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us sometime between our infancy and our later childhood years, that we are not by definition special, that love can be withdrawn, and that we face competitors for attention and resources every which way we turn.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

Managing disappointment

Jon Corzine’s failure at MF Global brings to mind the classic article written by Abraham Zaleznik entitled, “The Management of Disappointment,” (Harvard Business Review, Nov-Dec, 1967).  Zaleznik argues that people who strive for power will most often face significant disappointment and defeat. Think for example of Steve Jobs' firing form Apple, at the age of 30, after his conflict with the president John Scully. His company NEXT, which he founded after his "exile," failed as well.

The question becomes, not how to avoid defeat, but how to work through the experience of defeat. How can a leader gain insight and courage by deriving meaning from the failure itself? For example, Zaleznik describes briefly how Winston Churchill recovered from his personal defeat when the Britain’s military operation at Gallipoli in World War I failed, a campaign he had strenuously argued for. He was forced to resign his position as First Lord of the Admiralty, and it appeared that his political career was over. Yet he became one of the greatest war leaders in modern times, inspiring the people of his island nation to resist Hitler, after the British army was nearly defeated at Dunkirk. Zaleznik suggests that he recovered his conviction and passion by writing history and by relying on his trusting and loving relationship with his wife. 

Jon Corzine, suffered two significant defeats, his ouster as head of Goldman Sachs, and his subsequent defeat in the gubernatorial election (for his second term), in New Jersey. One question is, what meaning he made of these defeats? From a psychodynamic perspective we could say that a person works through the experience of defeat by overcoming the fantasy of omnipotence that leads so often to over-reaching in the first place. The defeat becomes a lesson in how to bear up under, yet use, one’s limitations. One result is that the leader becomes more connected psychologically to reality and less invested in fantasy. This new and strengthened relationship to reality becomes the basis for the leader’s “second coming.” He or she is then “twice born.” 

While I can only speculate here, newspaper reports suggest that Corzine approached his leadership role at MF Global as a reprise of his glory days at Goldman Sachs. He was going to transform a somewhat sleepy broker/dealer into a new Goldman Sachs. Was he in this sense repeating his past rather than trying to learn from it?

Let me draw attention to one detail that I think is significant. Corzine was injured severely in an automobile accident. His driver was speeding down the New Jersey Turnpike at 90 miles an hour while he sat in the front passenger seat without wearing a seat belt. His limousine collided with another car and Corzine experienced significant injuries to his chest, lungs and legs, and cuts to his face requiring plastic surgery. There is reason to believe that his subsequent electoral defeat was shaped in part by his debilitated physician condition. He experienced diminished physical stamina and reduced powers of concentration for a considerable period of time.

Let me speculate that the accident typified the same denial of risk and danger – no seat belt at 90 miles per hour—that characterized his leadership at MF Global. After all several months prior to its collapse, regulators were concerned by the level of risk MF Global was taking by using borrowed funds to buy European sovereign debt. If these two examples of risk taking are connected, it suggests that Corzine was repeating history rather than learning from it. One possibility is that he failed to consider how his own choices, not wearing a seat belt and prompting his driver to speed at 90 miles per hour, played a role in his subsequent injury. He saw it as an accident rather than as an example of his over-reaching.

If this speculation has merit, it suggests that Corzine is the kind of person who does not entertain readily, what psychologists call the “work of mourning,” the process though which people become reconciled to their disappointments. In the work of mourning one grieves for the loss of one’s imagined omnipotence. Perhaps Corzine could never reconcile himself to the role he had played in his own defeats. 

MF Global and productive antagonism

MF Global’s collapse is sad and disturbing; sad because it represents an ambitious man’s failure, disturbing because it highlights the fragility of financial institutions. But I want to draw attention to one only lightly remarked upon feature of the story. It was noted that when Jon Corzine, the CEO of MF Global was at the investment bank Goldman Sachs, traders were held in check by a vigorous risk management division which assessed the overall riskiness of the firm’s book of business. The two groups, risk managers and traders, were antagonists but deliberately so.

There is an underlying principle of organization here. It is common today to praise organizations and groups whose members “bust silos” and break down barriers, all in the service of creating one great team. But as the Goldman Sachs case suggests, checks and balances and the resulting antagonism these create, are important to the success of the firm. Indeed, such productive antagonism can result in overall better performance. The trader who is constrained by the risk manager must be all the more creative as a trader to generate profits for the firm. The risk manager who checks creative traders must be all the more creative in developing controls and measures for monitoring traders. It is not unlike the way in which one person’s tennis game improves when he plays against a better player. The antagonism raises the level of his game.

