and Robert Shiller made famous) irrationally exuberant, or,
changing the arithmetical sign, irrationally despairing. Some
of the biggest daily point gains and declines in Nasdaq's history
occurred in a single month in early 2000, and the pattern
has continued unabated in 2001 and 2002, the biggest point
gain since 1987 occurring on July 24, 2002. (The increase in
volatility, although substantial, is a little exaggerated since our
perception of gains and losses have been distorted by the rise
in the indices. A 2 percent drop in the Dow when the market is
at 9,000 is 180 points, whereas not too long ago when it was
at 3,000, the same percentage drop was only 60 points.) The
volatility has come about as the economy has hovered near a
recession, as accounting abuses have come to light, as CEO
malfeasance has mounted, as the bubble has fizzled, and as
people have continued to trade on their own, influenced no
doubt by capricious lists of the fifty most beautiful (er . . . , undervalued)
stocks.
As with beautiful people and, for that matter, distinguished
universities, emotions and psychology are imponderable factors
in the market's jumpy variability. Just as beauty and academic
quality don't change as rapidly as ad hoc lists and
magazine rankings do, so, it seems, the fundamentals of companies
don't change as quickly as our mercurial reactions to
news about them do.
It may be useful to imagine the market as a fine race car
whose exquisitely sensitive steering wheel makes it impossible
to drive in a straight line. Tiny bumps in our path cause us to
swerve wildly, and we zigzag from fear to greed and back again,
from unreasonable gloom to irrational exuberance and back.
Our overreactions are abetted by the all-crisis-all-the-time
business media, which brings to mind a different analogy:
the reigning theory in cosmology. The inflationary universe
hypothesis holds—very, very roughly—that shortly after the
Big Bang the primordial universe inflated so fast that all of
our visible universe derives from a tiny part of it; we can't see
the rest. The metaphor is strained (in fact I just developed
carpal tunnel syndrome typing it), but it seems reminiscent of
what happens when the business media (as well as the media
in general) focus unrelentingly on some titillating but relatively
inconsequential bit of news. Coverage of the item expands
so fast as to distort the rest of the global village and
render it invisible.
Our responses to business news are only one of the ways in
which we fail to be completely rational. More generally, we
simply don't always behave in ways that maximize our economic
well-being. "Homo economicus" is not an ideal toward
which many people strive. My late father, for example,
was distinctly uneconimicus. I remember him sitting and
chuckling on the steps outside our house one autumn night
long ago. I asked what was funny and he told me that he had
been watching the news and had heard Bob Buhl, a pitcher
for the then Milwaukee Braves, answer a TV reporter's question
about his off-season plans. "Buhl said he was going to
help his father up in Saginaw, Michigan, during the winter."
My father laughed again and continued. "And when the reporter
asked Buhl what his father did up in Saginaw, Buhl
said, 'Nothing at all. He does nothing at all.'"
My father liked this kind of story and his crooked grin lingered
on his face. This memory was jogged recently when I
was straightening out my office and found a cartoon he had
sent me years later. It showed a bum sitting happily on a park
bench as a line of serious businessmen traipsed by him. The
bum calls out "Who's winning?" Although my father was a
salesman, he always seemed less intent on making a sale than
on schmoozing with his customers, telling jokes, writing poetry
(not all of it doggerel), and taking innumerable coffee breaks.
Everyone can tell such stories, and you would be hardpressed
to find a novel, even one with a business setting,
where the characters are all actively pursuing their economic
self-interest. Less anecdotal evidence of the explanatory limits
of the homo economicus ideal is provided by so-called "ultimatum
games." These generally involve two players, one of
whom is given a certain amount of money, say $100, by an
experimenter, and the other of whom is given a kind of veto.
The first player may offer any non-zero fraction of the $100
to the second player, who can either accept or reject it. If he
accepts it, he is given whatever amount the first player has offered,
and the first player keeps the balance. If he rejects it,
the experimenter takes the money back.
Viewing this in rational game-theoretic terms, one would
argue that it's in the interest of the second player to accept
whatever is offered since any amount, no matter how small, is
better than nothing. One would also suspect that the first
player, knowing this, would make only tiny offers to the second
player. Both suppositions are false. The offers range up to
50 percent of the money involved, and, if deemed too small
and therefore humiliating, they are sometimes rejected. Notions
of fairness and equality, as well as anger and revenge,
seem to play a role.
Read More : Emotional Overreactions and Homo Economicus
