, they aren’t inherently evil (although I’m sure those types are attracted to the positions…); they are just the expression of one aspect of human behavior that presents itself and destroys society when society allows that particular environment to be created.

I wonder if this is a potential interview topic. It’s kind of like the Stockholm Syndrome. How and why is it that the 99.9% masses have been duped into believing that their abusers, their parasites, are somehow necessary for survival? If only they'd just be nicer parasites! I think there would be some interesting psychology there, how many of us feel the need to “look up” to a higher monetary power and live in subservience to it, an inherent trust in our leadership. I’ve even had a good friend of mine (the only one I have managed to convince to buy some G&S, BTW) suggest that the reason Dick Cheney got into the positions he did was because he was a good leader!

I think that also leads into how society is in denial of the obvious evidence that we are heading for disaster, both financially and energy-wise. The average person believes that if there was a pressing need for change right now then our leaders would alert us and make the changes. Never mind that our leaders these days are becoming increasingly sociopathic, incompetent, and in many cases less intellectually capable than the average person. Beyond that, our political leaders who are now in bed with the emerging global corporatocracy have every incentive to hide the truth from the people so that they can benefit from the coming collapse, both monetarily and politically.

Arthur Robey's picture
Arthur Robey
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Posts: 3936
Thanks Prof.

May the best of your yesterdays be the worst of your tomorrows.

I have long come to the realization that we need big brains to rationalize our stupidities. (Mia Culpa). How do you rationalize WW1? Hard- but we make a good fist of it, which is a magnificent feat.

Everything discussed was a model of reality, by necessity. It is good that the model is tested against reality.

I wonder if Prof Dan is familiar with the work of Dr. Iain McGilchrist?

Knowing about the great shift in the balance of power between the Master and His Emissary that happened as a result of the Enlightenment I distrust Models, even my own. They are as disposable as tissues.

I second the idea that everyone is trying to get us to spend money for short term gratification. Every time I get on my bicycle and go into town I come back less a hundred. And I pride myself on my frugality! The best way I find is not to get on my bike.

Dr Dan says he is not religious. My god is the God of the Yawning Chasms of Unknowing. It is only by dancing along the edge of the Chasm do we make progress-at the risk of falling off into Madness.There is no safety net. The dancers are my heroes.

Here is a visual analogy ripped out of a representation of the Cosmos on its grandest scale.. What we know is represented by the filaments of matter and dark matter. What we don't know is the inexpressibly large voids between them.

Arrange the matter how you want, it will not make any difference to she grandeur of The Void.

Source.

FreeNL's picture
FreeNL
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Posts: 112
At this point only fire and

At this point only fire and pitchforks will fix the bankers. They will try to destroy us all before they give up their power and everyone should know this. Don't expect rational or moral thoughts from them. They dont have the higher intelligence required to be good.

Only countries should have the power to create money.

LesPhelps's picture
LesPhelps
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Posts: 685
Enlightening article

Dan's comments at the end, however, indicate that he hasn't delved deeply into the impact of the debt bubble demise.  He is also ignoring resource limits to growth.

What is the incentive for a young person, or anyone for that matter, to enter the stock market or put money in the bank.  The stock market is at all time highs and banks are paying negative real interest rates.

Putting money in an IRA gives the government control over the funds.  When things get seriously off track, I expect the government to change the rules on retirement accounts.  Put more directly, I expect they will steal our savings.  They will likely take over IRAs and 401Ks and redistribute them.  It may be a more glaring wealth redistribution than zero interest rates, but the end result is exactly the same, rob from the savers to give to the non-savers.

No, I don't think a new generation of bankers is anywhere on the top ten list of things we will need in order to work our way out of the coming mess.

Oliveoilguy's picture
Oliveoilguy
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Posts: 576
Markets Might Eat Your Lunch

Thought provoking piece. Great Interview. Some underlying assumptions on Climate Change and Market Participation that might need a closer look.

Don Ariely said "And it has been really sad because lots of people have basically taken their money out of the market. They are putting it aside. And now they will never be able to retire. And I saw some report on this yesterday that shows that young people do not want to put money in the stock market."

Quite the opposite of making me sad, this behavior of not participating in the rigged markets is greatly inspirational to me and gives me hope for the future. This is a bold move to not follow the herd. It does not necessarily follow that taking money out of the market will prevent retirement. That may prove to be the courageous action that allows some people to safeguard their assets and avoid participating in a market crash. Hopefully if Don becomes more familiar with the variety of investing strategies discussed on this forum and with the history of money, he will not be so quick to assume that we all must be members of the stock market herd. 

These are his words below.