One question is; what is the nature of the setting that can develop and contain this productive antagonism? The description of MF Global suggests that Jon Corzine was an oversized presence in the firm, that as an ex-Goldman Sachs partner he was given great latitude to develop and implement the firm’s trading strategy. In other words, he “was the firm.”  It is likely that his power diminished how psychologically authorized his subordinates felt. They were willing dependents on his judgment and had less reason to exercise their own. This suggests that the antagonism that facilitated Goldman Sach’s success was weakly expressed. The tension between risk and speculation was held and managed-- or not-- in Corzine’s mind. This tension was in turn held hostage to Corzine’s personal fantasies, for example to return to the power game after his election defeat in the New Jersey gubernatorial race.

If true, this suggests that owner or founder-dominated firms are less able to create the productive antagonism required for success. This may be one reason why a start-up firm’s venture-capital investors frequently replace its founder as the enterprise grows. The firm must “grow up” and become an institution. The firm cannot afford to be the projective outlet for the founder’s fantasies. You need an institutional framework to sustain productive antagonism and the resulting checks and balances.

Mad Men and Women CEOs

Virginia Rometty has been appointed as the first ever women-CEO of IBM. It is striking how women now sit atop three storied technology companies; HP, Xerox and IBM. The news of Rometty’s appointment contrasts with the picture of men and women at work as depicted in the television series Mad Men. I have been watching the series on DVD starting with the first year of episodes. For those of you who are not familiar with the series, it portrays the members of an advertising firm in the U.S.  at the cultural turning point, when the 1950s become the 1960s. The underlying theme is women’s experiences at home and at work, and how these experiences paved the way for their coming into consciousness and power in the succeeding decades.

What strikes viewers is the amount of drinking and sexual exchange that takes place in the fictional advertising office. Men have no compunctions commenting on the sexual qualities of the secretaries who work for them, and there are sexual affairs between the advertising professionals, all men but for one, and the secretaries. Also, the men drink a great deal of liquor over the course of the workday and smoking is ubiquitous.  The picture is one in which men’s impulses are gratified, through sex, alcohol and tobacco. We might call the setting “de-sublimated.”

Now working in advertising may itself stimulate sexual fantasies. After all, companies use sexual innuendo to sell products. But informants who lived through that time tell me that, in the main, the picture is not exaggerated. We have of course come a long way from these arrangements. Women are much less likely to be treated as sex objects, and they have been welcomed into top teams. Hence the appointments of women to the CEO positions of technology companies, a typically male bastion.

One argument is that the pendulum has swung to far, that a climate of sexual puritanism now pervades the work world, and that political correctness, with its rigid behavioral norms and prescriptions, stifles pleasure and camaraderie at work. It may be dangerous for a man to hug a women colleague in an expression of gratitude and affection, as he might readily do with a male colleague.  I think there is some truth to this argument, but I want to point to a different issue.

If impulses are controlled and sexuality suppressed, it suggests that people are working harder. After all, the decline in overt sexual exchange at work has been accompanied by the disappearance of the "three martini lunch," a lunch that could last 2-3 hours with men returning inebriated and hardly fit for work. One wonders if the puritanism of the work world is one outcome of an increasingly competitive marketplace; one in which companies in other parts of the world take market-share from US companies. After all, the U.S. no longer has enviable living standards, as it did upon emerging as the only economy not devastated by World War Two. Indeed, wealth may no longer be associated with leisure. A study reported in the Wall Street Journal showed that since 1965, upper income professionals have increased the number of hours they work annually, “while total annual working time for low-skill, low-income workers has decreased.” (http://blogs.wsj.com/wealth/2010/09/30/do-the-rich-work-harder-than-others/)

I am led to ask the following. If puritanism suppresses pleasure, does it also suppress creativity?  Freud argued that creativity was sexuality sublimated, in the sense that the passion and urge to create, to be led by one’s fantasies, draws on the internal working model we have of sexual relatedness. We link our skills to our capacity for anticipation, and the excitement it generates, to “give birth” to something new. Or to put it in modern terms, creativity and sexual relatedness draw on the same pleasure circuits in the brain.  It is not uncommon for example, for men and women who work together intensely on projects through evenings and weekends, to have affairs. The intensity of the work and the collaboration stimulate sexual feelings.

