Saving the economy from our brains

[Joanne98]

– James Saft is a Reuters columnist. The opinions expressed are his own –

Our brains are wired for bubbles, it would appear, and regulation and tight external controls are the only way to save ourselves from ourselves.

Bankers, traders and investors effectively became addicted to the pleasure that comes from making money, while at the same time increasingly losing touch with just how much risk they were taking.

The result was a bubble in risk taking, debt and many financial assets and the inevitable crash and complete pull back in activity.

“The finance industry was adapting to the level of risk,” said Gregory Berns, a professor of neuroeconomics at Emory University in Atlanta who uses brain scanning technologies to try and decode the decision-making systems of the brain.

“It is an insidious process, you are not aware of it. You are addicted to returns, you are addicted to risk, you are addicted to cocaine — it’s all the same as far the brain goes.”

Berns, who says that the brain has no mechanism for being satisfied, compares the process of becoming adjusted to new stimulus such as making money or taking risks to the eyes adjusting to the light; while at first it seems bright, your brain adjusts and you no longer perceive the light as bright, the money as enough, the risk as high.

So in order to get the same buzz from making money you have to up the stimulus, doing more of what it was that brought in the money in the first place. At the same time your perception of risk becomes less sharp.

So with the same regret that a recovered alcoholic looks back on driving after seven martinis, we all now look back on an investment bank with a 40-1 leverage ratio.

Continued>>
http://blogs.reuters.com/great-debate/2009/02/06/saving-the-economy-from-our-brains/?p=1910?tempedition=debatehub