" Because if you think about it the natural inclination is to see what other people are doing and to try and follow other people. In psychology this is what is called "social proof." It is about our herding instinct. It is about the fact that you see lots of people waiting in the line to a restaurant and you think to yourself this must be a great restaurant; let me stand in line as well."

The stock market is not necessarily a "great restaurant" .......It might end up Eating Your Lunch.

Wildlife Tracker's picture
Wildlife Tracker
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Posts: 403
0.5-0.9% interest in high yield savings accounts

What the heck is that? There is no incentive to save anything in the bank. With all the fees and charges applied to banks we are already at the point where is costs more to have money in the bank rather than the alternative. Physical cash has lost some of its value as its no longer okay to pay bills with it. Companies only accept digits on the computer; therefore, requiring participation in the banks.

Fortunately gold and silver provide a decent savings vehicle for those of us that recognize the value there, but the taxes involved and ownership risks make it uncomfortable as well. I am slowly introducing a couple friends of mine also in their early 20s to alternative investment approaches, but it feels very awkward and unfamiliar to them, as well as to me.

treebeard's picture
treebeard
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Posts: 578
New religion

It seems that economics has become our new religion.  Materialism is a poor imposter for a spiritual and cultural foundation for society.  The questions wrestled with here are not new, they have been written and talked about for millennia, but we have rejected traditional sources of wisdom in favor of our love of power.  Awareness of the intensity and proclivity that we have for self delusion and living without beliefs have long been the foundation of deeper spiritual practices although they have become distorted to mean just the opposite.

The social contract has long been broken and the materialistic belief in "survival of the fittest" has been the justification for all manner of corruption.  We have projected our ugliness onto the natural world and now have used that illusion to justify our own brutality as "human nature".  If we can stand for a moment, without the constant rumblings of our self justifying inner dialog, in direct contact with the present moment, we can start where we are, with our own ugliness, and move on from there.  Perception without judgment (entangling and unexamined believe systems) leads to direct action on issues like climate change and everything else that appears to be a problem when we have a distorted view of "human nature".

We don't need apologists for the current corrupt system, hats off to the millennials who have not bought into the system and hopefully never will. As Mark_BC pointed out, we have never, even metaphorically, as a society asked the financial industry to serve the role they are currently operating in: 

So, they forget who they are serving, right? That they are basically—they are hired by the rest of us to do a particular job. And so they forget this. And then they have terrible conflicts of interest. 

I don't think that they have forgotten anything, they are doing what they have always have intended to do.  I agree that those within that industry are not evil any more than the rest of us, it is the cultural story that is completely broken.  But they do embody and help bring to awareness the emptiness and  bankruptcy, both figuratively and materially, of our current cultural paradigm.

Wildlife Tracker's picture
Wildlife Tracker
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Posts: 403
Participating in growth is basic species behavior

When there is opportunity, the dumbest concept is to not participate in it because it effects your quality of life, standing in society, etc. In the wild, resources are scarce and it is the most natural thing to compete for the resources available to ensure to viability of your position in society because those resources might now be there tomorrow. If you do not participate, you lose your competitive edge and your fitness might deteriorate making you incapable to compete for future resources.

When it comes time to a resource decline, the most competitive and most fit organisms will survive and this removes the weak from the population and which allows the population to recover in another growth cycle. Chaotic cycles are very important for this reason because it creates the bottlenecks required for progress. Bottlenecks created by food, disease, or environmental changes allows for more resilient qualities to appear in the population. 

When we created an ecological bottleneck by spraying pesticides on our crops, 90-99% of the population will die and humans associate that with success. However, the remaining 1-10%, once a minority in the population will repopulate with a resilience to the pesticide making that same pesticide useless. This is important because this is how the world works. We need to recognize that we are participating in a natural ecological bottleneck, however different from anything the planet has seen before.

pat the rat's picture
pat the rat
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Posts: 94
credit debt cash

The city of Buffalo dose to a point ? Went pay the water bill yesterday all the city wanted was cash or check, no credit cards or debit cards. Somebody there has an ideal about what is going on.

charleshughsmith's picture
charleshughsmith
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Posts: 598
banks being bypassed

Mark_BC, I think you are absolutely correct that we no longer need banks. Crowdfunding is enabling direct investing, eliminating vulture capital (venture capital) and banks; the technology exists to do the same for home mortgages and any other investment. As for banks creating better yields for their Muppets (customers), numerous studies have found index funds generate better returns that 99% of fund managers.

Meanwhile, banks' trading desks make money every day, day after day--how is that possible in efficient markets? Obviously it's all gamed--high-frequency trading enables returns not from brilliant trading but from built-in advantages.

If we simply eliminated banks, we as a society would be much better off as the parasitic sector would vanish.  In the meantime, we can start bypassing banks as individuals and enterprise: pay people with PayPal or Dwolla, pay off your mortgage and don't get another one, manage your own money, etc.