One hopes for a climate of what we could call “adult sexuality,” in which sexual feelings are acknowledged but not acted upon. Men and women would take notice and pride in the sexuality of the other, but there would be no affairs and no sexual exploitation. Instead, as Freud suggests, these feelings would fuel the creative process. But this may be a bridge too far, We may be confined to a new puritanism, and if so, one has to ask, what costs does this culture impose?

Trust and mistrust

Many economists agree that today the U.S. economy is caught in what Keynes called a “liquidity trap.” While the Federal Reserve Bank is engaged in what is called “quantitative easing,” essentially increasing the money in circulation, banks and companies are awash in cash. One result is that the Fed is trying to “push on a string.” No amount of easing can convince financial and non-financial institutions to lend or invest the money they already have.

The preference for liquidity means that decision makers are unwilling to take the risk of investing dollars in their own projects or the projects of borrowers. One question is why there is so little tolerance for risk, or conversely so much desire for safety. There are two kinds of risks to consider, market risk and counter-party risk. The former is familiar. We can never be certain that a project will pay off. The future is unknown. But the latter risk is less common. It is based on a suspicion that appearances are deceiving. Just because a company or banks says that its earnings, cash flow, book value, are “X,” does not mean that this is so. At the height of the financial crisis, counterparty risk was pronounced, because decision-makers did not how to value the mortgage backed securities that formed such a large part of commercial and investment banks’ portfolios. The “books” could not be trusted. As a result, financial institutions stopped lending to each other in the “repo” or repurchase market. They could not trust that the collateral for such loans was properly valued. One argument suggests that counterparty risk is one reason the Federal Reserve Bank has failed to stimulate economic growth. All the money in the world cannot reduce mistrust.

Perhaps this is a reminder of how much our markets depend on trust. We trust that the U.S. government will never default on its bonds, and that it can, if it wishes, lend “its full faith and credit” to other entities who want to borrow our money.  It is also why inflation is an emotional as well as a economic issue. Should inflation devalue the dollar we would interpret this as the government’s violation of our trust in its currency. One-reason investors trusted the faulty assessment of the bond-rating agencies, such as Fitch and Moody’s, is that they are a part of a quasi-monopoly sanctioned by the government.

But there is another kind of trust that is not trust in others, but trust in oneself. From a psychodynamic point of view, a person can trust himself because he has an internalized image of his parents and siblings as loving and beneficent. The psychological equation goes something like this, “If the most important people in my life loved me, then surely I can trust my own impulses.” People fortunate enough to have had such an experience can make decisions with emotional conviction.

Such people naturally gain the confidence and trust of others, as they should. The dilemma is that sometimes people can project what we might call a “pseudo-conviction.” This is based on an internal experience of feeling defective, of being unlovable, but the resulting despair can lend an urgency to the wish that one’s needs be met. Here the psychological equation goes like this, “Only by being admired and loved will I be able paper over my defects.” We call such people narcissistic, and if they have a modicum of talent, they too can win the trust of others by virtue of their drive and sense of urgency.

The problem is that such people are more likely to play fast and loose with data that purport to measure economic value. The desire for admiration undermines their integrity.  Beginning in 2001, several years before the financial crisis, Lehman Brothers recorded a temporary loan of securities, as the sale of securities, so that at the end of each quarter it looked like they had more cash than was the case. News reports also suggest that during the financial crisis itself, Richard Fuld, the CEO of Lehman Brothers, could not tolerate the idea that the firm was worth far less than he imagined, and that this stubbornness contributed to the firm’s demise. His refusal may have reflected his own narcissistic investment in the glory of the firm, the same emotional investment that enabled misleading accounting practices. One compelling issue worthy of exploration is what role narcissism played in the run up to, and the unfolding of, the financial crisis.

Rational expectations and impulse control

The awarding of the Nobel prize in economics to Thomas Sargent raises interesting questions how about how individuals and groups think about the future. The prize, for the theory of “rational expectations,” proposes that in the aggregate large groups of people, come to a shared and reasonable understanding of the future of some economic variable, for example inflation or exchange rates.

This theory is a version of the “wisdom of crowds.” The price of a company’s publicly traded stock, it suggests, reflects all the available information about the company’s prospects. This is why for example, day to day movement in share prices are close to random. The only new information that can change the price of a stock is by definition unconnected to current knowledge, and therefore will have no systematic effect on the stock’s price. If the effect were systematic, so the argument goes, it would have been anticipated.

