When it pays to be crazy

In the irrational, out-of-control world of the financial markets, acting rationally loses money rath

As recent events indicate, financial markets seem incapable of self-regulation, and instead swing headily from irrational excesses to violent crashes. But it’s unlikely that governments could do a much better job of avoiding financial crises, as the job of creating wise and effective regulation may just be too difficult to perform. Nevertheless, when banks crash, it is the public purse that has to bail them out. The solution to this problem? Governments need to make sure that, during times of plenty, they make enough out of the financial sector to prepare for the bad times – for, as we’ve seen, days of plenty are always numbered.

The events of the past two weeks are instructive. Bear Stearns was a venerable Wall Street bank that kept on trading all the way through the Great Depression. In 2007, it was voted Fortune magazine’s “Most Admired” securities firm. Now, after the self-destructive excesses of the sub-prime mortgage bubble that has burst, it lies in ruins: sold over to JPMorgan Chase, via a government bail-out, at a mere $10 per share – a pale comparison to its market capitalization at $170 per share as recently as January 2007. The bigger problem is that no-one knows which venerable old institution will be next to implode.

The US Federal Reserve has had to stump up a massive $30 billion in order to smooth the sale of Bear Stearns, and who knows what kinds of additional largesse will be demanded of the world’s treasuries and central banks before the losses can be stemmed (if they can be). The financial system relies on trust; and once it is lost, trust – like innocence – is difficult to regain. Things could get much, much messier before they start to get better.

The origins of the current crisis lie in the short-sightedness, greed and poor regulation of the world’s markets in securitized credit instruments – the ever more exotic march of acronyms of CDOs (collateralized debt obligations), MBS’s (mortgage backed securities) and the like.

The world’s commercial banks have spent five years borrowing cheap money, lending it to (often poor) people for near-to-zero margins, and then marking their books with a repayment probability of 100 percent. Credit spreads narrowed to absurd levels, long term rates fell below short term rates (you actually got lower interest rates if you locked your cash up for longer) and the weakest, most brittle CDOs and MBSs could get an AAA rating from supine, eager-to-please rating agencies.

It was the fantasy world of “mark to market” accounting practices that destroyed Enron, and in consequence their file-shredding accountants Arthur Andersen, when the last bubble burst, but memories seem to be short when there’s money to be made.

It was obvious that the liquidity bubble was going to burst sooner or later. So, one might ask, why didn’t the grotesquely well-paid analysts at Bear Stearns and elsewhere urge caution instead of the full-steam-ahead lemming sprint to the cliff’s edge? The answer is a disturbing one – in an irrational market, rational behaviour loses money rather than making it. The first bank to have pulled in the reins in the credit markets would have lost out as everyone else made a quick killing from the irrationally-rising market.

When a price bubble is inflating, there is massive money to be made from buying high, but selling higher. There is a classic co-ordination problem here. It is rational to act ‘irrationally’ as long as the crazy folk around you keep driving the market up; it becomes rational to act ‘rationally’ only when your rationality is contagious, or when everyone can see that the cliff edge is now in sight.

Anyone who thinks that financial markets can be successfully self-regulating hasn’t understood the way that acting crazy can be the way to make massive profits, as long as you’re not the only crazy one. Added to this, of course, is the problem of the time horizons of the people who actually work for investment banks. They’re so well paid that they don’t need to care about their position in 7 or 10 years’ time. If this year’s bonus can buy a townhouse, then there’s no need to sacrifice current margins to vague concerns for future stability.

The truth is that the players in the world’s financial markets find themselves in a classic Prisoners’ Dilemma. It’s rational for any fund manager to join in with the latest unsustainable get-rich-quick scheme, because he’ll make more money than if he shows restraint. But if everyone joins in, then you create an unsustainable bubble, and everyone loses out in the end. It’s collectively rational for the financial market to show restraint, but individually rational for each of the players in that market to (within limits) throw caution to the wind (especially while everyone else is doing so and the bubble is inflating). But there’s just no way of getting from individual commercial decisions to the collectively rational and restrained equilibrium.

So, the financial markets are structurally incapable of self-regulation. The obvious alternative is state regulation. But there are two massive problems here. The first problem is one of technical know-how. The world’s investment banks spend billions on wages to get highly technically gifted people to devise ever more complex financial instruments and strategies. Crashes and bubbles can happen in unpredictable ways, and it would take even greater resources and expertise to design the surgical regulation needed to head-off every possible disaster. States lack the capacity to stay one step ahead of these out-of-control financial behemoths.

The other problem, of course, is that states face a Prisoner’s Dilemma of their own. Tighter regulation or higher taxes in London drives the banks to Geneva, and it’s better for the state to get inadequate scraps than nothing at all. It would be collectively rational for states to co-ordinate their tax and regulatory activities but, yet again, individually rational for each individual state to defect and undercut the competition.

