Andréa Naccache
psychoanalyst
THE MARKET IS A FOOL
(or A Letter to Investors)
January-May 2009
In this article I will defend that improving legal
regulations is nothing but a palliative response to the
current financial crisis. People can avoid getting sick
from their losses (not sad, but sick), if they are
responsible for their own limitations. Rules are not
limits. Legal rules hide human limits.
The world will not evolve past its current state of
crisis by using the same thinking that created the
situation
- Albert Einstein
Since this profound financial crisis broke out, most of the media has been publishing
solutions to it. Suggested responses seem to point at two resources: a better legislation or
broader information for investors. In fact, the most comprehensive examiners insist on both.
Regulation should guarantee sufficient information - and punishment. The two solutions walk
hand in hand. On crisis prevention, we seem to be on a one-way street.
Both regulation and information are enlightened ideas – in the sense that they follow
the principles of the Enlightenment, the philosophical background to modern State, Law, and,
of course, Economy.
However, one does not have to be an Einstein to understand that regulation and
information are the very roots of the crisis. Right there, we find a matter of lights and
shadows, in what constitutes our society and mutual trust.
Much of the Enlightenment thinking considers human beings as individuals caring for
their own security. Of course, one primary assumption of the Enlightenment is that we need a
clear sight in order to be safe. We must search for light, avoid darkness and look for
guarantee when in shadow.
Information and regulation are both associated to this metaphor. When we hold
information, we are in the light. It may be regarded as our first source of security. When
relating with others in business affairs, what we have as information is the part of a deal in
which the sight is clear, for Adam Smith’s sake. If I see the product I want on your store
shelves, and you see my money, we have an easy deal. Smith claimed that one condition to a
good market was that parties be sufficiently informed. That is when the “invisible hand” could
do its best for everyone.
Regulation, in its turn, comes as warranty in case of shadows. It is based on the
assumption that the State will take care of us in matters that we cannot see. We hope that
banking finances will be healthy. We hope that signed contracts will be properly carried out.
May the State help us. The philosophical explanation, if we wish, is in Thomas Hobbes. In
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Andréa Naccache
psychoanalyst
natural conditions, Homo hominis lupus, “man is a wolf to man”, and the State was built for
the rescue. It is the State that ultimately breeds mutual trust – at least, presumably.
Looking at the present crisis from the information and regulation perspective has led
many analysts to say that what we have now is a trust crisis. However, let us examine the
current scenario closely. If we are to estimate it, there are grounds to believe that there have
never been as many rules as today, in every country that is financially relevant. Even the
usually liberal States now probably have more regulation and economic discussion than ever
before, just as their insurance systems are more articulated and guaranteed, with information
technology allowing instantaneous communication around the globe and detailed calculus.
There are agencies, surveillance, ubiquitous technology and protocols, plenty of paperwork.
An expensive structure is available to guide stockholding retired old ladies. Internet is
accessible for more people than ever, illuminating the conditions of contracts, allowing
comparison, choice, chatting, journalistic and expert analysis. Some specialists will surely say
that Bush’s government has taken bad care of the financial system, and that it was not as
safe in the end of 2008 as it was in Clinton’s mandate. Other may criticize – retrospectively –
Clinton’s decrease of regulation for some financial operations. Yet, there was always further
science being made. Always boosted enlightenment.
First, we may consider that, in times when financial audacity paid off, and we had that
for several years, the boldest professionals were being progressively promoted to heads of
businesses, while the safest positions were regarded as merely a source of comparative loss.
The most precise mathematics suggested not only to governments, but most importantly, to
companies, that the market was ready for daring policies. Experts could not disagree much.
Until the system eroded.
Now, some specialists will insist that, with new and revised regulation, this crisis is
not to happen again. And they may be right: this crisis, with the same very triggers, this kind
of fraud or risk abuse, will not be repeated because of the protective measures that will be
taken from now on. But there is no way to prevent, through regulation, some other similar
crises. Those specialists are like brain doctors suggesting we treat the brain, or heart doctors
suggesting we treat the heart, when the whole body is compromised, and every single cell
must undergo a metabolic change.
