Friday, February 15, 2013

"Mind over Money" on PBS Nova shows irrational exhuberance in markets as "empathy"; explanation of "bubbles" like 2008

PBS Nova has a useful report “Mind over Money”, directed by Malcolm Clarke (2010, 50 min) that tries to explain the physiological basis of human behavior that leads to financial bubbles.
The basic link for the show is here.

This particular episode is available right now on YouTube in its entirety (from Benjamin Balak).  Remember, many NOVA videos are available long term on only for-salve DVD’s.  I watched it on Netflix Instant Play.

The documentary set up some experiments with graduate students, including an auction of a $20 bill, where the highest losing bid still had to pay for the item.

The documentary also followed a young man in the NYC streets making "rational choices" in purchases but then lost that thread. 
Various other experiments were set up with people (including Wall Street traders) wired with electrodes.
Human behavior with respect to money doesn’t always seem “rational” or “calculating”.  The documentary gave an analogy between the tulip bubble in Amsterdam in the 17th Century with the Financial Crisis of 2008, where the “derivatives” (and credit default swaps) had become the “tulips”.  Wall Street tends to set up new “tulips” to cover risk temporarily and make the financial behavior appear to be “rational”.
The documentary distinguished between “empathy” and “sympathy”.  “Empathy” helps explain herd behavior (such as offering and taking out risky mortgages) that, to a rational person, seems to violate expectations of “personal responsibility”. Hence, the reign of subprime mortgages a few years ago. 

Jennifer Lerner (Harvard), Gary Becker and Richard Thaler all appear.   

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