Irrational Economics

Now, for me, there are two interesting aspects of this research. The first is the possibility of mind control, or brainwashing, based on rigorous scientific principles. Up to now, advertisers, propagandists and tyrants have had to rely on seat-of-the-pants techniques: methods found to work by trial and error. This is not to say that the Madison Avenue has not applied Joseph Goebbels' techniques without result or profit. In fact, the heuristic now is use is very powerful, but not 100% effective.

The horror arises when we consider what happens when Big Brothers and Bandits have this technology in hand. What if all of us were made to believe Saddam Hussein was about to blow us up with nuclear bombs? Or that we would benefit from receiving little or no Social Security? What if all of us perceived those lies as truth, due to involuntary reactions in our brain induced by manipulators?

Could we be made to commit suicide as well? That would be the ultimate weapon against criminals, objectors, protestors and anyone else deemed to be non-conforming. Seemingly guiltless and blameless, those in control could eliminate their enemies or just anyone at all. We would become science-fiction pigs offering ourselves for slaughter and cooking.

The second point of interest, the major point of the BW article, is this research may show that decision-making is not "rational." If so, the basis of neo-classical economics (aka market fundamentalism, conservatism, free markets, libertarianism, ultra-capitalism, etc) falls apart. From Adam Smith to Milton Friedman, all those conservative economists say that people make "rational" choices, and it is their rational choices which make markets work. Of course, according to those same economic theorists, markets don't crash or bubble; or, if they do, they are self-correcting. The same is true of recessions, Depressions and booms, which are not supposed to happen, but are self-correcting if they do. Anyway, all the pain and suffering is just Schumpeter's "creative destruction" [does the end justify the means?] in progress. Markets are rational, so they say.

The consequences of rational choice market theory were discussed by Mandelbrot in "the (mis)Behavior of Markets," in which he shows that markets simply do not behave according to that theory. If we believe Mandelbrot's account, then there is very little "rational" about markets. Instead, they behave according to rules that change from time to time. Moreover, fractal markets boom and crash unpredictably. Whether or not Mandelbrot's ideas are closer to "the truth" about reality, his fractal models describe the observed facts far better than neo-classical economic theories. Even the "random walk" theory - based on neo-classical economics and a generalized principle of rational choice - doesn't do as well as the fractals. (Test case: Index investing works under random walk, but not necessarily under fractals.)

I have always believed that proposition - the rationality of decision-making and markets - is at best an ideal, at worst a cynical ploy on behalf of plutocrats. Why should people, who are irrational about almost everything else, suddenly become rational when faced with balancing a checkbook? I pride myself on being far more "cold," "calculating" and "rational" than about 99% of the population, because that is part and parcel of being successful at scientific experimentation. Despite that sinful pride, I recognize (too often only regretfully, retroactively) that I make a lot of irrational decision.

Instant example: Yesterday morning, I "knew" Valero's stock (VLO) had got too high (over $73), and planned to wait until later on to buy it. No such luck - I felt impelled by the rapid rise to buy it anyway. Of course, later in the morning, the stock fell to around $71, and I did buy some more of it. Lesson: even cold, rational people cannot control themselves in situations that appeal to non-rational elements of our brains. Did I really want to buy that $73+ VLO? No; I felt irritated about it the rest of the day. I was "suckered" by the momentum, fearing it would "get away" from me, despite my earlier rational (and correct) calculation. Now, what was done is done, rational or not. I'm stuck with whatever consequences.