On June 24 2016, the day after Britain’s Brexit referendum, hedge fund manager Richard Robb went jogging around Hyde Park in London. “Normally I find jogging excruciating and count down the minutes until the torture will end,” he admits in a new book, Willful: How We Choose What We Do. But that day, “I didn’t even notice. My pain was crowded out by the looming horror.”
Robb’s fund faced a potential crisis because its trades were vulnerable to the shock waves sent through financial markets by the surprise result. He feared a scenario where “the stain on our reputation would be long-lasting”, he recalls.
In the event, his terror was not justified. He averted disaster by drawing on skills honed while working for the Japanese Dai-Ichi Kangyo Bank (DKB) during the 1997-98 Asian crisis and, later, steering his fund through the 2008 Lehman Brothers collapse. He looks back on the incident today with relief at the way his team worked to overcome the predicament.
However, the experience also sparked something else. Robb is now on a crusade to correct the economics profession’s obsession with “rational choice” — the idea that humans always make logical decisions and seek to maximise self-interest.
He points out that it does not necessarily seem “rational” for a wealthy former banker — as Robb was when he left DKB — to set up a hedge fund that involves risking money and reputation, and being exposed to events such as Brexit.
“In reality, starting a business put my nest egg in jeopardy,” he admits. The reason he went ahead was because he was bored by early retirement and sought the exhilaration of work that challenged him.
Robb had spent the first part of his career doing a PhD at Chicago University, home to the “Chicago school” of economics, which promoted the idea that free markets and rational actors would ensure the perfect allocation of resources. His subsequent working life, however, showed him a world full of people pursuing jobs and activities that could not easily be explained by this model.
He concluded that we need a rethink. Sometimes we make purposeful choices to maximise self-interest; but often we just pursue an activity “for itself”, because it supports our identity, gives psychic satisfaction and so on.
“Acknowledging the for-itself gives us licence to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice,” he writes.
When I first read the book, I must admit that I was tempted to roll my eyes and say, “Well, duh!” Yes, many economists and central bankers used to be in thrall to the Chicago school. But behavioural economists have long scoffed at its ideas.
As Robb notes, Daniel Kahneman, Richard Thaler and Cass Sunstein, to name but a few, have shown that mental biases and short cuts make humans anything but “rational” agents most of the time.
There is an academic discipline known as “economic anthropology”, which tries to frame economics within a broader social and cultural context. For example, it looks at economics in terms of the widest possible definition of social and economic “exchanges” and values, rather than just monetary transactions.
Sadly, few mainstream economists have much idea that economic anthropology exists, least of all those trained in the Chicago school. That is partly due to the inward-looking nature of sections of the anthropology community, as well as the arrogance of some economists.
However, others, such as Robert Shiller, are starting to draw on anthropology — check out his excellent new work Narrative Economics for an example of this. I hope that more will follow. Robb’s snappy little book opens the path to a more comprehensive dialogue.
The book is also important in other ways. The fact that a former devotee of Chicagoan economics has explained why he rethought his views symbolises a larger shift in the paradigm. And it is relevant in terms of public policy.
These days, we tend to debate employment using narrow economic criteria: hours worked, wages earned, household consumption, labour-market mobility and so on. Fair enough: most of us need a wage to survive (unless we’re wealthy former bankers).
However, as Edmund Phelps, the Nobel Prize-winning economist — and someone who partly inspired Robb’s rethink — has long argued, we also need to find a way to create a more human-centric vision of economics. We need, say, to recognise the sense of dignity and community created by jobs that cannot be captured by numbers.
This is, of course, fiendishly difficult. Chicago-style economics produces charts, equations and predictions that seem reassuringly precise, so they are easy for investors and policymakers to use.
The big drawback of behavioural finance — and economic anthropology — is that it often seems so vague that creating strategy from it can feel like chasing soap in the bath.
Robb, to his credit, tries to sketch out a decision tree to help investors, policymakers, business executives and his own economics students to decide when to use a rational model of economics, and when not.
It is rudimentary, but provides a platform for an overdue debate; particularly at a time when Brexit and the rise of populism have shown that it is foolish to predict voter passions purely in terms of economic incentives and numbers.
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