Buggy whip manufacturers considered their industry 'essential" too.... the fact is technology has leapfrogged banks. Whatever banks do, software can do better, faster and cheaper. Getting rid of parasitic sectors, fraud and waste is an under-appreciated way of restoring what everybody wants--higher net incomes, prosperity, etc.

HughK's picture
HughK
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Posts: 759
Thanks for the great interview

Thanks for an outstanding interview!  I have been busy at work lately, so I haven't taken the time to express my gratitude for the recent OTC conversation with Charles Hughes Smith and many other of the recent podcasts and articles.

I have already shared the link with my colleages and students in our school's Theory of Knowledge group.  Theory of Knowledge is a 12th-grade level IB course roughly equivalent to philosophy, and behavioral economics fits perfectly within our curriculum.  We already see it a little bit when we look at ways in which language can shape thought, as there is an article, the name of which escapes me right now, that mentions work by Kahneman, Tversky, and Ariely in the context of how framing a question can shape not only people's responses, but also their perceptions, in some cases.  But, we would benefit from bringing a little more behavioral economics into the course, so, thanks again!

Hugh

cmartenson's picture
cmartenson
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Posts: 5155
Bankers will never cede power

FreeNL wrote:

At this point only fire and pitchforks will fix the bankers. They will try to destroy us all before they give up their power and everyone should know this. Don't expect rational or moral thoughts from them. They don't have the higher intelligence required to be good.

Only countries should have the power to create money.

Of course the bankers will never cede their power and "share" of the economy willingly.  No group ever seems to do this, be they bankers, politicians, or boy scouts.  The 'natural' inclination is to hang on because, as Wildlifetracker says, the rule of the world is either you consume (or cling to) the resources in front of you or someone else will.

But the amount that bankers have assumed for themselves is vastly larger today than at any other point in history and is simply too large.  Most counter intuitively, even as technology has driven down the operating cost of literally every single other industry, the financial industry, which should be one of the industries most likely to benefit from technology driving down delivery costs,  has thoroughly bucked that trend and actually become more expensive over time, not less.

Historically, the unit cost of intermediation has been somewhere between 1.3% and 2.3% of assets. However, this unit cost has been trending upward since 1970 and is now significantly higher than in the past.

In other words, the finance industry of 1900 was just as able as the finance industry of 2010 to produce loans, bonds and stocks, and it was certainly doing it more cheaply. This is counter-intuitive, to say the least.

How is it possible for today's finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan?

The short answer is that Wall Street, for the last thirty years or so, has been skimming prodigiously from the top. The graph above shows how the total economic cost of financial intermediation grew from under 2 percent in 1870 to nearly 6 percent before the stock market collapsed in 1929.

It grew slowly throughout the postwar expansion, reaching 5 percent in 1980. Then, beginning during the deregulatory years of the Reagan administration, the money flowing to financial intermediaries skyrocketed, rising to almost 9 percent of GDP in 2010.

This is exceptionally counter-intuitive, as Philippon points out. Over the last forty years, information technology has increased efficiency and lowered costs throughout the economy. Retail and wholesale trade, for instance, have both shrunk by about 20 percent as a share of GDP since 1970, thanks to better technology and improved economies of scale.

(Source)

Yes, this is truly bizarre.  How is it that technology, the thing we most value as a society, has not managed to reduce the burden of finance, of all things?

Furthermore, in any industry with high margins and that does not require much in the way of hard labor there is a rapid intrusion of new entrants that drives down the salaries and profitability until the margins shrink to a very competitive level.

But not in banking.  There we find that salaries are more inflated than ever, even though there must be tens of millions of people willing to work those same jobs for less pay.  Happily.

The reason I suspect is that banking has done a bang-up job of working the lobbying angle to assure that the regulatory barriers to competition are extremely high.  It's a club and they've built a very big fence around the whole thing.

But, that aside, paying 9% of an entire economy to a class of people that provide no true value add, produce absolutely nothing, but merely skim, is akin to the burden Rome experienced in trying to field armies in distant lands.

It's just too much, it has to be reduced, or it will kill the host.  But, human nature being what it is, the odds of that reduction happening willingly, before the host collapses, are not very high.  

Perhaps that's too cynical of me, but I think not.   It feels more realistic than anything.  So we watch, and observe and prepare.

HughK's picture
HughK
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Global warming is still the keystone of the third E -Environment

Dear Chris and all,

As I said above, I really appreciated this podcast.

