Joe Wiesenthal at Business Insider put out a quick post this morning on the Pew Research Center study, “European Unity on the Rocks”, released today. It is an eye opening read.
To start with, it strongly supports the working hypothesis of many that the political forces now unleashed in Europe are centrifugal, not centripetal. This reality makes betting on solving the crisis through a deepening of the EU a longshot whose odds are getting longer by the day.
The main thing the report underscores to me, however, which also jumps out from Wiesenthal’s post, is the extent to which human nature is gifted in self-deception, especially when under duress. But more on Europe below the fold. First, a word on behavior.
Starting about 15 years ago, I developed a strong interest in behavioral economics and evolutionary psychology. This came about when I started working in asset management and realized (1) how poorly economics was served by the assumption of ‘man as a rational maximizer’ and (2) how emotional and inefficient markets really were.
In the literature I ran into four takeaways time and time again. Specifically:
We overestimate our abilities, our uniqueness, and our objectivity, even more so when under emotional strain. We have all seen the studies: 90% of people say they are above average drivers. Rarely do people think those around them work harder or better than they do. And so on…
We systematically understate the role of ‘random’. We crave order, and we are willing to torture the facts to get there. But sometime things just happen, and sometimes problems don’t have solutions. No fundamental cause, no guilty party, no concrete answers. Moreover, on the up side, when random does break our way it’s appropriated as skill. The investment world is shockingly bad at separating outcome and process—yes, even those who drone on and on to prospects about their processes.
People will find a way to believe what they are incented to believe. As the saying goes, “The most dangerous place to stand is in between someone and what they want to believe”. In my experience, it’s hard to overestimate the power of this statement. Starting with the conclusion and reverse-engineering the supporting arguments is central to the human condition and, surprisingly, serves an important role in our evolution.
When presented with points 1, 2, and 3, almost everyone recognizes their validity, but believes at some level that he/she is exempt. The typical reaction is “Yeah, for sure, of course that’s how [other] people act”. It is always easier to see others’ mistakes than one’s own. And this is one of the reasons we have a very hard time changing our cognitive biases. All of us.
Now, back to the Europe and Greece.
Here’s the table that was screaming of self-deception:
Look at the first column. Once the giggles have subsided, and you’ve shown it to your colleagues so that they can share in the derision, don’t you wonder how it is that Greeks—and only the Greeks—believe they, and not the Germans, are the hardest working people in the Eurozone? Okay, you may be tempted to think it’s somehow a mistake. Or you might consider for a sec whether tax evasion and statistical manipulation is somehow considered work by the Greeks surveyed. But, most likely, the answer is Greeks at this stage of the crisis are deep into a siege mentality. They increasingly see themselves as victims, with their suffering exacerbated by the demands of outsiders. They are simultaneously trying to buck themselves up by convincing themselves of their stoicism in the face of this onslaught and lashing out at those who they perceive are doing them harm. Perfectly in tune, the report finds that “Anti-German sentiment is largely contained to Greece, at least for the moment”. We know the Greeks have long been lying to the EU. The table shows that they are now lying to themselves as well.
There’s also an important side point here for sovereign analysis. There is a tendency to listen more to the people in the country being analyzed. It is presumed they have ‘better information’ and understand better how things work. But what I have learned in my experience with sovereign crises over the years is that whatever informational advantage they have is usually more than offset by (1) their difficulty in distinguishing between things that matter and things that don’t; (2) the psychological baggage with respect to their own past, and (3) the often emotionally-charged nature of their perspective. Shorter: never ask a Brazilian about Brazilian inflation risk.
The third column tells us something else about human nature. Five out of eight countries chose their own country as the most corrupt in the survey. Why? I, for one, still haven’t been to a country where people complain they are being taxed too little. Similarly, I hear in virtually all countries going through rough times that they could solve their problems if they could only end corruption in government. This is the height of wishful exculpation. It also ignores the fact that China has grown spectacularly over the past decade, despite what many believe to be a highly corrupt system. And, even if it were true that corruption were the primary cause of a country’s ills, it also ignores the reality that government is usually a reflection of a country’s culture, and changing the politicians doesn’t change the incentive structure that gives rise to corrupt behavior.
What politicians can be blamed for is opportunistically tapping into our cognitive weaknesses. At this, they are ruthlessly efficient. Having observed politic cycles in countless countries over the past 20 years, I have boiled campaigns down to a three point message.
I feel your pain. Politicians need to connect, to empathize convincingly. Or, to paraphrase George Bernard Shaw, they need to be able to fake sincerity.
You deserve more than you are getting, and it is not your fault.
I’m gonna get the bastards who are keeping you down. Northern Italy accuses the laggard south of holding them back, and minimizes the role of northern tax evasion. Southern Italy thinks the north is deliberately holding the south down so the spoils—whatever those may be—can accrue exclusively to the north. I also remember, back in the day when I played a lot of pick-up basketball in Washington DC, my black teammates telling me about “The Plan”. You get the gist…
You can fill in the details about what you should be getting, and who is keeping whom down, but I have seen this formula play out, time and time again, from Equatorial Guinea to the United States. The bottom line, brutal though it may be, is that when in pain human nature is well equipped to convince itself that the group it belongs to is not to blame and then to find another group at whom to lash out. And while politicians are less responsible for crises than we are inclined to allege, they are certainly there to pitch themselves to us opportunistically in our moments of weakness.
As things continue to heat up in Europe, expect less rationality, not more—especially from the countries deepest in the pressure cooker. And, be on the lookout for more, not fewer opportunistic politicians.