Self-Interest & A Banking Moral Hazard

Self-Interest & A Banking Moral Hazard

I have not really read into or studied the financial crisis of 2008, but I remember how angry and furious so many people were at the time. There was an incredible amount of anger at big banks, especially when executives at big banks began to receive massive bonuses while many people in the country lost their homes and had trouble rebounding from the worst parts of the recession. The anger at banks spilled into the Occupy Wall Street movement, which is still a protest that I only have a hazy understanding of.
While I don’t understand the financial crisis that well, I do believe that I better understand self-interest, thanks to my own personal experience and constantly thinking about Robin Hanson and Kevin Simler’s book The Elephant in the Brain. The argument from Hanson and Simler is that most of us don’t actually have really strong beliefs about most aspects of the world. For most topics, the beliefs we have are usually subservient to our own self-interest, to the things we want that would give us more money, more prestige, and more social status. When you apply this filter retroactively to the financial crisis of 2008, some of the arguments shift, and I feel that I am able to better understand some of what took place in terms of rhetoric coming out of the crisis.
In Risk Savvy, published in 2014, Gerd Gigerenzer wrote about the big banks. He wrote about the way that bankers argued for limited regulation and intervention from states, suggesting that a fee market was necessary for a successful banking sector that could fund innovation and fuel the economy. However, banks realized that in the event of a major banking crisis, all banks would be in trouble, and dramatic government action would be needed to save the biggest banks and prevent a catastrophic collapse. “Profits are pocketed by executives, and losses are compensated by taxpayers. That is not exactly a free market – it’s a moral hazard,” writes Gigerenzer.
Banks, like the individuals who work for and comprise them, are self-interested. They don’t want to be regulated and have too many authorities limiting their business enterprises. At the same time, they don’t want to be held responsible for their actions. Banks took on increasingly risky and unsound financial loans, recognizing that if everyone was engaged in the same harmful lending practice, that it wouldn’t just be a single bank that went bust, but all of them. They argued for a free market before the crash, because a free market with limited intervention was in their self-interest, not because they had high minded ideological beliefs. After the crash, when all banks risked failure, the largest banks pleaded for bail outs, arguing that they were necessary to prevent further economic disaster. Counter to their free-market arguments of before, the banks favored bail-outs that were clearly in their self-interest during the crisis. Their high minded ideology of a free market was out the window.
Gigerenzer’s quote was meant to focus more on the moral hazard dimension of bailing out banks that take on too many risky loans, but for me, someone who just doesn’t fully understand banking the way I do healthcare or other political science topics, what is more obvious in his quote is the role of self-interest, and how we try to frame our arguments to hide the ways we act on little more than self-interest. A moral hazard, where we benefit by pushing risk onto others is just one example of how individual self-interest can be negative when multiplied across society. Tragedy of the commons, bank runs, and social signaling are all other examples where our self-interest can be problematic when layered up to larger societal levels.
Capitalism and Externalities

Capitalism and Externalities

Capitalism has come under fire in the recent years in ways that I would not have predicted as I completed my college degree and entered the workforce. For so many years the idea of capitalism has been central to the American story and to American identity. It may not be perfect, but it has always been held above other economic systems as the best option available. However, recently, people have taken a new look at capitalism to ask if it can be maintained without the plundering of others. Can there be a reasonable sense of equity or equality within a system of capitalism? And in the United States, do we really have a meritorious system of capitalism, or is the American system of capitalism overrun with grift and graft?

 

Allowing people to flourish based on their own talents, allowing people to pursue their own interests, and to accumulate wealth can be a good thing, but it can also be done to excess. Like alcohol, chocolate cake, or Netflix, our pursuit of wealth can essentially be an addiction, and the costs can be born on all of society, not just on ourselves. Our actions and the systems and structures within which we operate have unintended consequences. These consequence, or externalities, can be positive or negative. Within capitalism, positive externalities include new technologies that improve our lives, more efficient markets which minimize waste, and hopefully more goods and wealth for everyone. But negative externalities related to capitalism include pollution, corruption, and extractive processes that harm individuals, communities, and environments.

 

In Letters From a Stoic, Seneca writes to his friend Lucilius, “I myself pray rather that you may despise all those things which your parents wished for you in abundance. Their prayers plunder many another person, simply that you may be enriched.”

