Dr Paul Crosthwaite, an academic at Cardiff University, has found that the bankers who brought the global economy to its knees two years ago may have enjoyed the sensation of losing hundreds of billions of pounds and plunging the world into recession. He argues such catastrophic losses can give some people masochistic pleasure.
He thinks financial crises, such as the “Black Monday” crash of 19 October 1987, the bursting of the dotcom bubble in the spring of 2000, and the credit crunch that entered into its most intense phase in the autumn of 2008 with the nationalization of banks in the UK, US, and Europe, demonstrate the innate urge for self destruction that Sigmund Freud called the “death drive”. A full blown crash is a source of euphoria as much as despair. Dr Crosthwaite said:
Economists and financial policymakers must recognize that investor psychology is far more complex than their models have allowed up to now. They need to take much greater account of psychological factors such as emotion and desire, which affect how market actors behave in profound ways.
His research challenges the conventional economic thinking that investors are wholly rational, and always pursue whatever is most likely to increase their own wealth, a rarely questioned assumption that is the basis of the free, minimally regulated market of standard capitalist thinking. In fact, financial markets are disposed to crisis because participants seek excess for thrills as well as their assumed betterment. Bankers and financiers take risks not only for high returns, but to get a gambler’s high.
Dr Crosthwaite says this research strengthens the case for firm regulation of banks and other financial institutions:
To avoid a repeat of the great recession, it is vital that policy makers and regulators limit the capacity of financial professionals to engage in excessive practices by curbing the disproportionate levels of risk that we’ve seen in the financial sector in recent years.