This feels like a heady conception, connected more to data than to experience, though it is rooted in the not unreasonable idea that “common sense” will prevail. The term “prevail” is key however. There are periods when common sense is not sensible, for example in market bubbles, when even the “smart -money” has to follow the crowd if it wants to participate in the rewards. Intelligent investors, who identified early, the high tech stock bubble at the turn of this century, and sold their high tech stocks, underperformed the market for several years. It takes time for common sense to assert itself, and in the interregnum the objective facts matter less than other peoples’ opinions. The wisdom of crowds takes a back seat to crowd psychology.

The question then becomes when is a crowd rational and when is it irrational. The common conception of crowds as irrational is based on the idea that people feel less inhibited in a crowd because they are anonymous. We have impulses which if expressed would be gratifying, but we know that expressing them would get us into trouble by inducing guilt or provoking retaliation.  The anonymity protects us.

Freud suggested a twist on this conception. We identify with a leader of the crowd who promises to release us from our inhibitions, as long as we agree to put our impulses in the service of his goals. We remain subordinates, but this time to our leader rather than to our conscience. So the dividing line between the wisdom of crowds and the crowd as mob depends on when and whether impulse control is weakened. This is why we associate market bubbles and their collapse with fear and greed, two very strong impulses.

Researchers like Thomas Sargent who believe that the market is efficient, rightly suspect that the literature on “cognitive bias” is only of secondary importance. Common sense will prevail -- except of course when fear and greed do.

The IBM report; "Capitalizing on Complexity"

IBM recently released a report, “Capitalizing on Complexity” describing the results of interviews it conducted with CEO’s around the world. Executives, they report, believe that business is going global, that customers are harder to secure and retain, and that leaders need to be creative. The IBM researchers frame these responses as part of the growing complexity of the world of business with its new and intense interdependencies among regions, industries, and markets. One result is that executives need to be more creative.

Reading the report raises the question of why the rhetoric about change has itself changed so little over the last 30 years. When Donald Schon wrote, “Beyond the Stable State” some 30 years ago, or Alvin Toffler, the book “Future Shock, these ideas of about pace, complexity and unpredictability were front and center. The continued repetition of these themes feels ritualistic, akin to a mantra.

Mantras can be invoked to stop thoughts. So the natural question becomes what is that thought that has not been admitted into this rhetoric. Perhaps the terms “interdependency” and “complexity” mask a more difficult question; what is the appropriate integration of society and economy, when is one subordinate to the other? Olympus, the Japanese camera company, fired its British CEO after only 6 months because he ran roughshod over its consensus culture.  However, urgent were its problems-- net profits had fallen 85% -- the social context imposed constraints on how decisions were to be made and at what pace. Japan is in fact the test case of the stalemate between society and economy. Its last two decades were “lost” economically, because the state could not abide the destruction of the country’s banking system and all the economic and social relationships this system supported.

Of course, each CEO when looking at his or her own situation has to be more nimble and creative. And there is little doubt that deregulation over the last two decades has unleashed creativity. But if the IBM researchers are serious and want us to confront the new interdependencies, they should be asking; “what are the collective challenges we face.” What systems should we use to regulate our many sided relationships, economic, social and psychological, with each other?

Wilfred Bion, the psychoanalyst who studied group dynamics said, “man is at war with his own groupishness.” We need the group to acknowledge our worth, but we hate the group for being able to do so.  This conflict results in unconscious dynamics. Perhaps the repeated mantra of “interdependence and complexity” is a psychological defense against really looking at our fundamental dependence on one another for the fulfillment of our individual lives.

The Market’s Ineffability

John Paulson, the famous hedge fund owner who successfully shorted the housing market in the run up to the financial crisis, made some wrong bets recently. The economic recovery and inflation he anticipated have not happened. As the New York Times notes, his bet on gold was right for the wrong reasons. Gold rose, not because of inflation but because of chronic uncertainty. It is now falling. His Advantage fund is down $6 billion and many of his investors may decide to withdraw their money.  

One source of the market’s emotional appeal is its “ineffability,” the experience that we as traders and investors are subordinate to its judgment and its surprises.  Leo Melamed, the entrepreneurial engine behind the Chicago Mercantile exchange, the exchange that first introduced currency-futures trading, writes about the “beauty of markets.”  “But the important effect of trading is that it keeps me linked to reality and truth. The beauty of markets, and for me their quintessential characteristic, is that they are the final determinant of veracity. Washington policy makers, Tokyo or Berlin ministers, officials of governments the world over can try to tell the world whatever they want, but the markets tell the world the truth…their opinion doesn’t count a tinker’s dam unless or until it is endorsed by the market.” (Melamed, Escape to the Futures, 1996, p. 436).