 

Seneca is acknowledging that when one person gains resources, often times it is at the expense of another person. The goal of capitalism is for our economic system to be positive sum, meaning that everyone is better off in an exchange – a state known as a Pareto Efficiency. However, this is not always the case. Seneca sees exchanges, or maybe more precisely the accumulation of resources and wealth, as zero sum, meaning that there is a fixed amount of stuff, and that anything that one person accumulates is taken away from another person. This, in my opinion, is where so much of our discontent in the United States and across the globe with capitalism lies.

 

Seneca may not always be correct. There may be Pareto Efficiencies out there and there may be situations in which capitalism builds a positive sum economic system. But it does seem like moderation in our approach to capitalism and wealth accumulation is warranted. At a certain point, for us to have more necessarily mean that we are extracting wealth and resources from other places. Mining, logging, and cattle grazing can have damaging effects on local environments and communities, even if they do help develop industry or increase GDP in the places we take resources from. Beyond a certain level, continuing this trend is likely to make our lives marginally better, while potentially making the lives of others much worse. We should constantly ask ourselves if we are nearing that point, and try to limit our need for more stuff and more wealth when we are at sufficient level where the marginal gain for us is meaningless and effectively just plunders others for our own enrichment. It seems reasonable if we should ask whether limitless growth is really possible, or if capitalism ends in a state of plunder, in which nothing is left for a sustainable existence for everyone.
Shifting Drug Use

Shifting Drug Use

In the United States we often fail to think about alcohol use when we think about drug use. Our country is comfortable with the idea of recreational drinking to take the edge off a tough day, to enjoy a party or social gathering, and to celebrate a holiday. Alcohol has a lot of downsides, especially when people drink in excess. Whether people have an addiction or just drink too much one night, consequences can include drunk driving car crashes, liver and stomach problems, and general poor decision-making. Alcohol is dangerous for the user and for other people within society. Nevertheless, we understand that it can be used responsibly, and unless you have a history of alcohol abuse, it is strange to not drink.

 

Other drugs don’t enjoy the same acceptance in society. Marijuana is becoming more accepted, but other drugs remain strictly prohibited and shrouded in fear and secrecy. When states consider increasing access to medical marijuana or marijuana legalization, legislatures and the public will debate for hours on end all the potential consequences of legalizing marijuana and the dangers which could stem from more marijuana use. But rarely will we have the same discussions of alcohol, and rarely will we consider the consequences of people shifting their drug use as policy changes.

 

However, research suggests that we should strongly consider shifting drug use when we think about drug policy. When I was completing an MPA at the University of Nevada, I looked at research on people switching from opioids to marijuana within states that legalized marijuana or expanded medical marijuana programs. There is good evidence to suggest that many people will shift away from opioids, which can be dangerously addicting, to marijuana when weed is more accessible. Marijuana seems to be less dangerous than opioids, with fewer risks for overdose. There are certainly consequences for using marijuana – I know of studies that look at negative health impacts of smoking weed studies that look at potential damage to intellectual functioning. However, opioids have been ruinous for many communities in the United States, with arguably worse health consequences than marijuana. The shifting drug use might not be the best outcome we could hope for, but it might be a step in a better public health direction.

 

In his book Chasing the Scream, Johann Hari looks at these ideas around shifting drug use. He writes, “After California made it much easier to get marijuana from your doctor … traffic accidents fell by 8 percent.” People were not driving under the influence of alcohol as much once they began using marijuana instead. As a result, the roads became more safe. Hari gives several examples of shifting drug use that might occur if more drugs (or all drugs) were legalized. The drugs used and settings for their use would change, which would have a lot of implications for public health and safety. He shows that in many instances, shifting drug use away from alcohol would make us safer and more healthy. We don’t always recognize this, and we don’t always think about shifting drug use appropriately because we fail to think of and count alcohol use as drug use.

 

Hari writes, “If you don’t count alcohol as drug use, then drug use would go up. But if you do count alcohol as drug use, then there is some evidence suggesting overall drug use will not go up after legalization.”  Patterns of drug use are complicated, and we don’t have a lot of evidence to help us anticipate shifting drug use in a world where access to drugs in a legal way was more available. However, if we want to express an opinion about shifting drug use, we should remember that alcohol is a drug, and we should think of it within the larger context of drug use, not as its own thing.