By looking at the problem with enlightened eyes, and blaming it all on legal flaws,
rather than reinterpreting investors’ responsibilities and limits, they are prone to treat the
crisis with “the same thinking that created the situation”.
It is not all about rules
In other words, despite those who believe that the solution to this crisis is to make the
giant regulation systems even bigger, there are strong reasons to consider that we are
already more enlightened than ever, with rules and information. Actually, just a few months
ago, we felt so safe, regulated and informed, that we trusted the market more and more. It all
seemed so right. It was paying back so well. What happened after all?
Human beings are not modern. We are incompatible with the system. We simply
cannot do our homework well enough. We do not double-check our choices. We do not read
enough. We are not completely educable. The old ladies have heard through the grapevine
that they should not trust anyone with their investments, but they insist on handing them to
some manager. We submitted our money to mutual funds, but they did not look after us so
carefully, and the life-saving State got distracted exactly when a bad bet, or a fraud, was
taking place. Of course!
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Andréa Naccache
psychoanalyst
That is not Murphy’s Law. It is Freudian logic. Nothing went wrong. It is expected that
expectations be frustrated. That is just why they are not called certainties.
At this point, we should pay attention to simple patterns of social organization. For
instance, we cannot act against rules if there are no rules. In fact, at the very moment we
create rules and expectations, we automatically give birth to contraventions. Whenever there
is a rule, we are bound to find some people willing to follow it, while others will definitely
infringe it. If that does not happen, we will be looking at a useless rule. It is actually imprecise
to state that a transgressor acts “against” the rules, since rules foresee and constitute
contraventions.
Therefore, it does not make any difference, if the present crisis is a matter of unfortunate
decisions, contraventions (i.e. frauds), or both. In short, if we now think that something went
wrong in the finance world in the last years, that is because we relied on a definition of what
was right that could not be fulfilled.
We did. We thought information and regulation were the right things to have. And we
thought we had them. We are now trying to reinforce these resources to correct the mistake.
Yet, more regulation, while providing protection, also fosters more blind trust and, logically,
more contraventions.
Would we be capable of reexamining our definitions of “right”? Could we consider
that maybe nothing was wrong with the regulation and information we had before? Though
they could certainly use some fine adjusting now, I strongly suspect that it would only serve a
palliative effect. Bottom line, however, can we deem they may not be the best medicines for
our sickness at all?
The essential foolishness
The most sophisticated studies into contemporary law understand that there is no
such thing as a gap/antinomy-free legal system, which means that, while many issues are
inevitably left out of regulation, some rules will simply display the opposite of others on the
same matter. It is not a fault; it is inherent to the system. The more specific the rules, the
more analogous situations are lost. One recently noticed example in Brazil happened on the
soda and water markets. As the tax load is heavier on sodas, one company launched a
flavored sparkling water, which was supposed to get a tributary treatment as light as the one
on water. Of course, within some time, soda companies, discontent with the smart
competition, managed to have that flavored sparkling water classified as soda by the
government. Yet, gaps and contradictions of the legal systems are constantly explored in
situations alike, not always with ulterior adjustment, sometimes creating new categories and
legal conditions. No language system can be complete, in terms of capturing the real world.
It is logically inevitable for legal gaps to be explored – just like hackers do to digital security.
Even if the legislator tried to fill a produced gap by outlining fully comprehensive rules – for
instance, by posing that all beverages should be equally taxed – some other gap, at some
other point, would arise.
In sum, no legal system is gap-free. The larger the system is, the less visible the
gaps are to the legislator, but the more visible to interested agents of the people. The bigger
the giant, the less he sees who is running between his legs.
There again, we should not worry so much about contravention in our present system.
We do not need to feel robbed. Gaps and antinomies may have been just enough to cause
the results we have had with this financial crisis.