It is easy to dismiss this as an exaggeration or a cover-up, but Paulson’s recent failure does suggest that the market’s truth can elude the most talented investor. One sees in this quote as well the pleasure associated with feelings of “awe.” The feeling of awe I suggest is derived from the self-organizing property of the markets, the fact that its logic is formed behind our backs and yet is built by our own hands. The pleasure we take in discovering self-organization is found in many places. People interested in group dynamics speak of the “music of groups," biologists are fascinated by the self-organizing dynamics of a bee colony, scientists by the logic and integrity of a natural ecology, legal philosophers by the evolution of common law, and even Marxists by the hidden hand of history. Awe emerges when we realize that despite our most purposeful efforts the logic of a self-organizing system takes us to destinations we never anticipated. No wonder critics of markets describe the love of markets as a kind of religious fundamentalism.

Perhaps this provides some insight into the rage people feel upon discovering that markets are fixed and manipulated. It represents an attack on our common and shared subordination to the truth and thus to our common fate. It is no longer the great equalizer. The resulting feelings of betrayal—the game has been rigged- may be more important than the anger at oversized compensation and unfairly distributed rewards.

Stepping in the same river only once: The legacy of Steve Jobs

The reflections on Steve Jobs’ life highlight his emergence out of the counter culture of the 1960’s. Though he was born at the very tail end of the baby boom, the Beatles, Buddhism and the Whole Earth Catalog inspired him. It is interesting that in the 1960’s a radical Marxist philosopher, Herbert Marcuse, published an essay on “the new sensibility” of the period, arguing that through its expression; “Technique would then tend to become art, and art would tend to form reality; the opposition between imagination and reason, higher and lower faculties, poetic and scientific thought, would be invalidated.”

The prose feels utopian, but surely one of Jobs’ great achievements was to bring aesthetics and design to the new technologies, to link beauty and utility.  The connections between Apple’s products and the counter-culture run deeper. Jobs showed how technology could be an extension of human abilities, echoing Norbert Wiener's wish thirty years earlier, that with the new technologies, which he called “cybernetic,” we might witness “the human use of human beings.” By developing the graphical user interface he brought “power to the people” in the sense that the desktop computer was easy to use and extended a person’s reach into the World Wide Web. Jobs, of course, was acutely conscious of these linkages, reflected in his famous -- shown only once—commercial, in which he equated IBM with Big Brother, the leader portrayed in Orwell’s dystopian novel of a totalitarian world. Interestingly, the 1960s was also the time when organizational development, a technology for corporate change, with its own utopian strivings for the end of hierarchy, also emerged.

These connections should lead us to be cautious about thinking that Jobs’ achievements might be duplicated, or that they could become the basis of a new business model. It is the dream of every marketer that his product or service speak to the consumer’s soul, that it express the customer’s way of life. But in truth, brands rarely achieve this unity of product and user. Think of how the tag line of the early sixties, the “Pepsi generation” was rendered. It too referenced the culture’s consciousness of a “new generation” but it referred to a substance, flavored sugar water, and a use, drinking, which were utterly conventional. This kind of advertising succeeds more by stimulating anxiety – “am I a member of the new generation or am I out of it,” than by extending or amplifying a sense of identity.

Steve Jobs strode on the stage just when the question of how the new technologies would reshape experience was percolating through the arts, theater, and politics. It was the prelude to the postindustrial revolution. He had the genius to position himself smack in the middle of this burgeoning cultural debate and expressed the issue pragmatically in product design. The counterculture was the wind behind his back. I think this is the case where you can only step in the same river once.

Steve Jobs is dead

Naturally, many of us are thinking of Steve Jobs’ death.  It came before his time. He had a genius for creating pleasing consumer products that stimulated only engagement, never resistance.  But apparently his own temperament and relationships to those with whom he worked was quite different.  There he thrived on conflict and contest and could be experienced as a bully.  The ethos of humanistic management suggests that he could not have possibly motivated followers, but the people who worked for him must have stretched themselves far more, and reached goals far greater than they could ever have imagined. Perhaps this puzzle reveals how much people want to belong to and identify with a success story.  They are willing to tolerate considerable abuse to be on the winning team. 

