Beyond Behavioral finance

In anticipation of the much-awaited movie Wall Street 2 (w/ Michael Douglas) and having watched a documentary on CNBC about Enron ("Enron: The Smartest Guys in the Room"), I've been thinking about what's really going on in the world of financial corruption, and how we seem doomed to repeat the same mistakes over and over. Of course as traders, recognizing these types of fallacies of human nature can lead to a better prediction of events or trends, but why do they exist in the first place? And if they do exist, do we sit back, accept it, and simply trade this perpetual battle between parties (much like war)?

I was in college, relatively oblivious to Enron when their stuff hit the fan. My life was much more relevant and interesting to me than what was going on on Wall Street (okay and Houston) at the time. So watching that documentary for me was sort of like taking a history lesson. But what really struck me was that in spite of new players, the game has still stayed the same. Except maybe a bit more savvy in their implementation - with the exception of Bernie Madoff. The main theme I've been able to extract is that people are people. There will always be a misuse of power once it's granted to individuals, a herd mentality and consent to wrongdoing when incentives are involved, and those that will follow the path least resistance regardless of the casualties involved.

This sounds much like the animal kingdom. However, you might think that people would be above being vicious at all costs, since unlike animals, we have a conscience. However, one might contend that animals are smarter than humans because they aren't burdened by emotions. A cheetah, for example, will actually wait for the perfect time and target to attack; a multi-dimensional optimization problem that we could all learn from in trading and other endeavors. Animals are sometimes known to do things that may interpreted as being motivated by more complex characteristics (chimpanzees demonstrating much of these), but they're motivated by something more fundamental: survival.

Are we too motivated by survival instincts, but played out on a grander and more complex scale? Recent immigrants to the U.S., for example, have been known for their prudent financial ways, but this is only after experiencing great uncertainties and instability in their homelands. You might see a "cheap" Indian in their crappy car, but never guess that that person owns land and gold or has payed for their childrens' educations and down payments on houses. This doesn't necessarily mean they're inherently smarter, but rather that they are products of their recent history and doing what they feel is best for their survival.

Unfortunately, Americans have developed a survival instinct more akin to repeated instant gratification. We have to go shopping every weekend. We have to get what we want-- NOW-- if not for any other reason, for the fact everyone else around us is getting those things. This mentality is ultimately extended to executives and investment bankers. We cannot expect a banker to hold back on a million-dollar deal even if it at the expense of others if we are not able to hold back on buying an iPad at the expense our credit card balance.

If the end game is really survival, I ask myself if we are actually doing the right thing by running amok in debt and unethical behavior. Maybe things do need to reach a point of unsustainability where a massive correction to our lifestyles and expectations allows us to reach a healthier level of existence. I just hope that we don't have to learn our lessons through man-made environmental disasters or warfare, but can learn mini-lessons in the form of financial bubbles and crashes.