Moreover, it is precisely because there is a well-regulated financial market in Hawaii
that, on the independent neighboring island, it will be interesting to offer trades under less
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Andréa Naccache
psychoanalyst
information and fewer rules. The film industry is moving to Canada because L.A. regulations
have grown economically unbearable for many moviemakers. Why would it not happen with
financial investments?
The riskiest bonds will always pose a temptation to many people. A protected and
covered market is also colder in interest. It is safer for the average investor, but it is less
appealing for the more ambitious one. And the ambitious will migrate to other papers, in other
places, that will, soon enough, be secured on the same system that insures the retired old
ladies funds. There is just no way out. That is a trend.
So, let us take for granted that six months ago we relied on as efficient regulation as
possible. Mistakes and risks are not undesirable on markets; on the contrary, they are
essential to them. Market players head for risk. Some people are willing to take a little bit of it
– putting their money in the hands of a bank clerk already gives them the chills. Some people
are just up to more.
Praxis
The so-called “risk” on markets is the essence of human relations. If we had a
perfect system where information reached the ones in search for it (and they paid due
attention, and were hypothetically aware of their needs), and if we had a perfect access
market in which people could acquire the goods of their best choice, than prices would tend
to be exact, in constant natural conditions. As a matter of fact, once established, this plain
system would dismiss most of human participation, simply feeding us like animals. So much
for an invisible hand!
In that situation, there would be no such thing as a “market” – nothing of a
“marketplace”. No need for meeting and negotiating. Not much to talk about and no real
challenge in doing business with each other. No public space, no gathering place, no dealing
with strangers, no facing different choices or personal decisions. No having to hand your
money to someone else in exchange of an almost unintelligible piece of paper. No coming
home at the end of the day happy about a good deal, or sad about a bad outcome.
There is a Greek word for what would be missing if this absurd possibility of totally
efficient regulation and information happened. It is “praxis”.
In his Nichomachean Ethics, Aristotle defines praxis as the action performed among
men, which is different from creative and specifically productive activities, referred to by the
word poiesis (1140 a). Architecture and arts are considered poiesis, for instance, while
political activities and conversations are praxis. Hannah Arendt analyzes this concept in her
book The Human Condition. She explains that action (praxis) is “the only activity that goes on
directly between men without the intermediary of things or matter, corresponding to the
human condition of plurality, to the fact that men, not Man, live on earth and inhabit the
world” (p.15, Ed. Forense Universitária, in Portuguese).
In other words, praxis is this confusing activity we people do when we are together.
We talk and do not fully understand each other. Then we make an effort. We rephrase our
ideas, we try to make each other out, we explain our values, we defend our positions, we are
misunderstood, we give up on some fights and go all the way in others. We have to hold
ourselves from hurting someone else at times. And occasionally, some of us will just kill.
Then we punish killers. We discuss justice. We will never be done with discussing justice and,
actually, prices either. We bargain. A lot of rain follows and reinvigorates some crops, but it
kills animals, and we have to renegotiate. Praxis is in the never-ending contingency of human
interaction.
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Andréa Naccache
psychoanalyst
Meeting, understanding and misunderstanding, striving to do better next time,
whatever your intentions are, that is how we develop human qualities – and democratic ones,
as a matter of fact.
It is important that the market remain foolish, and uneducable, so that people go on
unable to count on it. If we refrain from looking at this present crisis from the perspective of
blame, crime and risk taking, we will see that, as a whole, it points out that each one of us is
in fact alone with the responsibility for the use we did of this inherently cracked system. May
we start depicting the cracks.
The market is foolish, flawed, open to variation, which is just what features it as a
human phenomenon. When we win what we could have lost, when we lose a relevant
investment, when we trust others and attain good or bad results, we realize our human
condition. We only like to win because we could have lost, and every thoughtful investment
hides a throw of dice behind it.
Let us thus never read the whole manual of investments, and never stop trusting
others, because we shall never stop making mistakes, anyway. Rather, let us count on
mistakes, from now on.
We will be more responsible and less nauseated by losses, by bearing in mind that we
cannot rely on the “invisible hand”. Not only is it invisible but also blind.
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