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us sometime between our infancy and our later childhood years, that we are not by definition special, that love can be withdrawn, and that we face competitors for attention and resources every which way we turn.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.

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.

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.

Peak performance

I have been reading Arie Kiev’s book, The Psychology of Risk: Mastering Market Uncertainty.  He was a psychiatrist who died in 2009 at the age of 75. He was a prominent researcher in the fields of suicide prevention and depression. Later in his life he studied athletic peak performance, and in the last part of his life, the peak performance of traders and investors on Wall Street. He was an advisor to the famed hedge fund trader, Steve Cohen, of SAC capital. The book has many vignettes of how traders experience fear and anxiety and how that shapes their trading positions; for example, not building up positions in potentially profitable trades, selling winners too early or holding on to losers too long. His edited transcripts of his interviews with traders have the ring of authenticity.

His overall advice to traders might at first seem conventional. They should not fret over their previous failures, they should overcome perfectionism, they should observe their feelings without succumbing to them, and they should keep a diary of their trades and the feelings that accompanied them. Most importantly, he suggests that traders should subordinate themselves to a goal, for example a certain level of profit per-week or month, rather than to some imagined conception of either their prowess, if they are grandiose, or their shameful inadequacy, if they are fearful. The goal is everything. In psychodynamic terms, you could say that the goal should displace the ego. Just as theorists of “flow” might suggest, the trader should concentrate entire entirely on his performance in the here and now. There is the situation, the goal, and his skill. Nothing else.

A person attuned to psychodynamics might argue that this formula presumes the solution --the egoless trader -- rather than addressing the problem of how to achieve such a state of being. Would that we all could act as if we had no past, that we never succumbed to fixed ideas, “old tapes,” and grandiose fantasies? But Kiev has an answer to this objection. It is based on the idea of action. In the presence of risk, the trader has to “burn his bridges behind him,” for example, by making a commitment to a sizeable position in a particular stock, and in the face of the risk taken and the stakes accepted, draw on his best performance to make good on his decision. You can’t think your way to action. You have to act your way into new thinking. The prerequisite for change is danger not safety.

To the psychodynamically attuned this is a discomfiting idea. People develop in therapy or analysis, it is imagined, because the therapist or analyst provides safety and reliability. Indeed, in the days when ego psychology reigned in the United States, say in the 1950s, a patient was instructed to make no important life-decisions during her psychoanalysis. The patient was seen as fragile and vulnerable.

But perhaps there are two kinds of vulnerabilities. There is the sense of vulnerability prior to action, where our greatest fear is that we will disappoint ourselves or disapprove of our own conduct. But there is vulnerability within action, where we give it “our all,” knowing, that while we must be as prepared as possible, there are no guarantees.

Kiev’s book makes me think that I have something to learn about performance from performance coaches.

The Refusal of Leadership

The Occupy Wall Street protestors were expelled from Wall Street. In this blog post I want to focus less on the political meaning of this event, and more on the nature of the group dynamics the protestors created. It is readily apparent that the protestors organized themselves on the basis of a principle that we might call, “the refusal of leadership.” A YouTube of the protestors in Atlanta is striking here. (http://www.youtube.com/watch?v=3QZlp3eGMNI). John Lewis, a civil rights icon, came to address the protestors. The group, using a process in which  all participants repeated, sentence for sentence, what any speaker said, decided to keep to their agenda and refuse Lewis a chance to speak. Any viewer of the YouTube can hardly doubt that the protestors were serious and sincere, but the result of their group process feels extreme, if not outlandish. Why show such disrespect to someone whose moral and physical courage is beyond dispute, and whose place in the history of democratic movements is unquestioned? 

This “refusal of leadership” hobbled the protestors in many other cities as well. Their decision process was laborious and slow, and no one from the group could be authorized to speak on its behalf. This made it difficult for them to negotiate with city authorities, build alliances and produce a coherent message through which they could amplify their influence. It is more likely that while the group’s overt task was to protest, its latent or un-verbalized task, was to be a perfect group, where perfection meant that there was nary a sign of difference, since difference meant inequality.  Acknowledging Lewis threatened this task, since it meant acknowledging his unique leadership qualities.

