Grandma's Advice Is Best In Hard Financial Times The Wall Street financial crisis started with symptoms of panic, followed by an infection of fear and distrust. But what drives this type of psychology in the markets? Tim Harford, a columnist for the Financial Times, says the best way to avoid future toxic thinking is to follow Grandma's advice: Don't borrow too much and don't take too many risks.

Grandma's Advice Is Best In Hard Financial Times

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: The Rational Economics of an Irrational World." Good morning, Tim.

TIM HARFORD: Good morning.

: Well, give us a snapshot of the psychology of the markets in the last couple of weeks. How would you describe this?

HARFORD: Well, clearly people are extremely jittery at the moment, and part of that is irrational, it's paranoia. Part of it - and this is the really sad thing - is absolutely rational. The trouble with any financial market, any banking system, is banks depend on everybody believing that everybody else has confidence in the bank. If all the bank's depositors think the bank is secure and are happy to leave their money in the bank, then usually the bank is secure. And if all the depositors think the bank is bust, well, you get a bank run and the bank is bust.

: It seems like there's kind of a feedback loop here where peoples' paranoia makes a bank go bust, and a bank going bust makes people more paranoid.

HARFORD: But of course, if they really are out to get you, then you're not paranoid. So that's the problem.

: Well, what drives the crazy behavior?

HARFORD: Looking into this, he discovered that this sort of behavior is actually really common in many male animals. What happens is, you have, say, two gorillas or two stags fighting each other. One of them wins. They get a surge of the hormone testosterone. It makes them aggressive. It makes them take risks. And that goes on for several days. And then one day, effectively they are suffering from testosterone poisoning. These traders are basically suffering from exactly the same symptoms as rutting stags. So...

: So we should put women in charge of Wall Street, is what you're saying?

HARFORD: Well, that's a possibility, assuming that women want to be in charge of Wall Street, yeah.

: Well, if these sophisticated economic systems are being driven by these deep-seated evolutionary chemical drives, is there any way to take the inappropriate risk and fear and paranoia and distrust out of the system?

HARFORD: Well, there's no perfect solution. There are things you can do. If we are worried about the testosterone, you just keep an eye on the guys who are winning. That's simple risk management, and I think a lot of trading managers know that instinctively. And there are other things you can do. You can just remind people. Maybe everybody should just be forced to watch old Jimmy Stewart movies so we know what a depression looks like. We should be reminded. It is possible to have a housing bust. It is possible to lend too much money. But to some extent, these things are - I think these things are like earthquakes and hurricanes. They are always going to be with us.

: So what is your advice to consumers who are feeling, you know, a little bit paranoid and perhaps justifiably afraid of this financial mess we're in?

HARFORD: Well, the straightforward advice that your grandmother always gave you. You're not to borrow too much, not to take too many risks. We live in an uncertain world always. It's just sometimes we forget that it's an uncertain world. Remember that even the really painful recessions have actually involved most people staying in their jobs. Most people are going to keep their income. They're going to keep their homes. So we want to be cautious, but we really shouldn't panic.

: Tim Harford writes for The Financial Times, and he's author of "The Logic of Life: The Rational Economics of an Irrational World." Thanks a lot for talking with us.

HARFORD: Thank you.

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