Why Opposing the Bailout Hurts So Good

With so much talk of doom, gloom, and Great Depressions, why do so many Americans oppose the just-passed "bailout" plan? Is the lack of urgency rooted in a lack of understanding or are there other forces at work?

Dan Ariely is a professor of behavioral economics at Duke University and the author of Predictably Irrational: The Hidden Forces That Shape Our Decisions. I recently talked with him about some hidden forces shaping the current financial crisis.

Mac Greer: You have a lot of Americans seeing this as a Wall Street crisis and not so much as a "Main Street" crisis. What do you think it will take for most Americans to reach some sort of a consensus that this crisis really requires immediate action?

Dan Ariely: Well, one thing is we have been telling a lot of people for a long time that whatever they have in the stock market is about long-term strategy and not any short-term things. So the current change in speak, in some sense, doesn't seem to be very effective. We have been telling people for 20 years the money you have in the stock market is about retirement, it is not about anything urgent. Don't look at it. It is all about long-term strategy. It is very hard to convince people that all of a sudden that it is short term. That is one thing.

The second thing is that nothing has changed much in the short term living of people. In some sense, this is smaller than the effect of the increasing gas prices.

Greer: Yeah.

Ariely: What is happening? Basically the thing is we are creatures of habit, if you think about it. The best predictor of what we will do tomorrow is what we did today. That is it. Habits are good and bad. They are good because they help us save energy. We don't have to think about it. We don't have to contemplate every cup of coffee if it is worth it or not. As a consequence, we get into habits.

Now the question is, when will we change habits? I think we change habits only when we have to. Right now, because salaries have not changed and prices in the markets have not really changed, we don't have to change habits, so we don't see anything happening. The moment we will start seeing those, the moment stores will be closed, people we know will start losing their jobs, anything like that will happen, people would revise -- and revise big time.

But the other thing is, I think there is a huge sense of kind of justice. And people have been watching executives on Wall Street making a lot of money for a long time. There is clearly a feeling that they haven't produced anything useful to justify that amount. There's a kind of happiness with the fall of Wall Street.

Greer: A little schadenfreude. I think you're right.

Ariely: So I think it is a very complex, very complex phenomenon. The growth of the economy last year was mostly in the financial sector. Think from the perspective of an individual who sees the salaries, who sees the amounts of money and they think, what are these guys doing? They are managing my money that I worked very hard for and every year they take 1% out of it for the privilege of doing what? Following the S&P 500? So there is a sense of justice.

There is actually a very interesting paper by a group of Swiss economists who basically looked at people's desire to punish and there is a game we call the trust game. Imagine that you and I each get $10. And you get to pass to me $10 or you can keep your money. If you keep your money, the game is over. If you pass me the $10, the money quadruples on the way to me, so when I get it, I have my own $10, plus I have the $40 that you passed me. Now I have $50 and I can decide one of two things. I can either send you back nothing or I can send you back $25. If I send you $25, everybody is better off and everybody is happy. What happened if I send you nothing? You are unhappy, right?

Greer: Right.

Ariely: But now I give you a chance to punish me. I say, look, if you spend a dollar, the experiment will take $2 away from me. Another question is, would you be willing to suffer to punish me even more? And what happens is a lot of people are willing to punish other people, even when it costs them money.

What is more interesting is that this experiment they did was actually in the PET scan … So basically they measured what parts of the brain work as people think about it. It turns out that the part of the brain we call the striatum, which is usually related to reward -- it is the place that gets activated when we eat food and get sex and heroin and stuff like that -- is also activated when people make decisions about punishing others.

So the interesting thing is that there is some kind of pleasure in punishing others who have kind of violated some social fairness or norms.

Greer: So that may explain why I wouldn't support legislation, even if I think there is going to be some short-term pain for me because at the end of the day I think the chickens are coming home to roost and these fat cats on Wall Street had it coming. It is going to hurt them more than it is going to hurt me, so it is going to be worth any short-term pain that I have to endure.

Ariely: That is exactly right. So we are willing to lose money, the people with small portfolios are willing to lose a little bit of money if these guys would really hurt.

For more bailout or behavioral Foolishness, check out:

 Mac Greer  knows that The Motley Fool is investors writing for investors.