Chris, you mentioned that behavioral economics has informed your decision to avoid discussion of global warming, here in this part:

Chris Martenson: Yes. You really shifted my views a number of years ago when I was thinking about climate change and that climate change is a difficult motivating topic because it lacks some features. It lacks a face, or worse, the face that we might associate with it is staring at us in the mirror. It is abstract. It is distant. It is not near and immediate. That there are a variety of things around that story that would require transforming it out of just the strict statistical data into a more human accessible compelling sort of an argument. And what I am wondering then is to get back to this idea is, what are the best ways of motivating people towards taking new actions? That is the work I care about, but marketers would care about it the same or doctors. We could be talking about—we want to try and motivate somebody towards maybe weight loss or saving more money for retirement, reducing excessive consumption, whatever that new action is. What does behavioral economics tell us about the best ways of motivating people to new actions?

When you explained your "relative absence from the Climate Change arena" in response to the thread following your interview with Mark Cochrane, you said the following:

My relative absence from the Climate Change arena reflects very little about my own views on the matter scientifically, but quite a lot about my views on the utility of the AGW story to lead to the sorts of changes I desire to see in the world.

Behavioral economist Dan Ariely convinced me that humans have a certain amount of hard wiring and that wiring responds better to some threats than others.  If we want people to take something seriously enough to change their behaviors, then the threat we are describing is most powerful if it:

  1. Has a face.  We combat things like Hitler, Saddam, even wolves, because they are easy to identify in our brains.  We are less successful with things like climate change, because there's nothing we can see and touch directly. There is no single foe to defeat.  Worse, the only face we can legitimately attach to the issue is the one we see in the mirror every morning.
  2. Is immediate and visible. The nearer and more immediate the threat, the faster we respond to it.  A saber tooth tiger gets more of our attention than a slowly advancing (or retreating) glacier.  We will dive into a body of water to save a drowning child we see, but barely give a second thought to children dying halfway around the world from fully preventable causes.  Evolutionarily this makes perfect sense, but it is a distinct liability for a species with the ability to fundamentally deplete resources that took hundreds of millions of years to accumulate over a few hundred years.  Similarly, discussions about potential changes in 2100 tend to lose a lot of people.
  3. Is concrete.  Statistical arguments really lose most people.  Even the idea of smoking, with its very high statistical chance of leading to illness and premature death, is not compelling enough to get people to quit or to not take it up at all.  The point here is that humans do better with certainty than with uncertain arguments, even though statistical methods are really solid and businesses and financial people use them every day to great effect.  Uncertain, or statistical, arguments are far less effective than you might expect based on the (severity) x (likelihood) outcome of some things like climate change.
  4. Is something we can control.  This means we have some sense of agency in the cause.  If it's something that we feel we have very little control over, that serves to blunt our tendency towards action.  The things we can control are the ones we react to best and with the most vigor.  What sense of control does any one person have in the climate change story given that most think that even if their entire nation gave up burning fossil fuels, China would simply do it instead?                                                                                                   The full post is here

Behavioral economics aside, any handling of the third E (environment) without global warming will simply not meet the rigorous data-driven standards of the rest of the Crash Course.  While it may make sense to exclude climate change from the section on the environment - presenting the reader/viewer with a Third-E-lite - for purposes of making the narrative easier for a reader/listener to handle, this decision does not hold water on the level of an well-conceived, objective analysis of the major destabilizing threats we face as a civilization.  Also, I am not convinced that the behavioral economics criteria you listed above is the only reason that global warming has been excluded.  After all, neither peak oil nor ocean acidification has a face, etc, yet you have acknowledged that both are significant threats to civilizational stability.

I can think of two reasons that this is important and worthy of addressing:

1.  Because the Crash Course is an important part of a growing intellectual body of work - both academic and less formal - around the immediacy of various limits to growth.  This body of work draws upon a tradition going back to Thomas Malthus and includes such modern thinkers at M. King Hubbert, Dennis and Donella Meadows, Al Bartlett, Charles Hall, Cutler Cleveland, Joseph Tainter, Ken Deffeyes, Kjell Aleklett,, Jeremy Grantham, Gail Tverberg, Bill McKibben, James Hansen (and the thousands of other peer-reviewed climate scientists), Mark Lynas, Naomi Oreskes and the hive-minds of Zero Hedge and the Oil Drum.  While all of these thinkers have made outstanding contributions, Chris, you are unique in your popularization of the concept of the three E's.  This is a powerful and important new paradigm.  And while the trademarked three E's may include or exclude anything that PeakProsperity wishes, any accurate and realistic overview of the third E must include anthropogenic global warming as the keystone, as climate is the linchpin and the trump card of environmental stability and/or instability.  Whether you intended to be or not, Chris, you are clearly part of an important group of people who are presenting data and creating narratives that do a better job explaining the world in which we live than do the legacy paradigms that are still the mainstream conventional wisdom.  As you and Adam have intimated, it is likely that a day will come when a much greater percentage of people take interest in these alternative paradigms.  When that happens, it is my hope that the third E includes climate change because that will give people the most realistic, data-driven overview of major destabilizing shifts.

