Sunday, 29 March 2009

Psychology of a crisis

An article in yesterday's New York Times gives a very interesting account of the importance of understanding mood and psychology, and particularly their role in creating crises such as this one.

Robert Schiller writes about a paper delivered by Larry Summers in 1989 about a fictional crisis set in 1991, where a stock market boom had led people to believe that recessions would never return.

Euphoria gripped the investors of his fictional universe. “The notion that
recessions were a thing of the past took hold,” Mr. Summers said. He added that
over a 15-year period through 1990 — a time that included the 1987 crash —
investors earned an average real return of 11 percent. The popular view was that
“with a reduced cyclical element, the future would be even brighter.”

Much of the story mirrors what has happened in the past 2 years in reality. Handily, the paper's author is now director of the White House's National Economic Council, so is well placed to treat the patient, but, of course, that requires the agreement of many politicians, with differing worldviews and motives.

Here's hoping.

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