Wednesday, October 29, 2008

A Matter of Perception

Conservative New York Times columnist David Brooks had a surprisingly insightful column yesterday regarding the importance of perception to the economy. Although classical liberal economists such as those who blog at Cafe Hayek focus on the rational interest of businessmen and consumers as the best hope for a stable economy, behavioral economists such as Nassim Nicholas Taleb note that self-interest often leads people to see what they want to, often ignoring convincing evidence to the contrary.

For example, Taleb notes that modern risk-management models used by banks and other businesses are not effective in warning of major hazards. For instance, in his 2007 book The Black Swan, Taleb predicted the problems that would be posed by Fannie Mae, warning that it was sitting on "a barrel of dynamite." As Brooks concedes, the perceptions of Wall Street traders and others were influenced by their own biases and expectations, failing to perceive how a globalized economy created the possibility of widespread failure.

To be fair, one should note Brooks's observation that the same problems of perception could even more easily arise in a government controlled system. This is not a case for a communist or totally socialized system. Still, the views of Taleb and other behavioral economists should give pause to those who feel that self-interested businessmen are the solution to every financial problem.

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