2. Because there are practical and real differences as to how individuals, firms, other organizations, and government policymakers will respond to the three Es whether or not climate change is included.  In other words, it may be that installing solar hot water heating makes sense whether or not one believes in AGW, but there are many other outcomes that will be different whether or not the destabilizing power of climate change is recognized.  One simple example is where to buy land.  If one believes that the current dry and hot conditions in Australia and California are simply due to natural variablity, then it might make sense to buy farm or ranch land in New South Wales or California's central valley.  If, however, one believes that it is likely that these place will become hotter and drier due to global warming, then it makes more sense to buy farmland in western Washington or Tasmania.  Another example has to do with energy investments.  If one believes that oil is central to the functioning of our fast, bright, and warm civilization, but does not believe in AGW, then it very well might make sense to exploit the Canadian tar sands.  On the other hand, if one believes that exploiting non-con oil reserves means game over for the climate, then one might choose to support political leaders who seek to minimize such exploitation, and one may also vote with one's wallet by not buying stock in Trans-Canada or other corporations that are exploiting non-con oil.

OK, I'm out of time, so I'll post this as is; sorry, no time to edit.  Chris, I trust that you know by now how much I admire your work, so I intend no disrespect.  Nor am I a climate zealot, who requires everyone to believe the same thing he believes.  In fact, I probably spend too much time focusing on other aspects of the three E's.  Nonetheless, the data in support of AGW is very strong on three levels:  1. paleoclimate 2. what is happening today  3.  the results of models   The reality of this shift is almost universally acknowledged by climate scientists.  So, whether or not it's hard for people to stomach, any robust overview of the third E should include - if not feature - AGW.

Thanks again for all of your great insight.

Hugh

P.S. I have been told by a CM/PP veteran that global warming was a topic that produced many virulent flame wars at the site a few years ago.  As I only arrived here circa March of 2012, I did not experience that. I am happy to engage in a civil and respectful discussion of AGW on the Definitive Climate Change thread.  That thread has been very quiet since Mark, Stan, Tony, Doug, Eric, and others have not posted very much there lately.

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Wildlife Tracker
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I agree climate change is a trump card and should be discussed

Forgetting the methane toxic bomb, climate change involves a massive redistribution of water throughout the world that will provide great opportunity and great loss within a short period of time. 

The BIGGEST trump card (other than the methane death bomb) is climate change in combination with power plants. NOBODY wants to talk about because NOBODY is going to do anything about it. 

Coastal areas are a great place to have them... until the ocean floods them.

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Arthur Robey
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Max and the three E's

The reality of the Climate Catastrophe is smacking the Poms and the Californians upside the head right now.

Over on ZH the peanut gallery interprets the Climate Catastrophe as a blue team versus red team thing !? Can you imagine how inane they look to an outsider?  These people identify themselves by their allegiances. (Divide and Conquer, anyone?) So much for rugged individualism.

Never mind we will be able to rationalize the CC too. Or Not-see the Methane Bomb.

I cannot understand our inability to offer whole-hearted support to those who dance along the edge of the chasm. We are like the drunk searching for his keys in the lamplight. If the keys are not in the lamplight then they might be somewhere else.

Max K. and Stacey mock the policy makers and M.Keyser discusses the three E's. Other people are beginning to own the topic.

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treebeard
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Equalibrium

The species best suited to "survive" are those best at cooperation, not those that "out compete" their neighbors.  We give lip service to terms like the "web of life", but don't seem to grasp its meaning.  This not an academic debate, but a point on which the survival of our species depends.

Systems based on cooperation tend towards equilibrium, those on competition towards self consumption and destruction.  The whole economic theory of the stability of "free" markets and their supposed tendency towards equilibrium was based on some degree on this flawed misconception of the stability of competitive systems and the results have been telling.

To find ourselves we must first lose ourselves, whether we do it on our own or it happens to us.  Our inability to evolve as a species is playing in the creative destruction that we now see playing out before our eyes. The only question that matters now is whether we will respond with love and compassion or will let ourselves be consumed in the self destruction of fear and self interest.

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Wildlife Tracker
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Equilibrium doesn't exist in nature

There is a lot of give, and a lot of take, and lot of variables. It's chaotic.

Typically species that are best suited to survive are resource opportunists which have a large ecological range and have a large population and have a lot of genetic diversity. These qualities allow for a species to survive chaos in the form of disasters, disease, food scarcity, etc.

