Dan Ariely 2of 3: Trust and the Meltdown

Last week I set the foundation for today’s installment, complete with a sound file of bestselling author Dan Ariely’s talk to our Business School Alliance in Charlotte. This post will make the most sense to those who read that first.

New insights on the meltdown

The 2nd edition of Ariely’s book,  Predictably Irrational, includes a full chapter on the 2008 meltdown.  In it, he emphasized trust (and the breach thereof), saying that no matter the long list of expensive “heroic measures” the central banks take, they’re unlikely to achieve the desired effect without taking measures to restore trust.” After all, trust is the foundation of paper money to start with.

“Imagine how different things would have looked if the banks and the government had understood the importance of trust from the get-go. Had that been the case, they would have worked harder to explain more clearly what went wrong and how the bailout would be used to clean up the mess. They would not have ignored the public’s sentiment; they would have used it for guidance. They would have included some trust-building elements in the bailout legislation itself thoughts about the subprime mortgage crisis for example, they could have guaranteed that every bank bailed out with taxpayers’ money would have to commit to transparency, limit top managers’ salaries, and eliminate conflicts of interest.”

Trust and “learned helplessness”

Ariely says outright that Paulson’s behavior told us clearly that no one really understood what was going on. “One question we might ask is whether the general (psychological) depression that followed might have been mitigated if Paulson had been able to explain what went wrong in the first place, what his proposed measures were going to achieve, why he changed his decision to buy toxic securities, and what his plan was for the rest of the bailout money.

“As it turns out, even some answers could have made a difference. All creatures (including humans) respond negatively in situations where things don’t seem to make sense. When the world gives us unpredictable punishments without rhyme or reason, and when we don’t have any explanation for what is happening, we become prone to something psychologists call ‘learned helplessness.’” In a nutshell, those who’ve learned helplessness simply stop trying to help themselves because they believe such attempts are futile.

He suggested we help ourselves by changing “the way we consume news, from passive receptivity to actively thinking about the information and trying to make sense out of it.”

Amen to that. My prescription?  More NPR and NewsHour; complete abstinence from Fox(so-called) News.

Coming in part 3 of 3: How lack of trust in financial meltdown affected healthcare reform

Writing prompts for bloggers & newsletter writers

• I wrote a post with writing prompts in May based on The Atlantic’s Article “Why I Fired My Broker.”  I quoted Seth Klarman saying “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them.  And now it’s even worse because even the most sophisticated people have no idea what’s going on.”  What steps is your firm (or are you) taking to communicate to your clients that you are trustworthy?  That your processes are fail safe (or at least properly audited)?
• Do you think more straight talk with your clients on your compensation will engender trust?  If you work for a broker or agency, why not tell your clients why you believe the comp structure you work under is fair to you and to them?
• In a post on compassion fatigue and shared trauma by financial advisors we discovered how and why advisors avoid client contact.  Ariely points out the need for trustbuilding, which can only happen with increased contact.  What steps have you seen advisors take (or have you taken) to step up client communications? Can you point your clients to more trusted information portals?

Compassion Fatigue

As a ghostwriter with financial services clients, I stay abreast of developments in their professional publications. Ran across an article in Investment News on consumer-focused financial planners’ mental health challenges during this Great Recession.

Hard to be a Zen Master during the Great Recession

The article says mental health professionals coined the phrase “compassion fatigue” to describe a syndrome experienced by caregivers of  individuals facing a terminal illness. “Instead of empathizing or ‘feeling bad’ for someone, the caregiver essentially tunes out the patient in an effort to prevent himself or herself from being drawn into a pit of despair.”

The article goes on to say that “many advisers are experiencing a phenomenon known as ‘shared trauma,’ which develops when an adviser has been as victimized by the financial crisis as much as his or her clients” and says this causes some advisers to avoid client contact.”

Jeffrey Goldbert complained about that in an Atlantic Monthly article I blogged about — said he fired his broker because his broker had de facto fired him by not communicating. Perhaps his broker was suffering compassion fatigue or shared trauma, but the article gave me the impression that his broker had simply gone under a tidal wave of corporate compliance.

The Investment News article quoted Patricia Smith, the founder of the Compassion Fatigue Awareness Project in Mountain View, CA as saying advisers “need to start with the fact that [the bear market] isn’t their fault.”

Hmmm, I have mixed feelings on that point.  No, it wasn’t entirely the fault of financial advisers, but  most of them signed on to work in an environment where they’re expected to toe the company line, including pushing instruments at the direction of their firms.  If I called my Merrill Lynch broker to ask about X fund, he would be obliged to tell me what his research department’s position is on it.  Maybe his entire knowledge of fund X is limited to the firm’s position.  Firms go to great lengths to assure compliant client communications.

Because it’s difficult to set up shop as an adviser without the broker dealer infrastructure, is the best conclusion that system really is rigged?

Writing Prompts:  Financial Services

• With so many people trying to cast a wide net for blame, how much should be shouldered personally by advisers?  Are advisers equal victims?  Well-compensated pawns in the larger game?
• Should advisers pull on their big girl panties and consider this stress an occupational hazard for which they were pre-compensated during the boom?
• Do these findings give the investing public room to empathize with their advisers?
• What reforms do you anticipate between firms and their representatives?
• Will the ill will between client and adviser push investors to instruments like index funds?