Friday, September 19, 2008

Psycho history

What else do you call it when the Dow is down 500+ points Monday and up 400+ points Thursday (and up another 300+ points so far today, Friday, as I type)? When panic and rumor drive the markets? When the government and central banks make enormous new funds injections, nationalizations, and regulatory changes on a daily basis?

Psychohistory, of course, is the imaginary future social science at the heart of Isaac Asimov’s Foundation series. Blending history, sociology, and statistical analysis, psychohistorians predict the course of societal evolution, and even find the occasional tipping point from which events can be nudged onto a different course.

We are far from having such abilities.

Giant financial companies like Fannie, Freddie, and AIG, with trillion-dollar portfolios, are built on statistical analysis. History, one hopes, plays some role in executives’ understanding of current events and future prospects. History also guides government policies towards markets and regulation. I’ll assert that the processes of any large organization -- whether a corporation, government, or market -- are, at some level, a study in applied sociology.

(Some might argue that the credit crunch and attendant market implosion reflect economics, not sociology. To that opinion, I would answer: Economics describes how a society agrees to allocate its collective resources. If/when/how society regulates its economic institutions -- i.e., how it sets government’s role -- is likewise part of the social compact. If economics isn’t soc, it’s surely akin.)

Now giant financial companies are falling like dominoes. They are, to some part, victims of their own greed -- but also of investor panic. Old fashioned, rumor-driven runs on the bank. Mass phenomena. Within the realm of sociology. And the experts -- inside and outside of these companies -- didn’t see it coming.

Where was Hari Seldon when we needed him?


Ed Bear said...

Actually, the statistical analyses were the problem because a: the models were being fed "massaged" data which made the risks look lower than they really were and b: the models' relationship to real economic facts was in many cases tenuous at best.

If you go through the archives of a blog "The Daily Reckoning" you'll find warnings of a meltdown going back five years and the alarm being run with increasing vigor over the past six months.

Edward M. Lerner said...

Thanks for contributing -- two Eds are better than one. (Sorry. Couldn't help myself.)

Certainly there were lights flashing before now. To my mind, the warnings and alarms underestimated the problem (the scale of which, I suspect, remains to be discovered). And the early alarms failed to convince enough people (or to waken the regulators asleep at the switch).

Psychohistory in the Asimovian sense -- if we had it -- would have been much more convincing.