Species less likely to survive are resource specialists (single-resource consumers) which have a small ecological range and have a small population and have a lot of inbreeding because they are susceptible to disasters, disease, food scarcity, etc.

Humans most certainly are adapted to survive. However, despite our opportunist behavior, we have a single-resource based relationship with fossil fuels. It doesn't matter how big our ecological range is, or how large our population is, or great our genetic diversity is. Everywhere on Earth, humanity has this relationship with oil and it puts the entire human race in jeopardy. 

I would prefer equilibrium though. Chaos is brutal

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cmartenson
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It's all so much more complciated than we can imagine...

The thing about complex systems is that they are inherently unpredictable.  While that sounds like a bummer, the beauty embedded in there can be found in what are called 'emergent behaviors.'

For example, I could give you all the atomic data on oxygen and hydrogen, the bond angles, orbital shell descriptions, polar moments and anything else you might want to know about the combination of two simple atoms and water would still surprise the heck out of you.

Liquid water itself is an enduring mystery especially at the truly micro level, but ice and snowflakes have what appears to be an infinite set of forms that are delightful and surprising.  All of those beautiful forms are 'emergent behaviors' that arise from the few relatively simple rule sets that define how water bonds form.

If even predicting how two simple atoms in combination will form and reform defy our predictive and intuitive abilities then what can we say when dozens of atoms combine into millions of molecules, interacting across millions of life types numbering in the quadrillions - each level of which has not a simple rule set, but a very, very complex rule set that includes feedback loops - are all in motion at once?  

Not very much predictively it turns out.  But we can observe and that's still where we are as humans...in the observe stage.

That simple rules can create extraordinary complexity is not the exception, but the rule of the universe in which we live.   Awesome!

The bummer, such as it is, is that instead of remaining humble and in awe of the complexity of simple natural laws that we humans think we have the ability to predict and control outcomes when there's pretty much nothing in our history to support such confidence.

As always, I think we will continue to learn and nature will provide plenty of learnings and surprises along the way.

Here's one.  Wolves change rivers.

Say what? Crazy talk?

Nope:

 

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HughK
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Complexity, climate, and PP's core competencies

Dear Chris,

I share your awe of complexity in the natural world, and the way that wolves change rivers is a nice example.  I trust that Arthur Robey, the grand master of complexity and outside-of-the-box thinking here, would also appreciate it.

Nonetheless, to cite complexity and call for humility in response to a request to include climate change as part of the third E is not consistent with the approach that you have developed.  So, while complexity is certainly awe-inspiring, it does not justify excluding climate science from the third E.

The reason that this is the case is that the core competency of Peak Prosperity is to help people make sense of major trends of our complex, emergent civilization. The human mind is even more complex than many, if not most, aspects of the natural world, which is a big part of the reason why economics and the other social sciences are so hard to get right.  That means that any future economic outcome should be very hard to predict.  Does that mean that PP is evincing a lack of humility when it makes economic predictions and makes recommendations as to how to preserve wealth?  I don't think so.  I appreciate all of the general forecasting and advice that you give.  Even if your timing has been a bit off in some cases, which is normal for any attempt to forecast a trend in a complex system, I concur with your general economic prognosis and I have allocated my (very humble) assets accordingly.  While I had some general inkling that I should invest in this way before finding PP, your numerous articles and podcasts have given me a much deeper understanding of the likely instabilities in our economy.  

Having said all of that, it is possible - due to complexity - that the economy does not develop in the way that you have described.  Maybe there will be a miracle breakthrough in energy production that allows us to postpone the age of limits for another few decades or centuries.  Maybe bitcoin will be the new gold, and all of the stackers will have misallocated their capital.  Maybe people will just start living mostly virtual worlds online, and by doing so, dramatically reduce the amount of resources that they consume.  While all of these things are possible, I do not assign any great probability to them.  More importantly, I have to make decisions about how to save and invest.  Not deciding, remaining agnostic, and leaving my savings with mainstream fund managers is also a decision and a type of action.

In other words, in spite of complexity, humans must continue to make decisions, many of which will affect their future position.  I assume that most of us here at PP take the information you offer into account when we make decisions having to do with the three E's.  This is from the opener at the beginning of each PP podcast:

Up next, fresh ideas and insights into the factors that are driving the world and shaping your future.

PP is clearly about making sense of complexity, even if that's hard to do.  Your approach here is to combine data driven analysis, common sense, a warranted suspicion of mainstream narratives,  and a well-informed, generalist's perspective to provide a big-picture look at where we are likely to be headed as a civilization.  Therefore, to play the The Fool on the Hill card by avoiding the climate question by citing complexity is artful legerdemain, and is not consistent with your generally robust and well-informed approach to big problems.

