The Peltzman effect is about “moral hazard” — our tendency to take more risks when we’re insulated from the costs of that risk-taking.
If credit is cheap and easy, do we over-extend ourselves?
If we make cars safer, do people drive with less care and attention?
In an op-ed piece for the Washington Post, this columnist asks if societies’ measures to reverse drug overdoses actually enable drug addiction.
The ‘moral hazard’ of naloxone in the opioid crisis.
Who doesn’t like some thrills every now and then? Or maybe rollercoaster rides belong in theme parks – not in stock markets.
But the stock market is where cognitive biases how up at the most inconvenient times. Emotions precede reason, and there is no exercise of reason without emotion first. Our reactions are physiologically based: they do not instantly run to the brain centres that promote reasoning.
- Gamblers’ Fallacy: You have told yourself that the market has been going up and up – isn’t that ‘proof’ that you should buy in, or stay in? You know it’s a gamble but if the past ten days have produced gains, then buying in is less of a gamble…
- Status-Quo: Should you have changed your profile, your strategy? When, today when stocks are taking a hit, or three months ago, when commentators you respect were warning of a correction? Inertia is a very powerful force…
- Negativity: The bad news is always front on mind – it’s why the evening news is full of tragedies and conflicts. But is the stock market now a mess, a total catastrophe from which you should flee, no matter the cost?
- Bandwagon Effect: Fear and greed rule the markets. If everyone is piling in to buy, that is when the rational person knows it is time to step back. Otherwise he or she is letting confirmation bias distort thinking.
- Loss-Aversion: Your stock may have just dropped in value. Part of you wants to sell and flee, but you cannot help wanting to wait, to recoup your money… How long will you wait?
- Overconfidence: If you are proud of being an original thinker, or that your have unique insights or know-how, good for you. We all need to feel we can make our mark and have things come around our way. But if you need to imagine that you know better than the millions of other investors and gamblers in the stock market, that is closer to megalomania or narcissism than anything else.
- Endowment Bias: This is the corollary of the Loss Aversion bias: we imagine that whet we have is worth more than similar objects that others have or own. ‘My antique table is better than your antique table.’ You wish: but this is a projection of your own belief that you (and your possessions) are more important than others’. Your stock is only as valuable as the price it will fetch…
We’re never short of commentary and predictions about the decline of the West.
The usual culprits are environmental destruction, wars, and natural disasters. In a New Scientist article, Laura Spinney (‘Pale Rider: The Spanish Flu of 1918 and How it Changed the World’ 2016) offers a take on how things might unravel – our ever-increasing ignorance of how to keep our societies functioning and adapting to the pace of technological change.
Sorry, it’s not a re-tread of the old reliable ‘Kids these days, they’re so …!’ It’s all of us, and it’s built in: we don’t just like the short-cut thinking that Kahneman and Tversky explored in their ‘Thinking Fast and Slow’ – we live it.
But as our analytical skills degrade, who will run things that require the methodical, rational, time-consuming work to keep our screens on?
Read more here.