Read/Post Comments (22) | Recommend This Article (16)

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  • Report this Comment On October 06, 2008, at 12:48 PM, jsl4980 wrote:

    Again people are completely missing the argument against the bailout. Its not some childish plot of revenge or moral crusade.

    Its that a lot of people understand that the government has no money. We're running the largest deficits in history along with incredibly low interest rates. If they keep printing more and more money that will lead to greater inflation. Which will lead to the destruction of the value of the dollar, which will lead to a much larger financial crisis.

    Congratulations on getting an outside opinion that completely agrees with you, brilliant journalism...

  • Report this Comment On October 06, 2008, at 1:01 PM, dr8ke wrote:

    You're also missing the fact that this is the Government behind the bailout. Sure, perhaps the government has the resources and the ability to make the situation better - but will it? The government can only do two things well - spend money and screw things up. So 5 years from now when we're all millionaires and still can't afford a value meal, even the wooden arrow makers will wonder what the $&*#! we were all thinking!

  • Report this Comment On October 06, 2008, at 2:01 PM, JuletteMillien wrote:

    I will look into this research - that we actually get some pleasure from punishing.

    There is research that demonstrates something else... that serotonin is released (makes us feel joy) whenever we perform or receive an act of kindness, AND serotonin levels are increased as well for those OBSERVING the act of kindness. Pretty cool.

    I didn't want this bailout, because it made no financial sense.

    Emotional maturity demands that we actually have a reason for choices...not ideology, not feelings, certainly not politics...Oh my gosh, then this would require us all to actually read and know real information.

    Yikes, what am I thinking! I forgot that we have been dumbed down for a reason. Well at least somebody is thinking and benefiting from our feelings and opinions.

    I am deeply annoyed...can you tell? :)

  • Report this Comment On October 06, 2008, at 2:24 PM, richman1211 wrote:

    I might look into this research as well.

    I want to see if they studied the dynamic of influencing someone else to give their money to someone else to keep their own money safe.

  • Report this Comment On October 06, 2008, at 3:51 PM, whereaminow wrote:

    LOL, well this is interesting but not relevant.

    Unless, of course, you are priming us to support YET another bailout now that wall street has plunged again.

    "A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank." - Dr. Ron Paul

    www.mises.org

  • Report this Comment On October 06, 2008, at 4:29 PM, Joelshann wrote:

    Great--thanks for nothing. How about, government wasting all our money! It's not about whether I lose a buck to get someone to lose 2. I want to stop loosing money at the expense of Governmental attempts to what? Save the day?

    Not likley.

  • Report this Comment On October 06, 2008, at 5:00 PM, keddie1 wrote:

    This piece was first presented on Market Place (an NPR Program) last week... The point of the piece was ... How in the heck is Congress going to sell the Bailout plan to the American Voter.... that all the article was originally about... The only point the folks at Market Place were trying to make is that there had to be some immediate gradification in the bailout for the voter.... and the concept is that spanking the CEO by creating a $500K threshold and nipping a bit at the golden parachute is the spanking... and the revenge....

    that's all the original article dealt with...

    As presented on Market Place it didn't imply that People were for or against the bailout for strange reasons..... or that the American voter is dumb....

    They were just making the point that Congress deliberately sprinkled in a little revenge in an effort to soften the tax blow ... or if you are against it... to soften that they (our representatives) voted for it anyway...

    As for what the MF crew is trying to do with the article.... haven't a clue...

    I suggest that the article is amusing... and not much more... Imaging the top CEO getting a thrashing from Sister Agnes Trese..... smile... and move on...

  • Report this Comment On October 06, 2008, at 5:06 PM, burneb43 wrote:

    My own opposition to the bailout is NOT based on punishing the guilty, tho that is still a pretty good reason in hopes of discouraging future such greed, crookedness, and stupidity.

    My concern was whether the Fed had the political will to handle it in the public interest. We are supposed to get compensated from future profits of the bailed out firms, but 2 things are predictable:

    1-- they will try to reorg and cook the books so that future earnings will mysteriously dissapear and not pass to any entity or line item the government can claim against. Hollywood studios and music labels are infamous for these tricks.

    2-- if and when any bailees begin making profits, Republican congressmen will howl that any now owned by government shouldn't compete with private industry, and demand they be sold. Well-connected private interests will be allowed to buy for pennies on the dollar, and taxpayers will be cheated again.

