Foolishness as a Fount of Robustness

It has often been said that information is at the heart of the current economic crisis: markets grind to a halt as opacity erodes trust between investors.

In many of the diagnostic dissections of the crisis foolishness plays a central role, foolishness in the form of ill-advised risk-taking. In the wake of either getting burned or seeing others get burned, the players all withdraw to the sidelines, unwilling to put their money on the line.

We envision a process of rebuilding that will involve clearing out the bad assets, replenishing reserves, rewriting regulations, finding fault and assigning responsibility. In short, we imagine that it won’t be over (that is, the players won’t venture back out into the game) until all the t’s have been crossed and all the i’s have been dotted.

But maybe we’ll yet be rescued by the very same foolishness that got us into the problem in the first place. It might well be that just a few glimmers of hope, a few signs that the government knows what it is doing or is willing to step up to the plate, at least a mild indication that the loonier folks won’t be allowed to demagogue, a few bright spots in terms of basic indicators, and oila, the players are out there, slightly irrationally, ready to play again. If they really were careful assessors of the status quo and careful evaluators of the odds, they’d hold back and wait for all those t’s and i’s. But these are the same folks who thought it was fun to play with loaded guns, blind folds, and beer. It may be that the very characteristics that got us in will be what hastens our way out.

An appetite for being “only so careful” may be evolutionarily robust. It could well be that a population of more careful actors would still get into such messes every now and then (if, perhaps, a little less frequently), but they’d have less chance of climbing back out. Populations with a plentiful supply of crazies, though, might have a better chance of getting on with things.

One might think, by way of analogy, of relationships in which friends are emotionally somewhat volatile in comparison to those in which everyone is very even keeled. The former find themselves frequently at odds and at one anothers’ throats, but they rapidly make up and get on with things. The latter have far fewer blowups but have a much lower chance of recovering from one when it occurs.

We’ll see how the stock market does tomorrow….