Human Nature

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Or, why human beings are bad investors.

Free Exchange has Anthony Gottlieb’s recollections of interviewing Bernie Madoff about financial regulation:

at the time he came across merely as calm, strikingly rational, devoid of ego, and the last person you would expect to make your wealth vanish. I certainly would have trusted him with my money. I cannot say the same of other financial superstars I interviewed. . . . Perhaps it is the most confidence-inspiring ones that you have to look out for.

I couldn’t agree more. We human beings have this completely misplaced confidence in our ability to judge people by “looking them in the eye.” I recall reading about one study (sorry, I don’t remember anything else about it) which showed that hiring managers were more likely to make good hires by selecting solely on the basis of resumes than by interviewing people – because using resumes is completely objective, while interviews allow you to interject your own erroneous beliefs. (I do believe that if you use interviews well – that is, to obtain factual information, like how well someone can actually write a computer program – you can do better than just using resumes; but maybe I’m just fooling myself.)

There are a couple of ways to look at this phenomenon. One is to think about motivations. There are people who are trying to rip you off and people who aren’t. The latter have no motivation to try to seem trustworthy, so they don’t bother. The former do have that motivation, so they try. Some are bad at it; some, however, are very good at it.

More broadly, what does it mean to appear trustworthy? “Trustworthiness” is just a set of signifiers that are generated by one person and that enter the brain of another person, like a firm handshake or a steady gaze. It’s like those luxury car manufacturers who expend effort and cost engineering the sound of the car door closing, because that sound is a signifier for quality. There is some evolutionary process whereby these signifiers got attached to the concept of trustworthiness in our brain over the history of the species, and maybe the connection was valid at some point. But now that people can reverse-engineer the connection and replicate the signifiers whether or not they are actually trustworthy, our instincts aren’t much use anymore.

The only way not to be fooled by your instincts is to rely solely on objective facts. Now, in the Bernie Madoff case, one can object that the only visible “facts” were themselves cooked, and that is true. But that just means we need better policing of things that are presented as facts. And I think the overall point still holds.


Originally published at the Baseline Scenario and reproduced here with the author’s permission.

4 Responses to "Human Nature"

  1. Little Saver   January 1, 2009 at 2:00 am

    Best cards may be with those who deceive and somehow manage to hide it.

  2. nfrazier   January 1, 2009 at 6:52 am

    “Beware the wolves in sheep’s clothing, you will know them by the fruit they bear…”Did anyone who was duped actually examine what trades Madeoff was making, why he was making them, and what components of market volatility he was discounting? It’s hard work to deliver the benefit of more efficient markets – significantly harder than simulating the social heuristics of having done so.

  3. Guest   January 9, 2009 at 9:27 am

    The study you mentioned was referenced in the book “Sway”

  4. El Zorro   January 9, 2009 at 10:07 am

    For me, in this article there are two light assumptions as like:”our instincts…””There is some evolutionary process whereby these signifiers got attached to the concept of trustworthiness in our brain over the history of the species”Things too lightly superimposed without references in this article…Besides, is there any “human nature”?…We can always argue there is just a “human behavior”?