Mind Sciences spell out financial crisis’ psychological roots


Judge Richard Posner ’62 with Prof. Jon Hanson at the Mind Sciences Conference
Judge Richard Posner ’62 speaks at the conference.

The Project on Law and Mind Sciences held its third annual conference on Saturday, March 7, 2009, entitled “The Free Market Mindset: History, Psychology, and Consequences.” The surprise addition of remarks from Judge Richard Posner ’62 gave the audience a chance to learn about his thoughts on the causes of the current economic turmoil and his views on how judges make decisions.

Posner criticized the Congressional reaction to the financial crisis for being too focused on the greed and stupidity of bankers. He argues that it is natural to ignore warning signs in part because it is hard to get recognition for averting an event which does not occur. Posner also discussed the resurgence of interest in Keynes and the difference between risk and uncertainty. Risk, he says, involves probability, while uncertainty means it is impossible to predict outcomes. According to Keynes, the existence of uncertainty makes it important to for market actors to be confident. Although economists tend to be overconfident and often make theoretical assertions without the support of empirical research, he emphasized that economics is indispensable in addressing modern problems regarding property rights and weighing costs and benefits.

The conference explored the psychological dimensions of the current economic situation through four panels examining history, economics, psychology, and law and policy. In his introduction, Professor Jon Hanson, Director of the PLMS, showed a video of Alan Greenspan testifying before the House Oversight Committee in October 2008. Greenspan expressed shock at finding a flaw in his belief in the self-regulating power of financial institutions and rationalized his views by stating that “everyone has an ideology.” The goal of this year’s conference, Hanson explained, was to bring economists, social scientists and legal scholars together to help answer the implicit question posed by Greenspan’s testimony: where did we go wrong?

The first panel sought to place the free market ideology in historical context. HLS Professor Christine Desan illustrated how markets are shaped by background legal rules through the example of the shift from metal coin to paper money. Money based on contract she said, supports the free market mindset.

Professor Bernard Harcourt of the University of Chicago compared examples from eighteenth century Prussian markets and the Chicago Board of Trade to show that the “free market” may not be so free after all. He used the term “neoliberal penality” to describe the free market mindset as an idea of natural order within an autonomous economic system, sharply distinguished from the sphere of state penal action.

Harvard economist Stephen Marglin began the second panel by arguing that market economics undermines community solidarity. He indicated that foundational assumptions in the field of economics promote social isolation by defining people as consumers and prizing efficiency over deep social bonds. Boston College sociologist and economist Juliet Schor discussed economists’ blindness to science and how markets affect the natural world, arguing that while ecological discourse is preoccupied with “green” technology, too little attention is paid to the scale of consumption and production.

Professor Douglas Kysar of Yale Law School began the law and policy segment, claiming that environmental law has become excessively preoccupied with efficiency and scaling back government involvement. This focus has caused us to lose sight of important goals reflected in foundational environmental laws: precaution, risk aversion, and protection of future generations and non-human life. Professor Hanson followed with a presentation exploring the psychological phenomenon of “reactance.” Commercial advertisements commonly depict an oppressive figure-often a woman such as a mother or girlfriend-against whom the protagonist rebels by using the advertised product. This illustrates the intersection of stereotypes about choice and freedom, and “reactance” against perceived constraints. Hanson suggested that reactance is also used to promote politicians, policies, and legal theories. He then summarized evidence that he and 3L Mark Yeboah have collected demonstrating how reactance can be primed implicitly, leading individuals to exhibit stronger preference for markets.

Four social and psychological scientists, Professor Sheena Iyengar of the Columbia Business School, Professor of Social Theory and Social Action Barry Schwartz of Swarthmore College, and Ph.D. students Nicole Stephens and Jaime Napier presented research about individual freedom and choice. Prof. Iyengar argued that too much choice can cause problems, as individuals presented with too many options tend to experience negative emotions and often “choose not to choose.” Prof. Schwartz described how currently uncontroversial assumptions about self-interest can be self-fulfilling. In attempting to encourage positive behaviors with money, policymakers may actually change the way people view their activities, causing them to focus on economic self-interest to the detriment of motives such as social responsibility. Stephens, a Ph.D. student in social psychology at Stanford, showed the experience of choice to be a function of class. Her research has employed working class subjects rather than the typical college student demographic, and her results challenge the assumption that choice leads to positive outcomes and allows expression of individuality. Jaime Napier, Ph.D. student at New York University, discussed her findings that conservative ideologies can have a palliative function by justifying social and economic inequality, leading to greater happiness in life.