Both these problems have solutions, though. If ‘surgical’ regulation is too difficult, then perhaps governments need to treat the periodic expansions and contractions of the financial sector as an unavoidable evil, and simply make sure that they extract enough in the way of taxes when times are good. (Although there’s no doubt that some forms of regulation that would have headed-off the current crisis are shockingly simple – for example, imposing a maximum income-multiple on new mortgages, with tighter standards for income certification.)

Moreover, governments are much better situated for co-operation than are private players in the financial system. If tax flight is a problem, then governments need to get their heads together, and do more to impose uniform tax treatments of financial institutions and their employees. Co-operation at the European level is especially urgent, and realizable. Some of these forms of co-operation could be politically popular throughout the continent. The EU would be much more popular if it was seen taking a stand against the cynical and leaching Swiss treatment of hedge funds, or Monaco’s scandalous position on tax exiles. It’s high time that the hard working people of the continent stopped being exploited by tax havens.

At the moment, we have a horrible imbalance of power. When things are going well, the bankers take the spoils. When they fail, the state – and its taxpayers – pick up the tab. If we can’t control the irrational oscillations of world finance, we should at least make sure that its benefits are distributed more justly.

Martin O’Neill is a political philosopher, based at the Centre for Political Theory in the Department of Politics at the University of Manchester. He has previously taught at Cambridge and Harvard, and is writing a book on Corporations and Social Justice.
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Fitter, dumber, more productive

How the craze for Apple Watches, Fitbits and other wearable tech devices revives the old and discredited science of behaviourism.

When Tim Cook unveiled the latest operating system for the Apple Watch in June, he described the product in a remarkable way. This is no longer just a wrist-mounted gadget for checking your email and social media notifications; it is now “the ultimate device for a healthy life”.

With the watch’s fitness-tracking and heart rate-sensor features to the fore, Cook explained how its Activity and Workout apps have been retooled to provide greater “motivation”. A new Breathe app encourages the user to take time out during the day for deep breathing sessions. Oh yes, this watch has an app that notifies you when it’s time to breathe. The paradox is that if you have zero motivation and don’t know when to breathe in the first place, you probably won’t survive long enough to buy an Apple Watch.

The watch and its marketing are emblematic of how the tech trend is moving beyond mere fitness tracking into what might one call quality-of-life tracking and algorithmic hacking of the quality of consciousness. A couple of years ago I road-tested a brainwave-sensing headband, called the Muse, which promises to help you quiet your mind and achieve “focus” by concentrating on your breathing as it provides aural feedback over earphones, in the form of the sound of wind at a beach. I found it turned me, for a while, into a kind of placid zombie with no useful “focus” at all.

A newer product even aims to hack sleep – that productivity wasteland, which, according to the art historian and essayist Jonathan Crary’s book 24/7: Late Capitalism and the Ends of Sleep, is an affront to the foundations of capitalism. So buy an “intelligent sleep mask” called the Neuroon to analyse the quality of your sleep at night and help you perform more productively come morning. “Knowledge is power!” it promises. “Sleep analytics gathers your body’s sleep data and uses it to help you sleep smarter!” (But isn’t one of the great things about sleep that, while you’re asleep, you are perfectly stupid?)

The Neuroon will also help you enjoy technologically assisted “power naps” during the day to combat “lack of energy”, “fatigue”, “mental exhaustion” and “insomnia”. When it comes to quality of sleep, of course, numerous studies suggest that late-night smartphone use is very bad, but if you can’t stop yourself using your phone, at least you can now connect it to a sleep-enhancing gadget.

So comes a brand new wave of devices that encourage users to outsource not only their basic bodily functions but – as with the Apple Watch’s emphasis on providing “motivation” – their very willpower.  These are thrillingly innovative technologies and yet, in the way they encourage us to think about ourselves, they implicitly revive an old and discarded school of ­thinking in psychology. Are we all neo-­behaviourists now?

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The school of behaviourism arose in the early 20th century out of a virtuous scientific caution. Experimenters wished to avoid anthropomorphising animals such as rats and pigeons by attributing to them mental capacities for belief, reasoning, and so forth. This kind of description seemed woolly and impossible to verify.

The behaviourists discovered that the actions of laboratory animals could, in effect, be predicted and guided by careful “conditioning”, involving stimulus and reinforcement. They then applied Ockham’s razor: there was no reason, they argued, to believe in elaborate mental equipment in a small mammal or bird; at bottom, all behaviour was just a response to external stimulus. The idea that a rat had a complex mentality was an unnecessary hypothesis and so could be discarded. The psychologist John B Watson declared in 1913 that behaviour, and behaviour alone, should be the whole subject matter of psychology: to project “psychical” attributes on to animals, he and his followers thought, was not permissible.

