Tuesday, December 27, 2011

Loss Aversion and Psychoanalysis

One of the central findings of behavioral economics is that people feel more pain losing $100 dollars than they feel pleasure in winning a $100. Losses hurt more than gains feel good. This is called “loss aversion.” It is the basis for “prospect theory,” the behavioral economist’s response to, and critique of, the classical assumption that absolute values of wealth, rather than changes in wealth, matter most.

Some theorists use loss aversion to explain the puzzling phenomena that the rate of return on stocks is so much more than on bonds. This is called the “equity premium puzzle.” One reason, these theorists suggest, is that stocks prices fluctuate much more than bond prices. To compensate stock-owners for the pain associated with this volatility, and the losses it implies, you have to pay them much more to hold stocks.

But what goes unremarked is the psychological basis for loss aversion. Loss aversion seems puzzling particularly because research also shows that in general people are more optimistic than pessimistic. Why this sensitivity to loss on a foundation of optimism?  How can we square this circle?

I don’t doubt that psychologists can come up with common-sense explanations for loss aversion, for example, losing is more humiliating than winning is status- enhancing. But we still have to ask why. Or perhaps we could develop an explanation from evolutionary psychology. In our days on the savannah, as these explanations go, predators emblazoned in our mind the dangers we faced rather than the satisfactions we could garner. To survive we had to be danger-oriented.

I want to suggest that psychoanalysis can contribute to this dialogue, and in particular, can help link loss aversion to optimism. In psychoanalytic theory the most fundamental loss we all experience is the loss of innocence, the realization that dawns on us sometime between our infancy and our later childhood years, that we are not by definition special, that love can be withdrawn, and that we face competitors for attention and resources every which way we turn. This is the emotional meaning of what Freud termed, "the Oedipus complex."

It is also in the nature of psychoanalytic thinking to suppose that early experiences are also primary. They lay down patterns of thought in the mind that are not readily extinguished. In Wordsworth’s phrase, “the child is father to the man.” This is consistent with the idea for example, that early traumas, such as living in an orphanage as an infant, can have long lasting effects on a person’s emotional life. So in this sense all of us experience the trauma associated with the loss of innocence. Loss aversion, because it is so general, may express this underlying universal experience.

And how to explain optimism?  With this frame of reference, optimism can be seen as the fantasy that innocence can be retrieved. It is the hope for the restoration of our early childhood utopia. This also helps explain why gains in status, resources, and opportunities are never quite as satisfying as we expect them to be. They are symbolic but ultimately inadequate stand-ins for the innocence that we can never recover.

In a letter to the New York Review of books Daniel Kahneman, the co-founder of prospect theory, notes that his original research was motivated by the idea that “significant errors of judgment can arise from the mechanism of cognition, rather than from wishful thinking or other emotional distortions.” The term “wishful thinking” is of course a phrase that has much meaning in psychoanalysis. The wish in Freud’s sense is the progenitor of the dream and the symptom. This suggests that Kahneman, and his co-investigator Twersky, situated their pioneering work in a contest with psychoanalysis. Yet their sparring partner, psychoanalysis, has disappeared from view in the great stream of scholarly work stimulated by their initial theories and findings. And this surely is a great loss.

Friday, December 16, 2011

My Week with Marilyn

I recently saw the film, “My Week with Marilyn,” the story of the filming of “The Prince and the Showgirl,” which starred Marilyn Monroe and Laurence Olivier. It is relevant to this blog because it sheds some light on the relationship between sexuality and work. The movie depicts Marilyn as the prima-donna, coming late to rehearsals, being emotionally volatile, and demanding considerable attention. What is noteworthy, is that the film does not depict any sexual tension much less a sexual relationship, between Olivier and Marilyn. Instead, she has a flirtation with a young man, Colin Clark, the “third assistant director,” whose memoir about his experiences, written 50 years after the fact, is the basis for the film.

Some viewers were disappointed in the lack of fireworks between the two depicted stars, Olivier and Monroe, but I think that was the point. Marilyn could not work effectively as an actress unless she experienced some level of sexual tension. There is some basis for this depiction, insofar as Olivier was definitely bisexual, and may have preferred men to women. Instead, the third assistant director, at least in his telling, becomes the vehicle, through his openness, which Marilyn uses to tap into her acting skills and achieve a great performance.

