Author: ken

Post-Mortem on the Superpacs

It looked for a while that a flood of money would deeply skew the election, but that did not happen. The money was raised and spent, but to little effect. In a report on the electoral impact of the Super Pacs, The Daily Beast concluded: “No surprise, the conservative-leaning groups tended to be the biggest losers in our survey. But the sheer numbers are, in some cases, staggering.”

In their scorecard of effects, here are some specifics: “The major Karl Rove-linked group, American Crossroads, spent about $104 million dollars supporting or opposing candidates in 19 races . . . . Just under 98 percent of those races ended up being a loss for the PAC. . . . Percentage-wise, other groups fared worse. Winning Our Future—which backed Newt Gingrich’s presidential bid and received $15 million (of the $17 million it spent) from casino mogul Sheldon Adelson—saw 100% of its spending go out the window.” (See, “2012’s Super PAC Winners and Losers.”)

This is by no means to say that democratic governments can’t be bought, or that lobbyists and special interests don’t exert undue control over the legislative process. But, clearly, voters seem resistant to political advertising.

The prevailing theory behind these massive advertising campaigns has been that repetition seeps into the brain. If something is said often enough, the mind inevitably succumbs, accepting the message as part of reality.

But when you think of the long lines of voters that waited to cast their ballots in this election, often for hours, you know that there was nothing passive about their commitment. Moreover, in conversations, voters will often speak about feeling guilty if they don’t vote, and this despite the fact that in our Electoral College system extra votes don’t really count once a candidate has a majority. People joke about having been indoctrinated to vote by their third grade teachers, but they still vote.

Not everyone, of course. But the 50% or so engaged in the electoral process really do seem to be engaged – sufficiently, at least, to resist manipulation of the hundreds of millions of dollars spent on the campaign. They are not like consumers choosing a breakfast cereal, or rats in a cage being fed pellets of information. The theories of learning that predict the power of massive advertisement barrages seem to have missed something.

It may not be correct to say that the right to vote is sacred. But it does seem to occupy a special place in our world. My guess is that it has to do with the fact that it makes us into agents, actors who have a say in the future. As the world get bigger and more organized and automated, being a citizen with a voice holds its value. We don’t often get a chance to experience this, but when we do it reminds us that we are actors who can sometimes make a difference.

As the political parties battle for our votes, paradoxically they communicate our freedom to give and withhold. Trying to influence us, they remind us that we still control some actions that matter.

And Undeserved Rewards

Before we knew who was going to win the presidential election, Slate noted that he would end up being credited with the economic recovery now underway. That’s because our minds work by association, not logic.

We like to think that we can analyze the facts and draw conclusions about their consequences, and, sometimes, we can do just that. But that is the exception, not the rule. We generally prefer “thinking fast,” as Daniel Kahneman put it in his recent book (Thinking, Fast and Slow). We jump to conclusions that are obvious because they are right before our eyes.

That way of thinking was useful to us in the jungle when we had to respond to danger before it was too late – or to opportunity before it slipped away. It works less well in complex environments where many factors interact to create outcomes. And it exposes a bias we all share against the patience required to sift through the evidence and wait out events.

On the other hand, “thinking fast” often allows us to take advantage of our unconscious perceptions and thoughts, the raw ideas that have not been censored or smoothed out to fit our preferred conscious beliefs. These intuitions, frequently not clearly formulated, are based on real experience and they often are better guides to the truth.

But when we are responding to public events, bombarded by opinions that are driven by passionate hopes and fears, we revert to the blatant, obvious truths, defined by simple correlations. There is no time for “thinking slow.”

Elaborating on this point, Slate commented: “Whoever wins is poised to preside over a return to economic normalcy that’s bound to make any kind of basically competent governance look fantastic compared to the last decade of misery.” (See, “The Next President is Lucky.”)

This is not just true of voters and politicians. In the private sector, CEOs often get credit for results their predecessors planned, earning undeserved reputations as “turnaround artists” or “corporate saviors.” (And, of course, the reverse is true, as they can also take the heat for poor performances that were in the cards long before they assumed control.)
This principle operates in daily life as well, accounting for much of popularity in high school, reputation in professional communities, and success in business. In fact, unless there are clear standards for success and transparency in observing actual behavior, our evaluations of others are more likely than not to be driven by proximity and correlation.

And that does not usually prevent us from being certain we are right. The evidence, after all, is right there for all to see.

“Exceptionalism”

Our need to assert America’s superiority to other nations seems to be getting stronger as the case for it gets weaker and weaker. What’s going on?

Obviously no presidential candidate is going to call attention to the fact that we rank 34th in child poverty rates, just ahead of Romania. Or the fact that we rank 49th in rates of infant mortality. Take the fact that the “land of opportunity” now trails behind most of Europe in social mobility. On the other hand, we excel all other countries when it comes to the number of prisoners behind bars. And our rates of obesity outrank those of other countries, including Mexico.

No one wants to hear this – and, so, no one says it. This is no doubt due, in part, to the universal impulse to shoot the messenger who brings bad news. Yet other countries do seem somewhat better at facing adverse facts. And why do we have to go the extra mile and not just avoid unpleasant facts but also insist on being exceptional? The “most powerful,” the “world leader,” the “best.”

Certainly part of the explanation has to do with our history as a refuge for the oppressed throughout the world. We recall that priceless heritage, and it has been and continues to be reaffirmed as others seek opportunity here or political and religious freedom, or seek asylum.
It’s hard to give up that idealization. Even when reality does not quite live up to the hopes aroused, we remain a magnet for many.

And those hopes and struggles are entrenched in individual identities. So many have renounced their ties to their original homelands to settle here and put down new roots. They have vested interests in affirming the new selves they have worked so hard to establish. They do not want to see the flaws or acknowledge disappointment.

