Week 2 News

Hi,
Following are two articles related to our course material. The first deals with the effects of groupthink, and the second raises questions about the unconscious nature of racism. The latter also contains a "resource within a resource"-- check out the bias tests at websites associated with Harvard and the University of Chicago. I look forward to your posts and discussing on Tuesday.
David


November 2, 2008
The New York Times/Economic View
Challenging the Crowd in Whispers, Not Shouts
By ROBERT J. SHILLER

ALAN GREENSPAN, the former Federal Reserve chairman, acknowledged in a Congressional hearing last month that he had made an “error” in assuming that the markets would properly regulate themselves, and added that he had no idea a financial disaster was in the making. What’s more, he said the Fed’s own computer models and economic experts simply “did not forecast” the current financial crisis.

Mr. Greenspan’s comments may have left the impression that no one in the world could have predicted the crisis. Yet it is clear that well before home prices started falling in 2006, lots of people were worried about the housing boom and its potential for creating economic disaster. It’s just that the Fed did not take them very seriously.

For example, I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster.

But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?

The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.

Members of the Fed staff were issuing some warnings. But Mr. Greenspan was right: the warnings were not predictions. They tended to be technical in nature, did not offer a scenario of crashing home prices and economic confidence, and tended to come late in the housing boom.

A search of the Federal Reserve Board’s working paper series reveals a few papers that touch on the bubble. For example, a 2004 paper by Joshua Gallin, a Fed economist, concluded: “Indeed, one might be tempted to cite the currently low level of the rent-price ratio as a sign that we are in a house-price ‘bubble.’” But the paper did not endorse this view, saying that “several important caveats argue against such a strong conclusion and in favor of further research.”

One of Mr. Greenspan’s fellow board members, Edward M. Gramlich, urgently warned about the inadequate regulation of subprime mortgages. But judging at least from his 2007 book, “Subprime Mortgages,” he did not warn about a housing bubble, let alone that its bursting would have any systemic consequences.

From my own experience on expert panels, I know firsthand the pressures that people — might I say mavericks? — may feel when questioning the group consensus.

I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 2004, when the New York bank’s new president, Timothy F. Geithner, arrived. That panel advises the president of the New York bank, who, in turn, is vice chairman of the Federal Open Market Committee, which sets interest rates. In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.

Reading some of Mr. Geithner’s speeches from around that time shows that he was concerned about systemic risks but concluded that the financial system was getting “stronger” and more “resilient.” He was worried about the unsustainability of a low savings rate, government deficit and current account deficit, none of which caused our current crisis.

In 2005, in the second edition of my book “Irrational Exuberance,” I stated clearly that a catastrophic collapse of the housing and stock markets could be on its way. I wrote that “significant further rises in these markets could lead, eventually, to even more significant declines,” and that this might “result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well,” and said that this could result in “another, possibly worldwide, recession.”

I distinctly remember that, while writing this, I feared criticism for gratuitous alarmism. And indeed, such criticism came.

I gave talks in 2005 at both the Office of the Comptroller of the Currency and at the Federal Deposit Insurance Corporation, in which I argued that we were in the middle of a dangerous housing bubble. I urged these mortgage regulators to impose suitability requirements on mortgage lenders, to assure that the loans were appropriate for the people taking them.

The reaction to this suggestion was roughly this: yes, some staff members had expressed such concerns, and yes, officials knew about the possibility that there was a bubble, but they weren’t taking any of us seriously.

I BASED my predictions largely on the recently developed field of behavioral economics, which posits that psychology matters for economic events. Behavioral economists are still regarded as a fringe group by many mainstream economists. Support from fellow behavioral economists was important in my daring to talk about speculative bubbles.

Speculative bubbles are caused by contagious excitement about investment prospects. I find that in casual conversation, many of my mainstream economist friends tell me that they are aware of such excitement, too. But very few will talk about it professionally.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.

In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.