One question is where does this principle of the “refusal of leadership” come from? The German philosopher, Hermann Keyserling, expanded the contrary principle, which he called “the leadership principle” (Führerprinzip), or the principle that some select few were born to rule and should therefore be followed. The Nazis embraced this principal as part of their ideology of governance. If “the refusal of leadership” counters this idea, then it is surely welcomed. But is that its full meaning?

I am drawn to psychodynamic thinking here. Psychoanalysts thinks of the classic battle of the generations as one in which the father is “overthrown.” This concept can be used, sometime profitably and sometimes not, as a way of understanding revolutionary moments in history. But one interpretation of OWS is that the protesters did not wish to overthrow any particular father; instead they wished to eliminate the role of the father altogether. As my colleague Howard Schwartz as argued, a society without fathers, psychologically speaking, is a society with mothers only. In such a society the primary task is to ensure that everyone feels loved for just who they are, which means of course, that everyone is equal.

If this interpretation has merit, it leads one to worry that the protestors are expressing a cultural cul-de-sac. There is little doubt that authority today must be re-worked.  The new technologies are changing the equation between individuals and institutions.  But if authority is abolished then so is agency; that is, the capacity to formulate plans, amass resources, and achieve results.  It is this lack of agency that lends a certain pathos to the video of the Atlanta protestors.

One can’t help but think about the dilemmas facing Obama as a leader. It is likely that some of the same people who occupied Wall Street and its analogues in other cities, had great expectations for Obama. They projected into him great ideas, hopes and ambitions and, had he accepted these projections, he would have been a new leader-father. Instead he recoiled, and fell back on his intellectuality, cutting himself off emotionally from his supporters. It is almost as if there is a dance between Obama and his followers. They propose that he lead them, and when he refuses, they turn inwards to create societies without fathers, effectively abandoning him. Is it too great a stretch to think that in rejecting Lewis, an African American hero, they were also rejecting Obama?

Penn State and organizational myths

People are aghast that Joe Paterno, the head coach of Penn State University’s football program, and Graham Spanier, the University’s President, did not stop a football coach, Jerry Sandusky, from abusing young boys in the Penn State gym over the course of 15 years. Their behavior has raised questions about leaders’ ethical conduct and compass.  

I suggest that this horrific story also reveals something about the role of organizational mythology in shaping leadership behavior. An organization mythology is a story people inherit and then retell about what makes the organization special and distinctive, what has allowed the organization and its members to be members of an elite. When the mythology is widely held; for example, “Penn state’s football program and prowess is without parallel,” or, “What is good for General motors is good for the country,” as its CEO once said, then people who belong to the institution feel the glow of the myth and are elevated by their membership.

Yet in a classic study, Abraham Zaleznik studied the stress levels of workers and managers in a Canadian organization. To his surprise, he found that the lower down a person was in the hierarchy, the more job stress he or she experienced. This contradicted the common sense notion that executives bear more risk and therefore more stress. Zaleznik suggested that the people at the top of the organization were more likely to find succor and support in the organization’s mythology. Since they were at the top they could feel closer to the institution’s special sauce, and could imagine having a hand in sustaining its magical qualities. The normal stresses of work, as well as the uncertainties associated with the organization’s relationship to its setting, were therefore less troublesome to them. They were part of the mythology. 

On the other side, it is people in the trenches who often experience the underside of an organization’s functioning; for example, managers’ carelessness with petty cash, quality problems on the production line that are covered up, a male managers’ predatory behavior toward women, and dishonesty with expenses accounts. People down below often keep the seamy side hidden from people above, because they sense the danger in puncturing the organizational mythology. Why risk attacking the fantasies of the people on top? They may retaliate. Consequently, the executives on the top wind up having a “Potemkin village” view of their own organization.  