The problem with Ockham’s razor, though, is that sometimes it is difficult to know when to stop cutting. And so more radical behaviourists sought to apply the same lesson to human beings. What you and I think of as thinking was, for radical behaviourists such as the Yale psychologist Clark L Hull, just another pattern of conditioned reflexes. A human being was merely a more complex knot of stimulus responses than a pigeon. Once perfected, some scientists believed, behaviourist science would supply a reliable method to “predict and control” the behaviour of human beings, and thus all social problems would be overcome.

It was a kind of optimistic, progressive version of Nineteen Eighty-Four. But it fell sharply from favour after the 1960s, and the subsequent “cognitive revolution” in psychology emphasised the causal role of conscious thinking. What became cognitive behavioural therapy, for instance, owed its impressive clinical success to focusing on a person’s cognition – the thoughts and the beliefs that radical behaviourism treated as mythical. As CBT’s name suggests, however, it mixes cognitive strategies (analyse one’s thoughts in order to break destructive patterns) with behavioural techniques (act a certain way so as to affect one’s feelings). And the deliberate conditioning of behaviour is still a valuable technique outside the therapy room.

The effective “behavioural modification programme” first publicised by Weight Watchers in the 1970s is based on reinforcement and support techniques suggested by the behaviourist school. Recent research suggests that clever conditioning – associating the taking of a medicine with a certain smell – can boost the body’s immune response later when a patient detects the smell, even without a dose of medicine.

Radical behaviourism that denies a subject’s consciousness and agency, however, is now completely dead as a science. Yet it is being smuggled back into the mainstream by the latest life-enhancing gadgets from Silicon Valley. The difference is that, now, we are encouraged to outsource the “prediction and control” of our own behaviour not to a benign team of psychological experts, but to algorithms.

It begins with measurement and analysis of bodily data using wearable instruments such as Fitbit wristbands, the first wave of which came under the rubric of the “quantified self”. (The Victorian polymath and founder of eugenics, Francis Galton, asked: “When shall we have anthropometric laboratories, where a man may, when he pleases, get himself and his children weighed, measured, and rightly photographed, and have their bodily faculties tested by the best methods known to modern science?” He has his answer: one may now wear such laboratories about one’s person.) But simply recording and hoarding data is of limited use. To adapt what Marx said about philosophers: the sensors only interpret the body, in various ways; the point is to change it.

And the new technology offers to help with precisely that, offering such externally applied “motivation” as the Apple Watch. So the reasoning, striving mind is vacated (perhaps with the help of a mindfulness app) and usurped by a cybernetic system to optimise the organism’s functioning. Electronic stimulus produces a physiological response, as in the behaviourist laboratory. The human being herself just needs to get out of the way. The customer of such devices is merely an opaquely functioning machine to be tinkered with. The desired outputs can be invoked by the correct inputs from a technological prosthesis. Our physical behaviour and even our moods are manipulated by algorithmic number-crunching in corporate data farms, and, as a result, we may dream of becoming fitter, happier and more productive.

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The broad current of behaviourism was not homogeneous in its theories, and nor are its modern technological avatars. The physiologist Ivan Pavlov induced dogs to salivate at the sound of a bell, which they had learned to associate with food. Here, stimulus (the bell) produces an involuntary response (salivation). This is called “classical conditioning”, and it is advertised as the scientific mechanism behind a new device called the Pavlok, a wristband that delivers mild electric shocks to the user in order, so it promises, to help break bad habits such as overeating or smoking.

The explicit behaviourist-revival sell here is interesting, though it is arguably predicated on the wrong kind of conditioning. In classical conditioning, the stimulus evokes the response; but the Pavlok’s painful electric shock is a stimulus that comes after a (voluntary) action. This is what the psychologist who became the best-known behaviourist theoretician, B F Skinner, called “operant conditioning”.

By associating certain actions with positive or negative reinforcement, an animal is led to change its behaviour. The user of a Pavlok treats herself, too, just like an animal, helplessly suffering the gadget’s painful negative reinforcement. “Pavlok associates a mild zap with your bad habit,” its marketing material promises, “training your brain to stop liking the habit.” The use of the word “brain” instead of “mind” here is revealing. The Pavlok user is encouraged to bypass her reflective faculties and perform pain-led conditioning directly on her grey matter, in order to get from it the behaviour that she prefers. And so modern behaviourist technologies act as though the cognitive revolution in psychology never happened, encouraging us to believe that thinking just gets in the way.

Technologically assisted attempts to defeat weakness of will or concentration are not new. In 1925 the inventor Hugo Gernsback announced, in the pages of his magazine Science and Invention, an invention called the Isolator. It was a metal, full-face hood, somewhat like a diving helmet, connected by a rubber hose to an oxygen tank. The Isolator, too, was designed to defeat distractions and assist mental focus.

