24 Mar 2010 | Economy

Psychoanalysis of the Global Crisis 

Many financial commentators have attempted to explore the causes of the global economic crisis, its effects and its implications for the future. However, it has been less common for non-industry specialists to do so.

One expert who has investigated the issue is David Tuckett, a fellow of the Institute of Psychoanalysis and Visiting Professor, Psychoanalysis Unit at University College London. Tuckett gave his views in a paper he prepared for the Institute for Public Policy Research.

The crisis was the culmination of the latest in a long line of financial bubbles caused by a failure to organise markets in a way that controls human behaviour. Tuckett believes it is possible to see these bubbles forming and suggests steps that could limit the damage caused by similar events in future.

He alludes to ‘animal spirits’, an expression used in a similar context by the economist JM Keynes in 1936, and suggesting that these are central to the problem, as they disconnect the anxiety of consequences from the excitement of gain. Investment managers compete on the basis of the past performance of their funds. To explain that performance and to win new clients, managers describe the process they follow and offer commentary on what they have invested in. This process leads them to express spontaneous excitement or ‘love’ for certain investments and ‘hatred’ for others. In turn, this causes a loss of critical judgement and results in group think – following the herd – and eventually allows bubbles to occur.

Pointing to the effects of momentum, he explains the tendency for investors to be carried away by events and lose the balance between risk and reward – a phenomenon Tuckett describes as ‘path-dependent emotional sequences’. The excitement that is generated causes normal behaviour to be ignored and leads to excessive risk taking. At this stage, doubts are raised but dismissed or rationalised. This was what happened when investment funds and banks believed they could increase yield by securitising loans in increasingly complex packages.

The next phase in the process is a period of fluctuating unease at what is happening in investment markets. This creates doubts which eventually develop into panic. Those who are felt to have initiated the whole process are invariably blamed, along with anyone else who can be implicated in some way. Guilt – that is, feeling bad because one feels personally responsible – is not evident. Instead, blame is placed elsewhere.

Eventually, the original innovation which had appeared to be a good idea – in this case, securitisation of debts – becomes stigmatised to the point that it is hard to find anyone who will admit that they were ever a supporter. 

The lack of guilt makes it difficult for those involved to learn lessons from the mistakes they are making. Tuckett attributes the absence of any feelings of culpability to the fact that the individuals have participated in a basic assumption group, where individuals generally ignore new information and feel reassured in their actions because others in the group are behaving in the same way. 

A potential lesson from Tuckett’s observations, for us as investors, is that the basic assumption groups he identifies as the source of bubbles use new information ritualistically. This helps to overcome fears and allows the group to carry on with its behaviour unchanged. The alternative to a basic assumption group is a work group, which uses information at its disposal as part of a wider investigation. Crucially, members of work groups operate as individuals and arrive at conclusions independently.

Tuckett suggests that the mechanics of investment markets encourage gambling and offers his solution to prevent bubbles forming in future. He proposes a greater understanding within the industry of basic assumption groups, fund managers abandoning performance targets, a reappraisal of the role of pension consultants, and a shake out of business school orthodoxy including statistically-derived risk tools. He also argues for regulators to make use of psychoanalysis of market participants to justify intervention at an early stage in order to quell over-enthusiasm among investors.
 

Author: Ben Thompson
Ben graduated LLB in Law from Edinburgh University in 1999. He joined Baillie Gifford in 2001 and became a CFA charter holder in 2005. Having initially worked in our equity investment teams Ben is an Investment Manager in our Fixed Income Team, where he specialises in corporate bonds. 

 

The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

This article contains information on investments which does not constitute independent investment research and accordingly it is not subject to the protections afforded to independent research.

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