  • Report this Comment On October 06, 2008, at 6:35 PM, PueoFool wrote:

    I would give 90% of my investments to see the Wall Street fat-cats get punished. Oh wait....my portfolio IS already down 90%, what?? I just paid ~$7000 in taxes to bail who out? What?? And, I have to move out by when?

    This is the stupidest thing I've ever experienced in my entire life! It doesn't matter if we're willing to suffer, we're already there!!! Its time to start the punishing! That's the only thing that will make me feel better about losing my career, retirement, home, etc.

    Meanwhile if your any texas oil family, you're still richer than you've ever been.

    We need to literally take the money out of the bank accounts of the rich. I don't care if you redistribute it or not, anyone who made more than $100 Million dollars between 2000-2008, should have to pay for this deficit. The Bush policies have been an act of 'social terrorism', and just like terrorists, we should freeze the bank accounts of the fat-cat social terrorists.

    Either way, freedom is for no one. Some one has to act against their will, I say make the rich pay. They have all the money and there is less of them than us! Let's gang up on them and take our money back!

  • Report this Comment On October 06, 2008, at 10:12 PM, maiday2000 wrote:

    PueoFool,

    I hope your post was hyperbole, because no one in their right mind should listen to anyone who claims to be down 90%? Only someone who has a gambling addiction or is incredibly stupid could possibly be down that much in this market.

  • Report this Comment On October 07, 2008, at 12:35 AM, Azbjorn wrote:

    Fellow citizens, please check out the Naomi Wolff interview at

    http://www.911truth.org

    Everything could get very local and vocal real quick. I also expect a complete withdrawal of our military from Central Asia.

    Bear in mind the TIMING of all this, and I believe I see a pattern to 9-11 itself. the sense of urgency, the panic-ridden verbiage on all lamestream media, and also the 1st Brigade was activated at HQ NorthCom in Colorado, AND we are still 3 weeks from the election. I begin to doubt that we will even HAVE an election.

    Then again, I could be wrong, and this is all hyperbole. But do take a look at the new Soldier's oath. These new soldiers are bound NOT to the Constitution, but to the "Commander-In-Chief." If you have sons or daughters serving, and especially if you yourself have served, I beg of you to impress upon them the values of OUR oath (I served too) to the Constitution.

  • Report this Comment On October 07, 2008, at 12:38 AM, spongeLarry wrote:

    Just because we get pleasure from wanting the fat-cats to reap what they have sown doesn't invalidate it as a correct course of action.

  • Report this Comment On October 07, 2008, at 12:44 AM, Azbjorn wrote:

    We have a chance to remake an new world economic order from the bottom up, and it can be done WRITE here in this forum. I move that we start debating on an alternative paradigm for the purpose of doing business on a global scale. What is wealth? How is it created , destroyed, changed? How much is a person worth? How much is a good or service worth?

    I propose a credit commonwealth. It starts out pretty socialist, with a baseline annuity modified for a person's skill level or training times life expectancy. This line of credit may be spent on daily needs, or invested in education that would increase the annuity's worth. Misconduct/crime would be punished by a decrease in the annuity. So long term, the credit commonwealth would reward initiative and productivity while simultaneously satisfying those basic demands that, if not met, usually results in crime.

    Much of my economic thought is influenced by Ecotopian ideals (Ernest Callenbach's Ecotopia) and is tempered by Ayn Rand's Atlas Shrugged. I still believe that services should be contracted out to the best skilled, but the community should be able to provide the required credit to purchase the materials.

  • Report this Comment On October 07, 2008, at 1:34 AM, PueoFool wrote:

    Yes, I exaggerate, I'm doing okay. However, I still feel incredibly stupid through all this. My Caps rating went from 90-14 in a couple months, there's your 90%. ;)

    I guess I wanted to point out how its not as simple as paying $1 to punish the other guy by $2. Oh and please don't take investment advice from me.

  • Report this Comment On October 07, 2008, at 8:46 AM, GravityProof wrote:

    I expect better from the Fool. The bailout is a massive inflationary mess. The folks who caused this whole trouble are the Congress and the Fed with loose money. So they're going to fix it with much looser money as a government backstop?