The problem with modern life, Gernsback wrote, was that the ringing of a telephone or a doorbell “is sufficient, in nearly all cases, to stop the flow of thoughts”. Inside the Isolator, however, sounds are muffled, and the small eyeholes prevent you from seeing anything except what is directly in front of you. Gernsback provided a salutary photograph of himself wearing the Isolator while sitting at his desk, looking like one of the Cybermen from Doctor Who. “The author at work in his private study aided by the Isolator,” the caption reads. “Outside noises being eliminated, the worker can concentrate with ease upon the subject at hand.”

Modern anti-distraction tools such as computer software that disables your internet connection, or word processors that imitate an old-fashioned DOS screen, with nothing but green text on a black background, as well as the brain-measuring Muse headband – these are just the latest versions of what seems an age-old desire for technologically imposed calm. But what do we lose if we come to rely on such gadgets, unable to impose calm on ourselves? What do we become when we need machines to motivate us?

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It was B F Skinner who supplied what became the paradigmatic image of ­behaviourist science with his “Skinner Box”, formally known as an “operant conditioning chamber”. Skinner Boxes come in different flavours but a classic example is a box with an electrified floor and two levers. A rat is trapped in the box and must press the correct lever when a certain light comes on. If the rat gets it right, food is delivered. If the rat presses the wrong lever, it receives a painful electric shock through the booby-trapped floor. The rat soon learns to press the right lever all the time. But if the levers’ functions are changed unpredictably by the experimenters, the rat becomes confused, withdrawn and depressed.

Skinner Boxes have been used with success not only on rats but on birds and primates, too. So what, after all, are we doing if we sign up to technologically enhanced self-improvement through gadgets and apps? As we manipulate our screens for ­reassurance and encouragement, or wince at a painful failure to be better today than we were yesterday, we are treating ourselves similarly as objects to be improved through operant conditioning. We are climbing willingly into a virtual Skinner Box.

As Carl Cederström and André Spicer point out in their book The Wellness Syndrome, published last year: “Surrendering to an authoritarian agency, which is not just telling you what to do, but also handing out rewards and punishments to shape your behaviour more effectively, seems like undermining your own agency and autonomy.” What’s worse is that, increasingly, we will have no choice in the matter anyway. Gernsback’s Isolator was explicitly designed to improve the concentration of the “worker”, and so are its digital-age descendants. Corporate employee “wellness” programmes increasingly encourage or even mandate the use of fitness trackers and other behavioural gadgets in order to ensure an ideally efficient and compliant workforce.

There are many political reasons to resist the pitiless transfer of responsibility for well-being on to the individual in this way. And, in such cases, it is important to point out that the new idea is a repackaging of a controversial old idea, because that challenges its proponents to defend it explicitly. The Apple Watch and its cousins promise an utterly novel form of technologically enhanced self-mastery. But it is also merely the latest way in which modernity invites us to perform operant conditioning on ourselves, to cleanse away anxiety and dissatisfaction and become more streamlined citizen-consumers. Perhaps we will decide, after all, that tech-powered behaviourism is good. But we should know what we are arguing about. The rethinking should take place out in the open.

In 1987, three years before he died, B F Skinner published a scholarly paper entitled Whatever Happened to Psychology as the Science of Behaviour?, reiterating his now-unfashionable arguments against psychological talk about states of mind. For him, the “prediction and control” of behaviour was not merely a theoretical preference; it was a necessity for global social justice. “To feed the hungry and clothe the naked are ­remedial acts,” he wrote. “We can easily see what is wrong and what needs to be done. It is much harder to see and do something about the fact that world agriculture must feed and clothe billions of people, most of them yet unborn. It is not enough to advise people how to behave in ways that will make a future possible; they must be given effective reasons for behaving in those ways, and that means effective contingencies of reinforcement now.” In other words, mere arguments won’t equip the world to support an increasing population; strategies of behavioural control must be designed for the good of all.

Arguably, this authoritarian strand of behaviourist thinking is what morphed into the subtly reinforcing “choice architecture” of nudge politics, which seeks gently to compel citizens to do the right thing (eat healthy foods, sign up for pension plans) by altering the ways in which such alternatives are presented.

By contrast, the Apple Watch, the Pavlok and their ilk revive a behaviourism evacuated of all social concern and designed solely to optimise the individual customer. By ­using such devices, we voluntarily offer ourselves up to a denial of our voluntary selves, becoming atomised lab rats, to be manipulated electronically through the corporate cloud. It is perhaps no surprise that when the founder of American behaviourism, John B Watson, left academia in 1920, he went into a field that would come to profit very handsomely indeed from his skills of manipulation – advertising. Today’s neo-behaviourist technologies promise to usher in a world that is one giant Skinner Box in its own right: a world where thinking just gets in the way, and we all mechanically press levers for food pellets.

This article first appeared in the 18 August 2016 issue of the New Statesman, Corbyn’s revenge