In short, Mr. Janis’s insights seem right on the mark. People compete for stature, and the ideas often just tag along. Presidential campaigns are no different. Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president. Unless Mr. Greenspan was exceptionally insightful about social psychology, he may not have perceived that experts around him could have been subject to the same traps.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

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October 30, 2008
New York Times/Op-Ed Columnist
What? Me Biased?
By NICHOLAS D. KRISTOF

For the last year and a half, a team of psychology professors has been conducting remarkable experiments on how Americans view Barack Obama through the prism of race.

The scholars used a common research technique, the implicit association test, to measure whether people regarded Mr. Obama and other candidates as more foreign or more American. They found that research subjects — particularly when primed to think of Mr. Obama as a black candidate — subconsciously considered him less American than either Hillary Clinton or John McCain.

Indeed, the study found that the research subjects — Californian college students, many of them Democrats supportive of Mr. Obama — unconsciously perceived him as less American even than the former British Prime Minister Tony Blair.

It’s not that any of them actually believed Mr. Obama to be foreign. But the implicit association test measured the way the unconscious mind works, and in following instructions to sort images rapidly, the mind balked at accepting a black candidate as fully American. This result mattered: The more difficulty a person had in classifying Mr. Obama as American, the less likely that person was to support Mr. Obama.

It’s easy to be skeptical of such research, so test for your own unconscious biases at https://implicit.harvard.edu/implicit/demo or at http://backhand.uchicago.edu/Center/ShooterEffect.

Race is a controversial, emotional subject in America, particularly in the context of this campaign. Many Obama supporters believe that their candidate would be further ahead if it were not for racism, while many McCain supporters resent the insinuations and believe that if Mr. Obama were white, he wouldn’t even be considered for the presidency.

Yet with race an undercurrent in the national debate, that also makes this a teachable moment. Partly that’s because of new findings both in neurology, using brain scans to understand how we respond to people of different races, and social psychology, examining the gulf between our conscious ideals of equality and our unconscious proclivity to discriminate.

Incidentally, such discrimination is not only racial. We also have unconscious biases against the elderly and against women seeking powerful positions — biases that affect the Republican ticket.

Some scholars link racial attitudes to a benefit in evolutionary times from an ability to form snap judgments about who is a likely friend and foe. There may have been an evolutionary advantage in recognizing instantaneously whether a stranger was from one’s own tribe or from an enemy tribe. There’s some evidence that the amygdala, a center in the brain for emotions, flashes a threat warning when it perceives people who look “different.”

Yet our biases are probably largely cultural. One reason to think that is that many African-Americans themselves have an unconscious pro-white bias. All told, considerable evidence suggests that while the vast majority of Americans truly believe in equality and aspire to equal opportunity for all, our minds aren’t as egalitarian as we think they are.

“To me, this study really reveals this gap between our minds and our ideals,” said Thierry Devos, a professor at San Diego State University who conducted the research on Mr. Obama, along with Debbie Ma of the University of Chicago. “Equality is very much linked to ideas of American identity, but it’s hard to live up to these ideas. Even somebody like Barack Obama, who may be about to become president — we have a hard time seeing him as American.”

A flood of recent research has shown that most Americans, including Latinos and Asian-Americans, associate the idea of “American” with white skin. One study found that although people realize that Lucy Liu is American and that Kate Winslet is British, their minds automatically process an Asian face as foreign and a white face as American — hence this title in an academic journal: “Is Kate Winslet More American Than Lucy Liu?”

One might argue that Mr. Obama registers as foreign in our minds because he does have overseas family connections, such as his father’s Kenyan ancestry. But similar experiments have found the same outcome with famous African-American sports figures.

Moreover, Professor Devos found that when participants in the latest study were told to focus on the age of each candidate, or on the political party of each candidate, then Mr. Obama and Mr. McCain were perceived as equally American. It was only when people were prompted to focus on skin color and to see Mr. Obama as black that he was perceived as foreign.

This 2008 election is a milestone and may put a black man in the White House. That creates an opportunity for an adult conversation about the murky complexities of race, in part because there’s evidence that when people become aware of their unconscious biases, they can overcome them.