Paul Farrell has written about this phenomenon on Marketwatch:
He speaks of "all the too-greedy-to-fail fatheads running Wall Street? And, unfortunately, Main Street America's 95 million irrational and self-sabotaging investors
Yes, all of us! We're Americans. Don't confuse us with the facts, with reality. We're the greatest in history, a legend in our own minds. And a rapidly mutating virus is spreading this lethal pandemic far beyond the shores of Lake Wobegon. Yes, folks, the "Lake Wobegon Effect" is hard-wired in America's brain, an illusion of superiority, a smug arrogance where each knows we are the best, the chosen ones.
Warning: The Lake Wobegon Effect is the single best summary of today's stock market psychology, high frequency trading, behavioral economics theories and the new science of irrationality ... and it's sucking the life out of America's soul. Here, listen to more of these arrogant musings surfacing everywhere from deep in our collective brains."
So forget all of our "devices," our forever present blackberries, iPhones, iPads and Bloomberg terminals with their enhanced graphics and multiple sources. Alas, there's no panic button that gives you a quick dose of financial history, perspective or context. Our hi-tech world often leads to repeating low-tech mistakes in a speeded up environment driven byall those dazzling terminals, TV screens blazing and pundits buzzing.
Farrell reminds us of a psychological game called "The Invisible Gorilla."
He calls it "one of the most famous psychological demos ever. Subjects are shown a video, about a minute long, of two teams, one in white shirts, the other in black shirts, moving around and passing basketballs to one another. They are asked to count the number of aerial and bounce passes made by the team wearing white, a seemingly simple task."
Stop. Test yourself before you read on. What does "The Invisible Gorilla" study tell you about the brains of folks gambling in Wall Street's casinos? Where billions of shares, trillions of dollars, stocks, bonds, derivatives trade daily? What's "invisible" to you?"
Institutionalized Irrationality--perhaps even insanity--- helped cause the financial crisis as the federal inquiry commission pointed out quoting an appraiser who watched the real estate industry underwrite loans with no collateral over and over again:
"I see a lot of irrationality," he added. He said he was unnerved because people were saying, "It's different this time"--a rationale commonly heard before previous collapses."
Many writers of distinction could see the irrational trumping the rational coming, as I wrote in my book Plunder that came out a month before the 2008 crash.
I quoted Mark Twain, America's greatest man of letters, He once asked: "Why shouldn't truth be stranger than fiction? Fiction, after all, has to make sense." (His novella, The Man Who Corrupted Hadleyburg, was written while he was in Europe on the run from creditors.)
Fast forward a century or more as business and political leaders alike try to make sense of a relatively sudden and unexpected market meltdown in the summer of 2007 then again in 2008 and then again this past week.
Ultimately perhaps Twain's insight will lead to great novels that will capture the corruption of the underlying culture that allowed so many financial manipulations and so much greed, avarice, and irrationality in this era in the way that great writers of economic upheaval in America like Upton Sinclair, John Dos Passos, or Jack London castigated theirs.
It seems to have always been true, as a friend who watched his multi- ethnic city of Sarajevo implode into a bloody genocidal war in Bosnia years ago confided to me, "only fiction has to be plausible. Real life has no such constraint."
As a journalist with perhaps less fictional imagination than I need, I can only try to probe deeply into some of the forces that took our economy down in such an unexpected way at a time when our national leaders were looking elsewhere and thought they saw the only threat to our country coming from terrorists hiding in caves in far away lands.
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