CUCR

I’m currently writing from the Canadian skies, as the Zurich-New York flight I’m on approaches North America. In my head I’ve been calling it the “banker’s flight,” so it seems as good as any for a quick thought on Wall Street, risk and republicanism. My airplane reading is a book by Daniel Kahneman called Thinking, Fast and Slow.  Obviously it’s very highly recommended—people in the social sciences will recognize his name, he’s revolutionized psychology, economics and a bunch of other fields. The book is about our mental biases and how, for better or worse, we make decisions.

He talks about a series of studies that show that overconfidence in CEOs can be disastrous, that the most awarded CEOs often underperform, and that they often become deluded about their own abilities. Fine—he also quotes research that says the stock market punishes these firms, a victory for the Efficient Markets Hypothesis if there ever was one. What caught my eye, though, was a stray line that mentioned that because of overconfidence effects, CEOs tend to take stupider, riskier decisions with their own money than they do when they’re playing with other people’s money.

Since I’m reading a book about decision theory, I decided to think this piece of data through. It seems  to contradict a founding staple of classically liberal thought: that people make smarter decisions when the risks are higher for them, and that the reason government is so inefficient is because they’re playing with other people’s money. Is it possible that government spending could actually be more efficient than private investing, because bureaucrats are insulated from personal responsibility? (Yes, I’ve read Hannah Arendt. I’m well aware that bureaucracy’s void where individual responsibility should be causes ethical problems. This is a hypothetical.)

The first possibility I thought about had to do with the distinction between wealthy and middle class investors. It doesn’t seem to be correct, and if it is, then the leftist case for soaking the rich gets stronger. I haven’t really thought it through yet—though I would instinctively say that the effects are dominated by the myriad other determinants of risk-taking behavior and government inefficiencies.

On reflection, however, it occurs to me that this is an obvious observation, and that it brings out one of my favorite things about American culture. Of course the government is more conservative as an investor than the average CEO (it’s also wildly inefficient, since risk can be efficient, too). The mistake was assuming that we want all of the investment in the country to go to things that are safe and likely to succeed. We don’t.

It is risk, the risk of failure and the possibility of a major breakthrough, that keeps our economy progressing. It is the risk that Mark Zuckerberg took dropping out of school, or that our ancestors took crossing the ocean to get here (don’t get me on the PC stuff. All of our ancestors crossed oceans to get here—we’re not in Mozambique.) The reason we need a robust private sector is to allow us to take risks, because the government sure as hell shouldn’t. Some of those risks will flower, most won’t, and people will lose money. But only from risk-taking can good things happen.

This is also the thinking that forms the foundation of our concept of freedom of speech, religion and conscience.  We don’t know who is right about the great questions. It could very well be the minority, the one, loner, crazy voice. If we could prove that there was no value to his speech, there’d be less of a reason to let him be heard. But we can’t. The state of uncertainty and the possibility of massive reward (eternal truth) put us in a position where we should invest societal resources (living with the crazy, actually listening to other points of view) on the off chance that we’re hearing the words of the next Jesus, Socrates or Joan of Arc.

But if risk-taking is such a social good, shouldn’t we insulate risk-takers from their mistakes so to encourage more investment? Obviously not (though that would be an interesting justification for bank bailouts—we don’t want them to stop trying to make the markets safer through clever diversification. We’d just rather it worked.). The threat of punishment is what prevents recklessness and drives money towards investments that we actually believe are being made by visionaries and not cranks. But this is where personal responsibility enters the nexus of decision making. It is easy to make a moral argument about personal responsibility here, but it comes from my a priori belief in humanity. I genuinely don’t see that it comes up endogenously to this discussion.

My final hypothesis: I think Democrats have an inherent dislike of risk. Risk, they might say, disproportionally hurts those who cannot afford to fail. It also hurts those against whom the deck is rigged (black, immigrant, poor, gay, female, etc.) But the unfairness of risk is not the only argument against, and it can be solved by policies directly targeted at the problem rather than at the market. In general, though, the world would be a nicer place if we could engineer it to in allow no risk, or only very small ones. Our experts can. Why shouldn’t we?

The Republican is not so risk averse. We’re an optimistic bunch: the market is a game, and every American has a world to gain. I would respond to the Democrat: Because risk drives investment, investment funds innovation, innovation creates progress, and we have a duty to the next generation and to ourselves to keep the great engine of progress running along.