August 09, 2009

Free Choice?

In Sunday's NY Times Paul Krugman notes that Rational Market theory was still being taught despite the recent lessons that show it has failed.

Fox points out that academic belief in the perfection of financial markets survived the 1987 stock market crash and the bursting of the Internet bubble. Why should the reaction to the latest catastrophe be any different? In fact, what I hear from my finance professor friends is that thereís a lot less soul-searching under way than you might expect. And Wall Streetís appetite for complex strategies that sound clever ó and can be sold to credulous investors ó survived L.T.C.M.ís debacle; why canít it survive this crisis, too?

My guess is that the myth of the rational market ó a myth that is beautiful, comforting and, above all, lucrative ó isnít going away anytime soon.

Why are humans so susceptible to bad theories and bad choices?

Perhaps it is because that is just the way we are made. This weekend, I listened to a fascinating radio program on how people make choices which shows that we have much less free choice than we think. Otherwise, why would handing someone coffee (either hot or iced) predict our answer 100% of the time to a particular question? How can we protect ourselves from a built-in proclivity to make certain choices? One answer is making it easier to make a better choice (pdf).

Posted by Mary at August 9, 2009 01:38 AM | Philosophy | Technorati links |

I don't think one wants a free choice on every aspect of decision making. We want to worry about 2-3 major areas in life and follow others in every unimportant decision of life like what brand of coffee to drink? Some people care about what car they drive and some just buy the most popular one as their focus is on their kid's schooling or their friday night date.

Of course, sometimes we can create an illusion of choice where all the options are biased. Like asking a girl at the end of night, your place or mine? Creates an illusion of choice ;)

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Posted by: Ryan at August 9, 2009 04:23 AM

To my way of thinking, there's no such thing as a truly free market. Once upon a time, economists proposed the idea that if everywhere you went there were widget sellers and widget makers, and they all worked independently, then the market would behave in a particular way. Of course, there's no such thing as widgets, and people inevitably collaborate on how to share a market. Eventually, the most ruthless widget sellers and makers control the market.

This is such an obvious observation that it's amazing that it still hasn't taken hold in America. Yet here we are, discussing "free markets" as though they're anything other than an abstraction. All markets are controlled, it's just a question of how much and by whom. Any economist who doesn't recognize that fundamental truth is to economics what patent medicine salesmen are to the pharmaceuticals industry.

Posted by: Cujo359 at August 11, 2009 04:31 PM

Interesting how recent legislation is encouraging RISKIER behavior in 401k portfolios... you would think the opposite would be true.

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Posted by: bobby at August 15, 2009 10:15 AM

I think part of the problem is we do not want to hear about problems, if you tell someone something bad is going to happen they think you are a profit of doom, when infact you are simply stating reality.

So its heads in the sand again....

Posted by: suze@ 100% mortgage at August 18, 2009 11:04 AM

that's no such thing as free choice in the world.

Posted by: Bromacleanse at August 21, 2009 02:37 PM