Thursday, October 02, 2008

Surely Congress wouldn't deliberately have endangered the financial system order punish 'Wall Street types'

David Leonhardt tells the following story in the NYT:

"In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

Could that really be what was happening?

I wrote last year about an experiment in which people playing a game for real money were given the opportunity to spend some of their winnings “burning” another player’s winnings. It cost money and could't possibly have made anyone money...

And yet

"an astonishing two-thirds of the players gave up real money in order to burn another player’s. Surprisingly it didn’t seem to matter how much the burning cost. The decision to burn was unrelated to the price.

Two types of players were burned the most - those that were the richest and those that were seen to have made their money 'unfairly'."

Dan Ariely has just written about a similar experiment with the added twist that the participants were connected to a brain scanner:

"The basic picture that emerged from the brain imaging was activation in the striatum, which is somewhat surprising as this is a key part of the way we experience reward. In other words, according to the brain activation it looks like punishing others or, more specifically, the decision to punish others is related to a feeling of pleasure in the brain. What’s more, it turns out that those who had a high level of striatum activation, punished others to a higher degree. All of this suggests that punishment, even when it costs us something, has biological underpinnings. And this behavior is, in fact, either pleasurable or somewhat similar to pleasure."

So perhaps Congress members enjoyed punishing 'Wall Street types' and were prepared to pay (by endangering the economy) in order to do so.

Zizzo, D.J. & Oswald, A., 2000. Are People Willing to Pay to Reduce Others' Incomes?, The Warwick Economics Research Paper Series 568, University of Warwick, Department of Economics.