Human Nature

Whenever anything goes wrong in our life, we naturally seek an explanation. To not find some cause for why our plans went awry, or why we faced sudden resistance to our ideas, would be deeply disturbing to us and intensify our pain. But in looking for a cause, our minds tend to revolve around the same types of explanations: someone or some group sabotaged me, perhaps out of dislike; large antagonistic forces out there, such as the government or social conventions, hindered me; I received bad advice, or information was kept from me. Finally if worse comes to worst, it was all bad luck and unfortunate circumstances.

These explanations generally emphasize our helplessness. “What could I have done differently?

How could I have possibly foreseen the nasty actions of X against me?”

They are also somewhat vague. We usually can’t point to specific malicious actions of others. We can only suspect or imagine. These explanations tend to intensify our emotions —anger, frustration, depression—which we can then wallow in and feel bad for ourselves.

Most significantly, our first reaction is to look outward for the cause. Yes, we might be responsible for some of what happened, but for the most part, other people and antagonistic forces tripped us up. This reaction is deeply ingrained in the human animal. In ancient times, it might have been the gods or evil spirits who were to blame. We of the present choose to call them other names.

The truth, however, is very different from this. Certainly there are individuals and larger forces out there that continually have an effect on us, and there is much we cannot control in the world.

But generally what causes us to go astray in the first place, what leads to bad decisions and miscalculations, is our deep-rooted irrationality, the extent to which our minds are governed by emotion. We cannot see this. It is our blind spot, and as exhibit A of this blind spot, let’s look at the crash of 2008, which can serve as a compendium of all varieties of human irrationality.

In the aftermath of the crash, the following were the most common explanations in the media for what had happened: trade imbalances and other factors led to cheap credit in the early 2000s, which led to excess leverage; it was impossible to place accurate value on the highly complex derivatives that were being traded, so no one really could gauge profits and losses; there existed a shrewd and corrupt cabal of insiders who had incentives to manipulate the system for quick profits; greedy lenders pushed subprime mortgages on unsuspecting homeowners; there was too much government regulation; there was not enough government oversight; computer models and trading systems ran amok.

These explanations reveal a remarkable denial of a basic reality. Leading up to the crash of 2008, millions of people made daily decisions on whether to invest or not invest. At each point of these transactions, buyers and sellers could have pulled back from the riskiest forms of investment but decided not to.

There were plenty of people out there warning of a bubble. Only a few years before, the crash of the giant hedge fund Long-Term Capital Management showed exactly how a larger crash could and would occur. If people had longer memories, they could think back to the bubble of 1987; if they read history, the stock market bubble and crash of 1929. Almost any potential homeowner can understand the risks of no-money-down mortgages and lending terms with fast-rising interest rates.

Bubbles occur because of the intense emotional pull they have on people, which overwhelms any reasoning powers an individual mind might possess. They stimulate our natural tendencies toward greed, easy money, and quick results. It is hard to see other people making money and not join in.

There is no regulatory force on the planet that can control human nature. And because we do not confront the real source of the problem, bubbles and crashes keep repeating, and will keep repeating as long as there are suckers and people who do not read history. The recurrence of this mirrors the recurrence in our own lives of the same problems and mistakes, forming negative patterns. It is hard to learn from experience when we are not looking inward, at the true causes.