 

Ultimately, I (and I think Hari) would like to live in a world with minimal or almost non-existent drug use. However, our current approach to get there, drug prohibition, doesn’t seem to be working and seems to actually make our societies more dangerous. Shifting to a world where drugs were legalized and provided in a safe form by the state (or private entities) could lead to greater drug use, might lead to changes in what drugs people use, and would like change where, when, and how people use drugs. If we moved in this direction while simultaneously creating a strong system to help people stay healthy while using drugs and that encouraged them to find a lifestyle that didn’t include drugs, then our societies might become more healthy, and we might not actually see drug use increase in a dangerous way.
Help Them Build a Better Life

Help Them Build a Better Life

It is an unavoidable reality that we are more motivated by what is in our immediate self-interest than we would like to admit. This idea is at the heart of Kevin Simler and Robin Hanson’s book The Elephant in the Brain and can be seen everywhere if you open your eyes to recognize it. I’m currently doing a dive into reading about homelessness, and I’m working through Elliot Liebow’s book Tell Them Who I am. Liebow writes about American society’s belief that people will become dependent on aid if it is offered unconditionally. In a passage from his book where he reflects on the barriers that homeless women face in obtaining services and aid, and how those barriers can often become abuse, Liebow writes:

 

“One important source of abuse lies much deeper, in a widespread theory about human behavior that gets expressed in various forms: as public policy, as a theoretical statement about rehabilitation, or simply as common sense. Whatever the form, it boils down to something like this: We mustn’t make things too easy for them (mental patients in state hospitals, welfare clients, homeless people, the dependent poor generally). That just encourages their dependency”

 

What is incredible with the sentiment in the paragraph above is how well it seems to justify what is in the immediate self-interest of the people with the resources to help those in need. It excuses inaction, it justifies the withholding of aid, and it places people with material resources on a moral high ground over those who need help. Helping others, the idea posits, actually hurts them. If I give up some of my hard earned money to help another person, I don’t just lose money, that person loses motivation and loses part of their humanity as they become dependent on the state. They ultimately drag us all down if I give them unconditional financial aid. What is in my best interest (not sharing my money) just also happens to be the economic, moral, and personal best thing to do for another person in less fortunate circumstances.

 

This idea assumes that people have only one singular motivation for ever working, making money to have nice things. It ignores ideas of feeling respected and valued by others. It ignores the human desire to be engaged in meaningful pursuits. And it denies our needs as humans for love, recognition, and basic necessities before we can pull ourselves up by our boot straps.

 

Johann Hari’s book Chasing the Scream is an excellent example of how wrong this mindset is and of the horrors that people can face when the rest of society thinks this way and won’t offer them sufficient help to reach a better place in life. Regarding drug addicts and addiction, Hari quotes the ideas of a Portugese official, “addiction is an expression of despair, and the best way to deal with despair is to offer a better life, where the addict doesn’t feel the need to anesthetize herself anymore. Giving rewards, rather than making threats, is the path out. Congratulate them. Give them options. Help them build a life.”

 

Helping someone build a life requires a financial investment in the other person, a time and attention investment, and also requires that we recognize that we have a responsibility to others, and that we might even be part of the problem by not engaging with those in need. It is in our selfish interest to blame others for the plight of society or the failures of other people. From that standpoint punishment and outcasting is justified, but as Hari, Liebow, and the Portugese official suggest, real relationships and getting beyond fears of dependency are necessary if we are truly to help people reach better places and get beyond the evils we want to see eliminated from the world. We can’t go out of our way to find all the ways in which things that are in our self-interest are good for the rest of the world. We have to acknowledge the damages that our self-interests can cause, and find ways to be responsible to the whole, and help other people build their lives in meaningful ways.
Excesses and Externalities

The Problem with our Excesses

My previous post was about our desires to live a life that never involves any pain or suffering. We try to build a life for ourselves and our loved ones where every moment is happy, and where we never have to engage in drudgery, never experience physical discomfort, and never face any obstacles. Today’s post looks at another related aspect of our lives and mindsets that Sam Quinones highlights in his book Dreamland as part of our current opioid crisis: excesses.

