What, me, worry?

When it comes to masterplans for a global reduction in carbon emissions, it's usually taken as read that the world's richest economies will take the lead. Not only are they (well, we) best resourced to lead the necessary technological investment, and have the necessary economic and political stability to achieve their targets, they're generally also the ones responsible for large amounts of historical emissions. In short, it's their fault there's a problem, and they're the ones bet placed to help provide a remedy.

Of course, thing's are never that simple. Particularly when, it seems, the richest and most polluting countries are the least inclined to see the need to actually do anything.

That's long been a strong suspicion for many, but it's one that's borne out by new research by Hanno Sandvik of the Norwegian University of Science and Technology. Sandvik's paper, forthcoming in Climatic Change, finds a strong inverse correlation between the level of concern in a country’s population about the costs of climate change, and that country’s gross national product and greenhouse gas emissions.

Sandvik's explanation is primarily a psychological one. From the university's press release:
“People are all too willing to repress unpleasant truths, particularly if one is responsible for something that’s not good. I had a theory that the countries that contribute the most to global warming might perhaps have a population that would rather not believe so much in the dangers from climate change,” Sandvik says.

When Sandvik compared data on level of concern to data on emissions, he found support for his theory: the more responsibility a country had for causing global warming, the greater the tendency of its citizens to explain away or ignore the problem. And as a country’s emissions levels increased, the level of concern sank even further.
[...]
The five richest countries in the dataset were Norway, the United States, Ireland, Denmark and Canada. All of these countries are also considered to be among the worst in terms of greenhouse gas emissions. That consequently doubles the fertile ground for the lack of worry. Researchers were not particularly surprised by the findings. All “idealism research” shows that those who are most well off are always the least willing to contribute.

“If you take global warming to heart, you understand that you have to sacrifice something. And the richer you are, the less willing you are to sacrifice. It’s far more pleasant to decide that you actually don’t quite believe in the climate threat”, Sandvik says.

This also gives the lie to the line, occasionally parroted by the climate change denial lobby, that reducing emissions is the preoccupation of a wealthy minority who don't care about the wealth of developing countries. Like virtually all their arguments, that's demonstrably utter bollocks.

Phantastic phinance

It's hardly a secret that the rational agent hypothesis of neoclassical economics is, at best, an idealisation; and, at worst, a dangerous myth. It's much the same for the rational investor of finance theory, as backed up by a host of behavioural studies.

You don't need to have experienced many investment bubbles, crazes and panics to appreciate that. Some diehards have claimed that bubbles can be understood as rational phenomena, but that always seems like stretching the definition a little too far.

It's interesting then to get the psychoanalytic point of view on a question that has been dominated by economists. David Tuckett of UCL and Richard Taffler of Edinburgh Uni have a paper in the new International Journal of Psychoanalysis with the delectable title Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability.

Tuckett lays it out in the UCL press briefing:
“Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.

“Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious.

“What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.

“Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.”

That last point seems to bring us into the realm of situational psychology. I've recently been reading Phil Zimbardo's The Lucifer Effect on that area - an interesting and disturbing read. Most of the behavioural finance studies I've read (or, at least, read about) concentrate on the personal biases and heuristics that affect individual decisions - the effects of peer pressure and groupthink on economic decision-making seems a fruitful area for further study.

Grounded

The Sheffield Star marks what is probably the last flight from the city's airport, with a look back at its troubled history.

Meanwhile, steel boss Andrew Cook has stepped up as the erstwhile mystery backer of the save-the-airport lobby (Sheffield City Airport Movement, aka SCAM), which is still chasing the legal route:
They are then hoping for a full court hearing to consider whether owner Peel Airports and Sheffield Council abided by conditions which stated the airport - which opened in 1997 - had to be kept operational for 10 years and "all reasonable efforts" had to be made to attract airlines.
Mr Cook said: "The reason I am doing this is because I think it borders on madness for a city the size of Sheffield to give up its airport without a fight.
"I think it is an abomination that something that should be regarded as a valuable municipal facility should be thrown away."

Of balls and busts

It's not often that neuroscience/economics research hits the headlines, but a paper in this week's PNAS, concerning hormonal influences on the behaviour of individual stock traders, has sired prominent stories in many of today's organs - see, for instance, the Guardian or BBC.

The research is be John Coates and Joe Herbert of Cambridge uni. Their abstract sums it up nicely:
Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.

It's not a new concept, of course - I wrote about a related behavioural economics study two years ago (a post that, because of the title, is actually one of my most frequently accessed items by people coming to this blog via search engines - I suspect most of them will be disappointed).

And it doesn't take a genius to spot why this is now a lot more newsworthy - boom and bust economics seems to be on people's minds...