    It could be that opposing the bailout is just good economics (the Austrian kind.) Of course, writing about that is like writing about how to lose weight by eating less and exercising more.

    Motley Fool, you can do better.

  • Report this Comment On October 07, 2008, at 9:54 AM, ButtSauce wrote:

    What is it with the Fool and your constant cheerleading for the Bail Out? There a number of people here who question what was in the bill. We are already aware that the Swiss fixed their mess without tax payer money, so there are difinite concerns that go beyond a psychological knee jerk.. So could you guys cut it out? You're giving us the creeps, and the gap in credibility is going to spread next to you and your articles.

  • Report this Comment On October 07, 2008, at 10:04 AM, limeonaire wrote:

    This psychological analysis is interesting, but it's beside the point. The reason I'm skeptical of the bailout—while still acknowledging that we do need it, albeit only if it's done the right way—is that I don't want my generation to be saddled with insane national debt for the rest of our lives.

  • Report this Comment On October 07, 2008, at 10:10 AM, theeconomicsguy wrote:

    I did not oppose the bailout because I wanted to see others suffer. Part of the reason I feel the bailout is inappropriate is that it most likely will not work. But in that respect, I was proved wrong. The day after the bailout went through, stocks were up 800 points, then fell to only a 300 point gain... Oh wait, my chart is upside down... Guess what I meant was, I told you so. What our leaders need to stop doing is targeting their policy to the Dow Jones. The Fed's unofficial mandate is to keep an inflationary target of around 2%, regardless of how the stock market is doing. Instead, they have switched their target to something that is beyond their control. I am opposed to the bailout, because it turns capitalism on its head. The responsible financial firms that can benefit from their conservative practices are being punished, while the irresponsible are being rewarded. Lets look at Wells Fargo. They can afford to purchase Wachovia with no government intervention. But if we bailout the distressed banks, Wells Fargo doesn't get the deals, we perpetuate the risky behavior of the bad banks that started this mess, and we provide an incentive for the responsible to become irresponsible as well.

    But as you can see, all I really want to do is stick it to them bankers.

    (Full disclosure: I work as a credit underwriter at a non-distressed financial institution.)

  • Report this Comment On October 07, 2008, at 12:49 PM, warrl wrote:

    This has probably been said, but...

    It seems that advocates of the bailout assume that EVERYONE agrees the bailout will make things better, but some people are opposed anyway.

    I do and did not oppose the bailout because I didn't want things made better.

    I do and did oppose the bailout because I believe it will make things WORSE.

  • Report this Comment On October 07, 2008, at 4:29 PM, NotCrazy wrote:

    Do you really think that the reason we're against the bailout is because we're reacting irrationally rather than thinking?

    Seriously, how about this for a change? Rather than telling how important you, and Warren Buffet, and the last Emperor of China all think the bailout is, write some pieces explaining in a logical and fact-based fashion why it is important and how it will help. In other words, present an actual argument in favor of the thing.

  • Report this Comment On October 08, 2008, at 1:07 AM, mmdog wrote:

    As much as anyone might derive some satisfaction or pleasure from the perceived "punishment" they are exacting on [insert target of animosity here], there is a much simpler reason to oppose the bailout: trust. Can we realistically trust any of the people responsible for creating (or even just allowing this situation to develop) to suddenly change their behavior and fix it? It seems like little more than wishful thinking to actually expect any action taken by the government to result in a positive outcome.

  • Report this Comment On October 10, 2008, at 3:13 AM, Shadoobie1 wrote:

    All monetary systems are archaic. From communism to fascism and all social and free market combination that use money and labor. Money is an idea, that is all it is. We NEED a resource based economy not a monetary one. Not in the 21st century no sir. These systems rely on scarcity, and scarcity is a lie. The relevance of these conversations occurs only inside of your willingness to be participate in a game of indentured servitude. I share this willingness until I or someone can figure out how to initiate the transformation. Humanity will either do this or they will die off killing each other.

    "Greed and competition are not the result of immutable human temperment... greed and fear of scarcity are in fact being created and amplified... the direct consequence is that we have to fight with each other in order to survive". - Bernard Lietaer

    Can we get some news on new an supposedly secret North American Currency (merging canada, us and mexico) in this hizzY?

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