If anyone is interested in having an evidence-driven discussion of why complexity does or does not refute the findings of climate science, I would be happy to do so in Peak Prosperity's Definitive Climate Change thread.

Cheers,

Hugh

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Arthur Robey
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You are Right Hugh.

We are not allowed to throw our hands up in the air and say "It is all too hard" However:-

My ego demands that I defend bringing chaos and complexity into the discussion. Or else It will just Pop.

The general winding down of the Cosmos produces heat death. Life counters this and produces emergent properties and emergent complexities out of the stream of energy going past..

Why? Dunno. The faster we use energy, the greater the rate of entropy and the faster the emergent properties happen.

Without oil there is likely to be simplification. I am in favour of Life and it's complexities. Heat death sounds boring.

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treebeard
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Were we all Gentlemen....

....in the eighteenth century definition of that word, "oh he's a gentlemen, so he has no profession at all".  If we all did not all need to put bread on the table we could have the robust discussion that these topics deserve.  Maybe I will have time later to post in more detail.  My day is full and I am behind on a dozen or so projects.

My own world view is quite the opposite, I believe that the universe is not in the least bit chaotic, but I think in the few brief paragraphs tossed back and forth, I don't think we have a common agreement on what we mean by that term.  I have a feeling that it has more to do with our feeling about the nature of free will, and not a qualitative principle guiding the universe, perhaps I'm wrong, I don't want to prejudge the matter. But it would take a lengthy discussion to bear that out.   Although I do believe that collectively we are on the verge of a quantum level change in reality, and the old dysfunctional ways are intensifying before they perish.  We create what we believe, we believe in chaos and we are certainly creating that in spades.

For my own part, I believe love is the foundation of the universe, and that every part, particle and species is deeply in love with every other part.  The nature of the universe that we see, that is unfolding before our eyes is one of deep and intense relationships, the kind we are barely able to perceive in our deepest human "love" relationships.  Whether it be soil microbes and mycelia, mineral and plant life or complex relationships between aquatic life or the deer and their predators that roam the woods outside my window.  Is the world what we would call a "cruel teacher", yes, but that sense of cruelty comes only from our own distorted view of reality.  That is love.

The limits of intellectual perception have been laid out clearly in the heisenberg uncertainty principle, and our impact on reality by our mere perception in the wave particle duality of light.  The orbital description of atoms has long been displaced with energetic fields of probability. But what we need to know regarding how we should conduct ourselves has been said a thousand times.  Native Americans long ago developed the principal of seven generations, yet in our current demented system, the brightest among are trying to skim money out of the system by compressing transaction times by milliseconds.  We are pushing time in the wrong direction and our shortsightedness is destroying us.

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Arthur Robey
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My diamond has many facets.

?

Edit: The Diamond has many facets? No. It is definitely mine.

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Time2help
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Bankers, politicians and....

cmartenson wrote:

Of course the bankers will never cede their power and "share" of the economy willingly.  No group ever seems to do this, be they bankers, politicians, or boy scouts.  

Ouch.

Putting the Boy Scouts in the same sentence with bankers and politicians, that's just cold. 

wink

T2H (Den Leader)

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herewego
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Half-baked

I find this interview and discussion to be rich and important.  We seem to be grappling with ever deeper, less obvious, more powerful layers of understanding here at PP. 

I was struck by the idea of “choice architecture” from the interview.  Don’t we run into that every single minute?  The choices built into the architecture of industrial civilization are simply NOT the ones that would build “a world worth inheriting”.  For example, though I can and do choose not to own a car, I still, even though the growing season I grew up with has morphed into a new and difficult beast here in the West Kootenays, get into a fossil-fueled vehicle of some sort many times a week in order to have money.  The choices I need to make – make a living where I live or get to work without further damaging the climate – are not available.  No wonder it’s an effort to decide to consider climate change.

On the issue of the climate change discussion here at PP:

Dr. M. says: “…what are the best ways of motivating people towards taking new actions? That is the work I care about.” 

There seems to be a concern that long, loud, angry, overwhelming CC discussions will not help motivate people to start thinking and acting on any part of the 3 Es.  Point taken.

Others call for a more public and completely rigorous acknowledgement of CC because that’s what we do here at PP.  There seems to be a concern that we MUST take CC on because it is real and terribly impactful.  Fair enough.

I don’t have a solution but can offer heartfelt understanding for both desires.  I do not think they are in conflict with each other. Possibly we could find a way to be both really good at motivating people towards taking new actions AND excellent at coming to grips with climate change. 