 

Quinones is critical of our capitalistic culture that creates a message of buying things to find happiness, fulfillment, and meaning. The marketing departments of everything from soap companies, life insurance companies, to take-out restaurants suggests that happiness is right around the corner, as long as we are willing and able to buy more of what they offer. It is owning something bigger, having more, and expanding our consumption that is branded as a good life. But as Quinones sees it, “Excess contaminated the best of America.”

 

I studied public policy and I spend a lot of time listening to podcasts with economists. A common idea in the world of public policy and the mind of economists is the idea of externalities, secondary consequences of policies and peoples actions. Some externalities are positive, such as people developing a sense of civic pride after participating in an election, but many externalities are negative, such as green house gasses polluting the planet as we drive to and from work. What Quinones describes with the quote above, is the reality that our drive for excesses produces negative externalities that damage our planet and ultimately ruin the lifestyle that we chase.

 

By always wanting more, wanting it faster, and wanting it more tailored to our specific desires to make us feel like royalty, we have put ourselves in a place that is unsustainable. Our single use plastic bags have trashed our cities and open spaces. Having our individual cars to drive to everyplace we want to go emits more pollution than a well developed public transportation infrastructure. Over-purchasing consumer goods produces more garbage that has to go someplace.

 

This post has simply highlighted the reality that we live with negative externalities, and that our consumer driven culture is creating externalities which poison the planet. Quinones throughout his book focuses on the idea that our culture’s excesses have fueled the opioid epidemic by turning us inward toward our own wants versus encouraging us to think of others and how we can work together as part of a community. I think he is correct, and I think the space to start in making a change is by getting people to truly reflect on their lives, their purchases, and what they pursue. As Ryan Holiday put it in Stillness is the Key, “Eventually one has to say the e-word, enough. or the world says it for you.”

 

The way out of our opioid crisis, and indeed the way out of so many of our problems today, is to say enough to our own selfish desires. We need to stop the negative externalities that we produce when we purely pursue our own selfish ends, and instead we need to embrace our communities and put others first, to create more positive externalities which can heal our communities and fill the empty holes that consumerism leaves inside of us.

Creatures of Logic

One of the things I am most fascinated by is the way in which our lives, our thoughts, and our decisions feel to us to be purely rational, but are clearly not as rational we think. Our minds are bounded by a limited amount of knowledge that we can ever have, a limited amount of information that we can hold in our head, and a host of biases, prejudices, and thinking vices that get in the way of rationality. We feel like we are in control of our minds, and our actions and decisions fit into a logically coherent, rational story that we tell ourselves, but much is missing from the picture of the world that we develop.

 

Usually I turn these considerations inward, but it can be helpful to turn this reality outward as well. Dale Carnegie does so in his book How to Win Friends and Influence People. In the context of criticizing other people, Carnegie writes, “When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.”

 

The other day I wrote about criticism, and how it can often backfire when we want to criticize another person and change their behaviors. Carnegie notes the terrible consequences of criticizing people, ranging from quitting work that they might actually excel at all the way to committing suicide, and his quote above is a reminder that people are not logical automatons. Our motivations and sense of self matter to how we perform, what we do, and how we think. Adding mean-spirited criticism, even if well deserved, can be harmful. What is more, our criticism often serves to mostly prop ourselves up, and is more about how special we think we are, than about how poorly another person is performing or behaving.

 

Carnegie believes that we need to be more considerate of other people when dealing with them in any circumstance. His quote extends beyond moments of criticism to areas of motivation, quality relationships, social responsibilities, and individual health and well-being. We cannot simply look at others and heap and hold them purely responsible for the outcomes of their lives. People are not rational, and will not be able to perfectly sort out everything to identify the best possible decisions for their present and future lives. We must help them by remembering their bounded rationality and we must help develop structures that allows them to make the best decisions and perform at their best. People are going to make logical errors, but we can design society and the world they operate within so that they minimize the errors that they make and so that the negative externalities of their biases are also minimized.

