June 19, 2015

Are our brains wired so as to make us confuse ex-post real risks with ex-ante perception of risk?

Sir, James Macintosh writes: “When investors come to believe that the inherent uncertainty of markets or economies has gone away, it is usually a sign of trouble ahead, as it encourages excessive risk-taking.” Short view, June 19. And of course its opposite is the more uncertain economies seem to be, the less risk-taking will be done.

So I need to ask, once intellectually Mr Macintosh accepts that proposition, why is it so hard for him, and for others to take the leap and dare understand how utterly wrong current bank regulation is, with its more-risk-more-capital and less-risk-less-capital?

Is it something in our brains that confuses ex-post real risk with ex-ante perception of risk? Or is it something else. Like that it would require us believing experts could be 180 degrees wrong… and that is something too uncomfortable to accept?

Mr Macintosh, welcome to the real world where a Mario Draghi and many others, are just like any Chauncey Gardiner figure extracted from Jerzy Kosinski’s “Being There”.