Emotional predictions and the financial crisis
Mark Twain reportedly worked hard to be funny. He tested his new material on an imaginary focus group and assumed that if the people in his head laughed at a punch line, so would people in a theater. This amusing anecdote from Daniel T. Gilberts & Timothy D. Wilson’s ‘Why the brain talks to itself: sources of error in emotional prediction’ (Philosophical Transactions of The Royal Society B (2009) 364, 1335 – a great read) illustrates that our brains often talk to themselves. We generate mental simulations, so called previews, of future events all the time in order to produce premotions on which we then base our predictions about the future. While Gilbert and Wilson argue for two general sources of error (dissimilar content and context of our views at the time of prediction and the event occuring), there is also an interesting point to be made from their observations concerning the financial crisis and what society as a whole will or will not learn from that.
As Gilbert & Wilson state, our previews (i.e. mental simulations of future events) are only as good as the memories on which they are based.
There are several sources of error in this. We tend to base our previews on the most accessible rather than the most typical of all memories. Ironically, the most available memories are often of the least typical events. Furthermore, recent experiences are especially available in our memory.
These errors can have enormous consequences. Just think of the current financial meltdown. Whenever you talk to finance professionals, they are often quick to express real and honest surprise as to the extent of the crisis now unfolding. No one could have seen that coming, they say.
Although one should not let them off the hook to easily – for some have truly been blissfully ignorant in chasing bonuses -, a case can be made that they truly did not foresee these consequences of their actions. Let’s not consider how realistic that assessment is.
Instead, let us focus on another issue which I deem to be even more important: what will society as a whole learn from the recent crisis?
Considering human psychology and judgement errors, we apparently will make much too dire predictions of the future in the short term as we overestimate the importance of the crisis. But when things have picked up again, we are also very likely to forget much about the causes for the crisis and the lessons that should be learned from it.
The bottom line is this: We will probably learn a lot in the short time, a bit in the medium term but will remain ignorant to the enormous risks inherent in our current (financial / institutional / political) system in the long term.
In order to learn from our mistakes and to not let all the current hurting be in vain, society has to initiate a mechanism to not let us forget.