Religion As a Community Social Structure

There are not many things that pull people together quite like religious beliefs. Sports pull us together when our kids are on the same team, when we are all in a stadium, or when two of us are wearing the right hat on an airplane, but those don’t make for strong ties that are lasting and uniting. Religion offers an entire worldview and set of corresponding behaviors that do create lasting ties between people who otherwise wouldn’t have much in common and wouldn’t likely interact for any significant time. Robin Hanson and Kevin Simler look at religion in their book The Elephant in the Brain to understand the ways that religious signaling, behaviors, and beliefs operate in ways that often go unnoticed.

 

They quote a few authors in a short section that stood out to me:
“Religion,” says Jonathan Haidt, “is a team sport.”
“God,” says Emile Durkheim, “Is society writ large.”

 

Simler and Hanson go on to explain what this community and larger social aspect of religion means given that we tend to think of religion more as a private belief system:

 

“In this view, religion isn’t a matter of private beliefs, but rather of shared beliefs and, more importantly, communal practices. These interlocking pieces work together, creating strong social incentives for individuals to act (selfishly in ways that benefit the entire religious community. And the net result is a highly cohesive and cooperative social group. A religion, therefore, isn’t just a set of propositional beliefs about God and the afterlife; it’s an entire social system.”

 

Religions typically encourage pro-social behaviors that get people thinking more about a cohesive group than about selfish motives. By pursuing these prosocial behaviors, people can gain more status and prestige in society. For selfish reasons then (at least to some extent), people pursue the religious dictates of their society in their own personal lives. As they do this, positive externalities may arise and may create a society that is more cohesive and supportive all around. This might not always happen, but having a shared system of understanding the world, our places in the world, and the stories about who we are and why we exist help to create the social fabric and social capital to further encourage cooperation and social cohesion. In a weird way, our selfish motives encourage religion, even if we don’t acknowledge it and assume that religion is entirely about personal beliefs.

Norms and Productive Coordination

In my previous post I wrote about wasteful competition that occurs between animals within the same species, including us humans. To try to be impressive, we do a lot of things that are relatively wasteful. We might spend hours and hours focusing on developing a single skill, some animals will spend lots of time building an impressive dwelling, and some animals grow brightly colored plumage that puts them at risk of being seen by prey and requires energy to maintain. All of these examples are things that are done to impress others, attract a mate, and pass along our genes.

 

Kevin Simler and Robin Hanson wrote about this phenomenon in The Elephant in the Brain, and they also wrote about a phenomenon that goes in the other direction, productive coordination. The authors write, “humans are different. Unlike the rest of nature, we can sometimes see ahead and coordinate to avoid unnecessary competition. This is one of our species’ super powers – that we’re occasionally able to turn wasteful competition into productive cooperation.”

 

The method that we follow to get to productive cooperation the authors call norms. We are all familiar with norms and know what they are, even if we don’t recognize most of the norms around us and can’t perfectly define what norms are. Rules are the laws, guidelines, and standards that we follow in our day to day lives. Some are written down and formalized. Some have strict and explicit penalties if violated, and some are unwritten, a bit fuzzy, and sometimes don’t include obvious consequences when violated.

 

I find norms interesting in the context of Simler and Hanson’s book because they show the ways we get to well functioning societies with fewer costly and wasteful externalities from our signaling and self-interested behaviors. Norms create a way for us to compete with each other without having to go to war with every person who might have a higher status, greater wealth, or more social and political power than we have. Many norms help all of us, as a group, function a bit better together even if they get in the way of our individual self-interest from time to time. In many ways, norms are what create the elephant in the brain.

 

The idea that our self-interest is constantly at work, hiding in plain sight and influencing our behavior while being consciously ignored comes about because of norms. We have many unwritten rules against openly bragging about ourselves and against openly disregarding others in the pursuit of our self-interest. If we did not have norms that made us feel guilty, that caused people to look down upon us, and that isolated us socially when we bulldozed our way toward the things we wanted, then we would have no reason to hide our self-interested motives and we would openly and directly compete for the things we want. Norms shape our lives by defining acceptable behaviors, and they limit our direct pursuit of our self-interest to cut out some wasteful and damaging behaviors while pushing us to be more cooperative and peaceful.

The Purchases We Make

In their book The Elephant in the Brain, Kevin Simler and Robin Hanson write about “conspicuous consumption,” a term coined by economist and sociologist Thorstein Veblen who lived about 100 years ago. Simler and Hanson write, “When consumers are asked why they bought an expensive watch or high-end handbag, they often cite material factors like comfort, aesthetics, and functionality. But Veblen argued that, in fact, the demand for luxury goods is driven largely by a social motive: flaunting one’s wealth.”

