Right to rampant risk-taking (7 Sept 2009)

Yesterday I was wondering about whether it makes since to curtail individual freedom in order to achieve a larger efficiency that no one individual will experience as directly beneficial. In particular, it's possible that we like to think we can outwit everyone else when we can't, but that fantasy is more beneficial to us than a smoother-running system.

Steenbarger, a guest poster at Barry Ritholtz's Big Picture blog, calls attention to the research that suggests that certain traders are addicted to playing the market recklessly.

It turns out that a large body of psychological research finds that people who are sensation seekers tend to also be risk takers. Indeed, many hapless traders are attracted to markets precisely because of the stimulation of risk and reward. At the extreme, this makes trading an addiction, not a disciplined quest to exploit market inefficiencies.

Obviously this means market players are not all contributing useful information, and markets themselves are not automatically efficient in that sense. It may instead provide opportunities to express irrationality, to defy reason and take defiant chances. Markets are just another social medium in which individuals can try to leave their distinctive mark, even if it requires acting insanely. And markets may then conduct misleading information to other participants, compounding the confusion and generating unexpected or suboptimal outcomes.

Does that mean such individuals' participation in markets should be curtailed in the name of perfecting markets? Of course we shouldn't, but I wonder though if all the talk about the unfortunate reality of inefficient markets will at some point lead to attempts to perfect them by force and prohibition. A perfect market, as Albert Hirschman pointed out in his "Rival Interpretations of Market Society," requires that participants not be connected by any ties other than commercial ones, ties that might affect their economic-rational judgment: "Involving large numbers of price-taking anonymous buyers and sellers supplied with perfect information, such markets function without any prolonged human or social contact among or between the parties." Perhaps the isolating aspects of capitalist society are self-reinforcing, or at least are reinforced by economistic technocrats who wish to conjure their perfect market, which would reinforce the plausibility of their predictions and enhance their credibility and power. The more that traditional ties are broken, denied, or prevented from forming, the more "perfect" markets can be become; efforts to promote "rational thinking" over emotional or altruistic thinking may work to further our way toward such perfection, until we are all perfectly anonymous in our solipsistic individuality.