Why should this be?  Perhaps as we mature, and are no longer at the center of our parents’ loving world, we come into touch with our anonymity, so we yearn for one bite at the apple, our “one minute of fame.”  Steve Jobs is dead, yet the world will go on without him and Apple continues to exist as a company with a valued franchise.

If the marketplace is a network of transactions, and each of us are nodes, we do have to live with its indifference toward us. This has always been a hard pill to swallow and is one reason why the reactions against the market, whether from the left or the right have been so powerful.   Maybe there are times, as some economists claim, when the market is “perfect.” But it is certainly not natural. It is an artifice, a cultural achievement which may go against our nature. We really need to understand the implications of this.

For the love of money

At the conclusion of the wonderful film, The Social Network, the fictionalized Mark Zuckerberg is seen trying to unsuccessfully “friend” a woman who had rejected him at the beginning of the film because, in her eyes, he was a jerk. The simple moral message is clear; “Money can’t buy you love.” As successful as he is, the woman will always consider him a jerk.  So is there a desire for money?

Freud says somewhere that there is no desire for money, because desire is built upon our earlier experiences as infant and children, and when we are young, we have no conception of money. This suggests that the pursuit of money is indeed the indirect pursuit of love. One can see the problem here. The love attendant upon getting a lot of money is always suspect. Aren’t people pretending to love you to profit from their connection to you? This gives an account of why the pursuit of money might become compulsive, and why those who pursue money seem greedy. As you get more money, your grow more suspicious of others who wish to connect to you. So you need even more money to extract the signals of love from others. So greed is not really a hunger for money it is the unsatisfied need for love.

It does not have to always turn out this way of course. For example, the wealthy hang out with the wealthy, they gain some modicum of appreciation through philanthropy, or if they are “self-made,” they take pride in their achievement, that is they love themselves. One suspect that Steve Jobs, who is not by most accounts at all philanthropic, fits the last category and rightfully so. He is a genius!

But one has to ask how this dynamic works when it becomes general. What happens in a bubble when becoming wealthy seems within easy reach?  People become wealthy on paper without experiencing the crucible of hard work that should accompany real money-making. They are, in this sense, immature money seekers.  The power they feel to spend their wealth becomes its own aphrodisiac. They are in love with themselves, another word for narcissism. The psychodynamics of the bubble is therefore the psychodynamics of narcissism. Perhaps this gives some insight into why bubbles will always be with us. Who can resist the siren song of being at the center of a loving world?

Markets and memory

Kahneman and Tversky, two founders of the behavioral economics school of thought, conducted a simple experiment to indicate what they called the “anchoring bias.” People were asked, “How many African nations belong to the UN?” Before they answered, the experimenters spun a “wheel of fortune” with numbers on it. Those who saw a high number on the wheel tended to guess high on the number of nations, those who saw a low number, guessed low. The wheel had nothing to do with African nations and the UN, hence their term “an anchoring bias.” The wheel had established an irrelevant but compelling anchor.

This bias is among the many “cognitive biases” researchers have used to critique the conception of economic man as rational. But I think the term “bias” is itself biased. It suggests something that is misdirected and off-center. Anchoring is in fact one example of a much larger phenomenon; human beings have memories, these memories are linked to a sense of identity, and identities are never readily relinquished.

There is an even older saw in economics; “disregard sunk costs,” which means begin everyday as if you were born anew and optimize your allocation of capital accordingly. In other words, “what’s bygone is bygone.” Were this rule followed, all markets would clear immediately, housing would drop to its market clearing price however low, banks would write down debt to sell it on a secondary market at a few cents on the dollar. Kodak, a company that has struggled for over a decade to find its way into the digital age, and is about to run out of cash, would shut down tomorrow and simply auction off its over 1000 valuable patents, returning the money to shareholders.

But markets don’t clear like this. People have memories and desires. The ultimate anchor is, “who I was, and whom do I hope to continue to be,” e.g., a Kodak scientist, a responsible leader in Rochester, New York, where Kodak is headquartered, a home-owner in my community. Perhaps the only market that may not have a memory is the stock market itself, which according to many analysts moves randomly from day to day. But if the market for capital assets clears, while other markets, such as the labor market and the housing market, don’t, we are set up for gridlock.  If Kodak’s share price continues to fall, some other company may acquire it to get its patents, thereby avoiding an auction, and promptly lay-off most everyone, many of whom will not be able to sell their houses or be willing to accept minimum wage jobs. 

Karl Marx once famously characterized capitalism as a system in which “all that is solid melts into air.” But this is correctly understood as a fantasy about a society whose members have neither memories nor desires.