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Thursday, November 18, 2010

Human Nature and the Lessons of Derivatives

The most obvious lesson of the derivative crisis is that unregulated financial markets are a disaster.  This is so due to basic human nature.  Greed, the desire to gather unrealistic returns, is inexpungible from the human character.  An associated characteristic of human nature is the desire to escape from responsibility thereby eviscerating the usual judgment required to build trust.  We trust our genuinely experienced emotion of greed and cease testing the trustworthiness of various otherwise dubious arrangements.  Another lesson presented is the tremendous gravitational force of conformity.  Under this force people stop doing their homework and using common sense (that is, somberly reflecting on human nature) and accept the judgment of established but biased opinion makers.  The last lesson of human nature I want to mention is the massive influence of fixed ideas.  A fixed idea (like the idea that markets best regulate themselves) becomes a moral imperative—a great “Should” that broadly clouds the judgment and intellect while giving a great sense of righteousness. Ideology, however righteous we may feel it is, should never be worshipped as an idol.  It should never take our eyes off the proven characteristics and weaknesses of human nature and the incomprehensible resourcefulness of God.   

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