Streets Vs The Boardroom

Wednesday, October 22, 2008

FIGHT OR FLIGHT!

During this remarkable period of economic trauma, there has been a containership-full of often basic and informative psychological analysis of what is going on. The drama cannot be just the result of a floating crap game of evaluations of imaginative sponge companies such as AIG and Lehman. Commentators have sought the depths of causality of what is, in effect, a staggering epic reflecting basic human responses to changes in one central modern equivalent of our ancient foraging grounds--financial markets.

Virtually everyone is familiar with the "flight or fight" syndrome. It's a staple concept for understanding animal and human behavior. A peaceful environment becomes infected with a predator or a competitor. A decision becomes necessary--battle the intruder or leave the scene.

Sellers flee and buyers fight. When more flee than fight, markets are likely to drop. This doesn't mean all sellers are cowards or viscerally frightened. Many still have profits on their books and are reassured to take them and count the change. Nevertheless, the raw fear around the world--especially among bankers and executives who know best the croupier character of the assets they manage or mismanage--has shaved the world's wealth into a Marine crew cut.

Their fear is wholly reasonable because they know best the unreliable sturdiness of their assets--which European regulators have just announced they needn't value at their current sales price (the market) but at some other level that will not fatally destroy their viability as companies in which to invest. Go figure.

There are fighters still. For one, Saint Buffett has advised us all to Buy American (stocks). For another, for every seller there's a buyer, so 50% of the market at any time is confident they have analyzed the battlefield well.

Among the major fighters are those governments who, in an historic spasm of disregard for decades of more-or-less commitment to free markets, have become cowboy printing presses to supply liquidity to everything from Hungary to the ever-fabulous AIG (nyse: AIG - news - people ) to The Royal Bank of Scotland (nyse: RBSPRD - news - people ) to dim-witted, sales-deprived American auto companies so that they can begin urgently producing the efficient cars a thoughtful freshman could have called for five years ago.

Economics as a discipline has been properly roiled by new findings about how human beings actually process economic information and decide what to do about it. Research, from MRI tracking of your brain to experiments about basic incentives, has laid waste to the rational model of economic behavior. Human beings do not weigh all available data--which only in Dreamland will be available all the time--and then determine what they should do with perfect intellectual independence.

It is clear they attend endlessly to what other people do, to nonstop kaleidoscopic televised yammer and no doubt to the tides on trading floors, in board rooms, in the offices where police pension funds decide about their money, and anywhere else real life disturbs perfect accountancy.

Nevertheless, there are fighters who see a plausible target and assess their own assets favorably--and therefore buy stocks or bonds or companies or the bellies of pigs. They do what generals do in warfare--survey the whole field, the balance of territory, food, water, healthy troops, strategic skill and then take broad action. Corporals and privates may be brave fighters in detail, though they may be tempted to flee, but it's the generals who are most likely to succeed. They have to fight. Or they can surrender, relocate themselves to the Cayman Islands or Monaco and the game ends. But that's not the full human story. Someone has got to catch some protein and find some fruit because breakfast must be served. And will.
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