This framework may shed some light on two of the puzzling features of the Penn State case. Not only did the President and head coach fail to act on information available to them -- Spanier learned of police investigations into the reported abuse as early as 1998 -- but they failed to develop any crisis management plan in response to the scandal’s certain revelation as a result of the grand jury investigation. On the other side, people have been puzzled about a janitor's failure to report his seeing Sandusky having oral sex with a young boy in a gymnasium shower. They have also wondered why a young graduate assistant, upon witnessing Sandusky raping a 10-year-old boy, had to first seek his father’s advice before reporting the incident to Paterno (not to mention the police).

Perhaps the concept of organizational mythology is useful here. The mythology is protective for people at the top, while the contradiction between the mythology and facts on the ground make it dangerous for people at the bottom. That is why the leaders ignored the reports of abuse and were so unprepared for the certain crisis, and people in the trenches were frightened by the prospect of reporting what they had seen.

It is probably true that organizational mythologies are harder to sustain today. Competition and market forces humble great companies quickly. Perhaps today, leaders at the top are losing mythology’s protective power. One question is, what is their response? Do they turn to the hard work and the stress of ensuring that the company continues to produce value for stakeholders?  Or do they look for escape clauses, like golden parachutes, to reduce their dependence on an organization that can no longer provide myths.

Disney, YouTube and Identity

The New York Times reported today that Disney and YouTube have sealed a partnership in which Disney will produce video shorts to be distributed through a co-branded YouTube and Disney web site.  The Times goes on to note that Disney hopes this deal will enable it to stem the loss of visitors to its website, Disney.com. This decline in visits has led to lead to $300 million financial loss over the last year for its online division, Disney Interactive. The deal represents a turnabout for Disney, which has up to now pursued a “go it alone” web strategy.

One could look at this as a simple business deal, a tactic in pursuit of higher profits. But it is useful to consider what is it that Disney represents as a cultural institution. Disney’s film franchise is rooted in fairy tales.  Fairy tales are morality plays that help children differentiate between good and evil and assure the child, that despite the dangers of childhood, there are beneficent adults who will protect them as long as they are good and dutiful. So Little Red Riding Hood should be wary of dangers in the forest, but should she be attacked, a good woodsman will come to her rescue. Cinderella will find her prince despite the evil machinations of her stepsisters and stepmother, if she remains uncomplaining and cheery.  It is also helpful to note that the Grimm brothers published their fairy tales as one venue for creating a shared German language and culture, for linking families to a wider world.

What this suggests to me is that fairy tales are one avenue through which children can take up an identity offered to them by the adult world. They learn what it means to be good within a cultural landscape adults have fashioned, and they can identify their own aspirations for a good life with the fairy tale heroes who live “happily ever after.” We can think of this process as one through which adults confer an identity on children by first scaring them, and then offering them a formula for living in plentitude.

YouTube presents an entirely different proposition; it provides no master narrative of good and evil. By enabling visitors to sample, scan and search, it asks them, “What kind of person are you?” “What motivates you?” “What in this wooly combination of funny, fictional, instructional, professional and amateur videos that gives you the greatest pleasure and the most meaning?” Instead of conferring identity, it helps children explore identities. The web, as Sherry Turkle reminds us in several of her books, is a marketplace of identities.  Looked at from this perspective, one can see why Disney.com might be failing, why the number of visitors to its site is falling, and why it is losing money. It is approaching its future through the rear view mirror of the master narrative.

Lacan, the psychoanalyst, argued that a child is not a person until he takes on “the name of the father.” This play on the words of the Catholic Catechism, suggests that that a child becomes a person only when he internalizes the cultural meanings of the adult world, represented by the father, or more generally the “paternal function,” which is the parents’ representation of the human world beyond the family. It is a world of cruelty as well as kindness, a world of indifference as well as care. It is the world of grown-ups.  But what happens when fathers or more generally adults no longer believe that they can be effective guides. Is their role then to facilitate the child’s naming of himself, while the social media becomes a tool for finding names?

This raises another practical business question. In positioning the new website can the partners, Disney and YouTube really carve out an intermediate space between receiving an identity and exploring an identity? Can you co-brand master narratives with a process of searching, hyperlinking and free-associating? The logic of this augment would suggest no. This does not auger well for the partnership’s success.