A related comment might be that no matter how urgent an issue is, an unprepared, unsupported, unskilled mind may nevertheless not be able to engage with it.  To look at CC requires plowing through masses of data, and extremely heated, devious, confusing controversy.  I have a strong mind and I can’t take it.  I get there anyway by registering the images of retreating glaciers and icecaps, noticing how tomato plants can’t grow here in June anymore and recognizing that burning fossil fuels like we do is just inconsistent with my values. And if one is successful in finding data they trust, what task do they face?  Acknowledging the possible end of the biosphere we know, love and utterly depend upon.  This is a lot to ask!  It brings me to my knees.  My orientation to life on Earth has to go through deep and painful reorganization every time to let in the magnitude of the situation.  I don’t wonder that many folks won’t think about it, and do wonder how we can become much, much better at helping people develop the inner resources that let this level of engagement happen.

Love, as Treebeard so often eloquently expresses, is the place I can stand in the storm.  Love of biosphere.  Love, though I cannot know if said biosphere will persist.  Love, though I get it wrong every day (see paragraph 1).  Let your heart break again love.  Love it now, for what it is and has been for so long, our everything.  I have been working on taking in that my most natural allegiance is not to this current, insane form of civilization but rather to the biosphere of my home planet. Even that is a few degrees off since the deepest truth I can occasionally experience is that I simply AM planet.  “Merge” is an interesting new inner directive. 

Sadly, my time is very constricted now with a new work situation, so I’m going to post this half-baked and incomplete.  Much appreciation to you all for your mind-stretching posts!

Susan

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gyrogearloose
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Posts: 528
HughK on complexty and climate

HughK wrote:

If anyone is interested in having an evidence-driven discussion of why complexity does or does not refute the findings of climate science, I would be happy to do so in Peak Prosperity's Definitive Climate Change thread.

No mention of logic,   well that is appropriate, because logic takes a big holiday in that thread ......

The finest supporting example of a lack of logic comes from Mark Cochrane, (with a degree in environmental engineering from MIT and a doctorate in ecology from Penn State.)

In an 'Alice in wonderland' way he 'proves' modeling the climate is vastly simpler than modeling the weather.

Mark Cochrane wrote:
For global climate models however the analogy is the need to get the temperature right but you get to take the average of estimates for 30 years of 365 days each (give or take a few leap year days) at 5,000,000 locations. That is, you have about 55 billion attempts then you average them. The Law of Large Numbers (LLN) says that your difference from the mean temperature of the planet should be extremely small.

The reasoning in Marks 'proof'  is essentially that if your model makes enough estimates of the temperature of the planet, it will produce a result very close to the actual average of the planet.

Despite many attempts, none of the true believers in that thread can see the glaring logical failure of the argument.

The problem with his 'proof' is that it proves ANY model will produce an accurate result as long as it does enough estimates.

Can you see my point here ?

With such a fundamental failure to be able to reason objectively, the 'discussion' on climate change is no better than the Mad Hatters tea party.

Finally to quote Dr Chris Martenson  "I don't normally wade into these waters mainly because the entire topic of global warming, for many, comes down to a matter of belief and is therefore subject to a rapid escalation of emotions."

Regards Hamish

Arthur Robey's picture
Arthur Robey
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Posts: 3936
On Logic

Logic 101.

There are two forms of proof.

  1. Proof by deduction. An example: Men build airships. I am a man, therefore I build airships. Except that I am a man and I don't build airships.
  2. Proof by induction: I have counted a thousand swans. They are all white. Therefore all swans are white.

What can we gain from that? Proof is a goal set by an opponent who wants to set an impossible standard because there is no such thing as "proof". Evidence is a much stronger position than "proof" or "Logic". Logic is for mere machines. It is the basis of the computer on which this passage is written.

So let us not wave "Proof" and Logic" around so freely as though the words had some sort of Magic Power.

And how is evidence gathered? By the felt experience. Fortunately we are able to enhance our experience with prosthesis. My vision is sharpened with glasses. And in the same way our instruments bring us information that is beyond our senses to experience.

When the correct relationship is established between the Model-making left brain and it's natural Master, the Right brain then one is in a much better position to understand "Reality."

And the Reality has been shown by quantum physics to be as much a mirage as the models in your left brain. But that is a subject for another missive. There is a lot that can be said about the relationship of the Left model-making brain and its product, Quantum physics.

Did I mention Quality?

gyrogearloose's picture
gyrogearloose
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Posts: 528
The Mad Hatters tea party continues

Arthur Robey wrote:

Logic 101.

There are two forms of proof.

  1. Proof by deduction. An example: Men build airships. I am a man, therefore I build airships. Except that I am a man and I don't build airships.
  2. Proof by induction: I have counted a thousand swans. They are all white. Therefore all swans are white.

For logic 101 you use logical fallacies ! the contagion spreads!!!!

LOL Hamish

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