 

The other pieces of the argument, the good performance of the item, the colors we were dying to have, and the durability of the product might be true sometimes, and that allows us to make those excuses even though they only describe part of our purchase. A big part of Hanson and Simler’s book focuses on the idea that we use these excuses that sometimes are true or that partially describe our decisions to justify actions that signal something other than the stated reason for our action.

 

In the case of buying luxury goods the thing we are signaling is our wealth, which demonstrates our financial resources and can be used as a proxy for our social capital and human value. Our wealth may give others insights into our skills and abilities to do hard things, helping us stand out against a crowd. Our wealth may reveal our deep social connections or our family’s high status, two traits that certainly helped our ancestors pass their genes along in a small political tribe.

 

The problem today, however, is that we don’t admit this is what we are doing with our purchases, and as a result we have trouble addressing major externalities from our consumptive habits. We spend a lot of money on unnecessary luxury goods, and many people go deeply into debt to signal that they are the type of person who would own a certain type of luxury good. Our unyielding desire in the United States for ever further and greater consumption leads us to buy larger houses that we have to heat, faster cars that use more energy, and to own more clothes that will take millions of years to break down thanks to the new synthetic fibers we make them from. Our consumption and our drive to continuously signal our wealth and social value, some would argue, is poisoning and heating our planet to dangerous levels.

 

Simler and Hanson don’t focus on the externalities of our signaling behavior in their book, but they do acknowledge that they are there. In the book, the authors make an argument that most of us would rather ignore. That we do things for selfish motives that we would like to keep under the covers. This is important if you are an economics, sociology, or policy researcher, and for us in our daily lives, we can take a lesson from Hanson and Simler that stems from an awareness of our self-centered behavior. We can think about our signaling behaviors and ask if conspicuous consumption is really worthwhile. We can step back and ask if the ways we signal our wealth help or hurt the planet, and we can start to make decisions with positive externalities and attempt to avoid the negative externalities I mentioned above.

Deception is Expected

Robin Hanson and Kevin Simler consider it normal and expected that humans are deceptive creatures. We evolved, according to the authors, to be deceptive so that we could get a little bit more for ourselves and have a slightly better chance of reproducing and keeping our genes in the mix. We don’t boldly take things and openly cheat to get what we want (most of the time), but instead we do our best to be a team player, with some marginal cheating and stealing under the table. As they put it,

 

“Deception is simply part of human nature–a fact that makes perfect sense in light of the competitive (selfish) logic of evolution. Deception allows us to reap certain benefits without paying the full costs. And yes, all societies have norms against lying, but that just means we have to work a little harder not to get caught. Instead of telling bald-faced lies, maybe we spin or cherry-pick the truth.”

 

This leaves us in an interesting position as we think about how we should act at an individual level and how societies should organize themselves at a larger level. We want to have norms in place that deter cheating and lying to help protect people’s property, to prevent fraud, and to create a system where people can meaningfully engage with one another and trust their institutions. But at the same time, we recognize that there is going to be a substantial amount of deception and a natural urge to be deceptive in order to obtain a little more benefit with a little less cost. Individuals will behave this way, and so will the families, social groups, communities, states, and nations that individuals create.

 

A solution that I would explore would be to accept Simler and Hanson’s views openly, and then begin looking closely at externalities. Externalities (usually discussed in the negative sense) are the additional things that stem from the original action. Deceptive behavior can have negative externalities, such as wastes of money when we buy sports cars to show off rather than using our money for more productive and charitable uses. At the same time, deceptive behavior can have positive externalities, such as the benefits of charity when we donate large amounts of money, again to show off.

 

If we accept this is happening, then in our own lives and in our societies we can try to add additional costs (such as taxes) on deceptive behaviors with negative externalities, and we can do more to encourage deceptive behaviors that produce largely positive externalities. We don’t have to abandon our human nature, but we can collectively decide to shape the consequences we might face for being deceptive in certain situations. This can help bring our behaviors and actions in line with the outcomes we want, but it does require that we accept what is taking place inside our brains and accept that we are not always as wonderful as we would like to appear.