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?