Does Greed Always Trump Fear?
In a recent NY Times op-ed, economist Paul Krugman examines the rapid return of Wall Street to its former greed days. As he states, “as the rest of the nation continues to suffer from rising unemployment and severe hardship, Wall Street paychecks are heading back to pre-crisis levels. And the industry is deploying its political clout to block even the most minimal reforms.” The op-ed piece argues for greater regulation. I’m wondering if there isn’t something inherently problematic with the financial industry that makes it exceedingly hard, if not difficult to regulate.
Many people (including me) believe that financial markets operate on a balance of greed and fear. During bull markets and bubbles, greed dominates, people are exceedingly optimistic that things can only turn out well, and any sense of lingering fear is cast aside. During brief periods, after a major downturn in the markets, or during deflation, fear dominates greed. From the look of things now, with news of bonuses returning, crazy merger deals being negotiatied, it looks like greed is rising again. This doesn’t surprise me, what surprises me is how fast greedy behavior resumed. Perhaps though, I should have expected this. After all, the financial industry is constructed on a concentrated number of players actively working to create increasingly complex instruments that can slice and dice assets ostensibly worth billions of dollars. Add on top of that that the financial institutions incentivize and reward employees large sums of money for relatively short-term performance. And then, add on to that, a regulatory framework where the watchers often envy the bankers and wish to learn about the industry so they can switch to the other side, and where their compensation is typically a small fraction of those they should regulate. So if greed is structurally stronger than fear, what does that mean for the average individual investor? I’m not sure, but I will be pondering more.
posted at this week’s Carnival of Personal Finance
There are plenty of studies showing that the adverse emotional impact of a negative event is greater and lasts longer than the favourable impact of a positive event.
On that basis I would have thought that fear is a stronger emotion than greed.
I’m not sure whether the curernt market is being driven by greed (hoping to make a profit) or fear (worry about underperforming for fund managers who had too much cash or inflation or whatever for other investors).
As an aside – the last thing we need is more regulation – our lives are excessively regulated already. We need regulation which is better – simpler, more focused and more effective. It would also help if we had regulators who were willing and able to effectively monitor and enforce.
traineeinvestor, interesting point on the adverse emotional impact. If the survey data is correct, a number of individual investors are still holding on to large cash positions in their savings and retirement portfolios, in other words giving in to the fear element. This would mean that they have missed out on the market’s rebound from March to date, and are at risk for underperforming with respect to inflation.
[...] Elizabeth G from Modern Gal asks us, “Does Greed Always Trump Fear?” [...]