One can write the film off as simply a picture of Marilyn’s character, or disposition. But this fails to take account of her iconic status. There has always been a bit of a mystery about her mass appeal, looks are not enough, though men are often drawn to her vulnerability. But I think the movie breaks through to an important idea; that Marilyn embodied the equation between sexuality and life, a point that Freud made theoretically. She is never so much alive as when she is feeling sexual, and as the film depicts, men used her and she used men to feel this life force. The film is saying that Marilyn performed at her best when she felt alive, something we can all identify with, and to feel alive is to feel sexual.

This connection is discomfiting, if only because sex and predation at work are also connected. This was the subject of a previous blog. (http://learningfromexperiencelarryhirschhorn.blogspot.com/2011/11/mad-men-and-women-ceos.html.)  But if we can transcend the taboos associated with political correctness we can come to a deeper understanding between work as a source of vitality rather than simply as a burden. It is a most critical feature of the movie that the relationship between Colin, the memoirist, and Marilyn, is never consummated. In Freud’s sense, sex is sublimated and its sublimation gives rise to the vitality we need to be creative. Freud believed that people would not readily accept his basic insight that sexuality was part and parcel of our work of building a civilization. Perhaps Marilyn’s singular status is linked to this truth.

Tuesday, December 6, 2011

Daniel Kahneman, cognitive bias and Freud

There has been a great deal of interest in the publication of Daniel Kahneman’s new opus; Thinking Fast, and Slow.  He and his collaborator, Amos Tversky, are the founders of the “cognitive bias” school of decision-making. Their work has had a great impact on the field of behavioral finance. Kahneman makes the central distinction between fast and slow processes, the former based on intuition, and the latter on rational calculation. The former works well in situations designed for fast responses, for example, finding the shortest path to run away from a predator, but poorly in situations requiring forethought; for example, predicting the likelihood that the price of oil will rise next year.

Interestingly, Freeman Dyson, the physicist, has reviewed this book in the New York Review of Books, and points out, toward the end of his review, that Kahneman's distinction echoes Freud’s’ distinction between the ego and id. He goes on to note that Freud’s contribution was literary rather than scientific, but suggests that Kahneman's theory may not shed sufficient light on situations that provoke strong feelings, while Freud’s does.

I think Dyson has it half-right. The better analogy is to what is called Freud’s’ topographic model, in which the unconscious, preconscious and conscious levels of awareness interact in shaping a decision. The conscious process is calculative, the preconscious is intuitive, and the unconscious channels thoughts along lines associated with strong feelings such as anxiety, ambition and desire.

One of the central features of unconscious mentation is that it is repetitive. It is the source of our decision-making “ruts” because we feel compelled to repeat strategies that give us some secondary gratification, while keeping us from taking the risks to be really successful. For example, it is why someone might prepare inadequately for a talk, with the unconscious belief that if even if his performance is inadequate, people should like him for just the way he is!

The topographic model suggests that there are emotional as well as cognitive biases. The latter, cognitive biases, trip up the preconscious when a train of associations stimulated by an intuition leads us for example, to focus on the most vivid example, rather than on the most typical. The preconscious is vulnerable to short cuts. But the former, the emotional biases, belong to the unconscious domain, where we live out our life scripts and enter into relationships based on a models of relating we learned as children.

Consider again the case of Jon Corzine at MF Global, a subject of an earlier blog.  The Wall Street Journal published an article today suggesting that his colleagues had warned Corzine many months before the firm’s demise that his bet on Eurobonds was too risky. Yet he ignored them. Why? Was it because he was thinking too fast, as Kahneman suggests, or because his unconscious mentation --perhaps a fantasy of his “second coming” after his defeat in the New Jersey Gubernatorial race-- distorted his thinking process.  

The cognitive bias literature is exemplary as science, but it may be exploring domains that lack salience, that are based as Dyson suggests at the end of his review on “parlor games.” We need to introduce the unconscious.