But I think the main reason we continue to insist to ourselves that we are exceptional is our complicity in denying that we have failed to live up to our own promise. It is our big, dirty secret. The intensity and virulence with which we insist on it is in inverse proportion to our conviction in actually believing it is true.

The evidence for this is the ritualistic nature of the affirmation, the complete absence of any need to justify it – indeed the total absence of any efforts to combat it.

The presidential campaign shows this again and again. It’s like reciting the pledge of allegiance or the Lord’s Prayer. And the more ritualized it becomes through repetition, the more these acts become like entering a password on our computers to get on the internet.

It’s how we connect.

What Is Their Secret?

The Daily Beast expressed the other day what most of us are coming to feel about the big banks: “You can slam them. You can sue them. You can even try to split them up. But the big banks won’t care.”

On Friday morning, both JPMorgan and Wells Fargo, America’s two most valuable banks, reported record profits, as their mortgage-lending businesses rode the housing recovery to new highs. “The banks that blew the housing market during the bubble now stand to gain the most from its recovery.” (See, “JPMorgan and Wells Fargo Announce Record Profits.”)
Neil Barofsky, the man who ran the Troubled Asset Relief Program, now says that the big banks today are essentially government-sponsored entities — they function outside the market. That means: “TARP only made the problems behind the 2008 crisis worse.”

It may have staved off a financial collapse at the time, but the big banks are even more immune to control as a result. Barofsky added, “it failed to increase lending and preserve home ownership.” Moreover: “Bank executives kept their pay, counterparties and creditors were made whole, and the too-big-to-fail banks were not only kept whole but even made stronger. He added that today they are 20% to 25% bigger.” ( See “Market Watch in The Wall Street Journal: “Barofsky: TARP was double-edged sword for banks.”)

It is if our need for them has become entrenched, like our dependency on oil. We don’t seem to be able to imagine ourselves without their presence. As many feared when they were bailed out, they have now become an established part of government.

Moreover, they have acquired a kind of virtual immunity to prosecution. “On top of the boosted revenue, the bank also quietly put away $684 million in litigation reserves. At the start of this month, New York Attorney General Eric Schneiderman filed suit against JPMorgan, alleging loan fraud at Bear Stearns, the crisis-cratered firm that Dimon purchased with government assistance in 2008. Dimon took an existentialist tone. The suit ‘is going to make it much harder in the future for companies to buy a troubled company … It’s unfortunate. But that’s life.’” As The Daily Beast commented sardonically: “And life’s a lot easier when your bank makes $5.71 billion in three months.”
As for Wells Fargo, adds The Daily Beast: “With all this good news, [they] can afford not to sweat the small stuff: that is, the federal government’s lawsuit, announced this week, claiming that Wells blew hundreds of millions in Federal Housing Administration insurance on bad home loans.

This doesn’t seem to be a mere matter of “moral hazard,” the absence of consequences for irresponsible and reckless behavior. It’s a kind of immortality.

Barofsky concludes that the big banks need to be broken up. “I think they should use a meat cleaver not a scalpel.” But that may no longer be possible.

Our Need to Belong

A core concept in our culture is that we are individuals in competition with other individuals. Like chimpanzees roaming the veldt, we need to outsmart and out maneuver other chimps who might otherwise get the food we need or the mates we desire.

But that idea only goes so far to explain our behavior. In a new book, The Righteous Mind, Jonathan Haidt suggests that our chimpanzee-like competitiveness has been over-laid by an evolutionary trend to cohere and cooperate, to work together. He argues: “We are like bees in being ultrasocial creatures whose minds were shaped by the relentless competition of groups with other groups. We are descended from earlier humans whose groupish minds helped them cohere, cooperate, and outcompete other groups.”

Haidt argues that we have, in effect, a kind of switch that allows us to turn off individual competition in favor of group cooperation and intergroup competition. “The hive switch is a group-related adaptation that . . . cannot be explained by selection at the individual level . . . [It] is an adaptation for making groups more cohesive.”

Darwin had a similar idea, arguing that groups or tribes that learned to work together had an advantage in the evolutionary struggle for survival. This is not conscious, but something that works because it is instinctive, automatic.

There are many other ways to account for unconscious cooperation or coordination in groups: people may cohere because they seek approval from others, or need to belong and fear being isolated. Our bodies intuitively accommodate information from other bodies, our brains mirror the activity of other brains. And no doubt there are other possible explanations. The important point is that group cohesion happens. Our culture stresses competition and rewards winners, so that is what we pay attention to. But that is just half the story.

What are the lessons here for investors and others who seek to predict events? What does this imply for markets? There may be wisdom in crowds, as James Surowiecki contends, but there is also great irrationality and danger: bubbles and crashes, groupthink and panic, irrational exuberance, irrational pessimism, and powerful convictions based on little or no information.

These forces are particularly influential in the absence of hard data. If we are unable to look to reality to correct such beliefs, we look to each other to confirm them, and often angrily reject contrary opinions.

How to cope with these distortions? There is a kind of gradient of conformity. At one end are the mass delusions that animate authoritarian regimes. (We get a taste of that at football games and political rallies.) At the other end, there are innocuous shopping impulses and fads that help us to “keep up with the Joneses.”

What are the warning signs that our groupishness is driving us? One indicator is the righteousness we feel in contemning others and their “misguided” beliefs. On a lesser scale is the smug comfort we enjoy in gossiping with others. But the best way to tell is to examine our motives. What kind of evidence do we have for what I am thinking? Do I want to believe this too much? What would be the emotional price of changing my opinion?

Our individualism is not something that comes naturally, as we tend to think. We have to work at it.