Psychoanalysis of the Global Crisis

It's time to veer away from statistically driven risk models.

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pointingtopAt Baillie Gifford, we employ all of the research tools at our disposal. As is the case with most investment managers, we draw on the views of many experts in our industry. However, where we believe we differ is in our enthusiasm to step outside the confines of financial “expertise” and seek additional information sources. An example of this was the recent assessment of a paper by the psychoanalyst, David Tuckett. He has offered a psychological insight into the financial crisis and suggestions on what we can do to limit the impact, should a similar situation arise in the future.  Tuckett, a fellow of the Institute of Psychoanalysis and Visiting Professor, Psychoanalysis Unit at University College London, gave his views in a paper he prepared for the Institute for Public Policy Research. [1]

The financial crisis was the culmination of the latest in a long line of financial bubbles caused by a failure to organize markets in a way that controls human behaviour.  Whilst opinions are divided on the predictability of asset bubbles, Tuckett believes it is possible to see these bubbles forming and suggests steps that could limit the damage caused by similar events in future.

Tuckett, like Keynes in 1936, identifies ‘animal spirits’, as central to the problem, as they disconnect the anxiety of consequences from the excitement of gain (experiments show that we are normally pre-disposed to fear loss more than seek gain and so this in itself is a departure from the norm), and encourage investors to overlook signs that a market may be starting to overheat. Read the full paper here.

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