October 2008
"Sheeple" - Following each other into the financial whirlpool
article by Julie Surycz
The financial crisis draws attention to some of our natural human instincts and our tendency to behave like sheep. Many of the proposed solutions do not hit at the heart of how human beings are wired nor do they target behaviour that feels so instinctive to us.
Sometimes we don't make wise decisions because we simply follow the crowd. We don't act like individual people - we act like "sheeple".
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Sheep are the dumbest farm animals. They live in fear of being isolated and separated from their flock. They feel safe and comfortable when they follow the crowd and go-with-the-flow.
The current economic crisis has highlighted our sheep tendencies. Sometimes we don't make wise decisions because we simply follow the crowd. We don't act like individual people - we act like "sheeple".
Everyone is panicking. The flat and hyper connected world has accentuated the effects of the crisis and the spread around the globe has been dramatic and intense. Governments are huddled around boardroom tables, trying to come up with compelling solutions. They don't want this debilitating saga to happen again.
But it will. Maybe not in the same way, but something similar will happen again. Bailouts, mergers, liquidations, acquisitions and nationalizations will help the crisis in the short term but these solutions do not hit at the heart of how human beings are wired nor do they target behaviour that feels so instinctive to us.
The financial crisis draws attention to the nature of human beings. Similar dramas will happen again until we understand and respond to some of our natural human instincts.
1. Understand relative economics - keeping up with the Joneses.
What is rich? How much money do you need in order to be 'rich'? What makes a good standard of living?
'Rich' is how much money you have relative to others - compared to the people in your age group, your social circle, your profession and your neighbourhood. It is our natural human instinct to judge ourselves against the herd. Everyone tends to have a reference level against which they compare themselves. If your income or standard of living falls below this level, you feel dissatisfied and will attempt to improve the situation.
Andrew Oswald is a professor of economics in the UK. He focuses on relative economics and the social determinants of mental health and happiness. This is a largely untapped area as most economists focus on absolute, rather than relative, income. Oswald believes we developed our flocking mentality because relative position matters to us.
In 1974, economist Richard Easterlin developed a theory that is known as the 'Easterlin Paradox'. It says that as economic growth improves, the wellbeing and happiness of people does not increase to the same extent. This is because people do not define their satisfaction in isolation, according to their absolute income. We compare ourselves to the social norms around the goods, money and possessions we believe we ought to have. Having more is not enough for us - it is only enough if everyone else has less.
The world's richest man and most astute investor, Warren Buffett, believes the economic crisis snowballed because we followed the flock and compared ourselves to others. He says the downturn has followed an inevitable progression that is not surprising if you understand human behaviour. In an interview, he said:
Our instinct to compare ourselves to others made it very easy for agents to sell houses with 100% mortgages, small deposits and poor credit ratings. They simply appealed to people's desires to keep up with the Joneses and live the standard of living society dictates we deserve.
2. Understand how people link happiness and money - when is enough enough?
The financial crisis has highlighted that people have an insatiable desire for more money and the "happiness" it brings. We do not know when enough is enough. Like sheep, we tend to follow the herd and get swept up in society's definition of happiness.
Abraham Maslow represented his psychological theory of human motivation in the form of a pyramid. Lower level needs such as food and shelter must be achieved first before a person naturally craves the next level. The uppermost point of the pyramid is self-actualization, which encompasses meaning, creativity, spontaneity and personal growth.
Social Trends is a 'state of the nation' report from the Office of National Statistics in the UK. The April 2008 report concludes that, over the years, people have become wealthier but this has not made them any happier.
Since most people in the first world have satisfied the most basic needs on Maslow's pyramid, they now need more than just money to keep them satisfied. People are starting to desire more meaning and purpose in their lives. The problem is that few people are introspective enough to realize this is the case or where that meaning should come from. They don't know what the solution is. So, people say that when they have reached a certain standard of living, a certain level at work, have a certain size house, car or share portfolio, then they will be happy. That is why they were enticed by 100% mortgages and get-rich-quick shares.
The Social Trends research reveals that the UK's material abundance has deepened peoples' non-material desires. There is now greater emphasis on the pursuit of meaning and other intrinsic motivators. The problem is that people don't know how to get this meaning.
3. Understand how the brain is designed
There are too many left-brain people who control the financial world.
The brain contains about 100 billion cells. Even though it is so intricate and complex, the basic structure is fairly simple and astoundingly symmetrical. Banking management tends to be left brain people and this affects their perspective and response to issues. They are paid to act in the now, to be logical, sequential, objective, analytical, details-focused and literal. They are typical sheep.
Jeremy Grantham, Chairman of GMO, says:
Grantham points out in his October 2008 newsletter that the people who anticipated this crisis were generally right brain thinkers. However, none of them were CEOs of big banks. The right side of the brain is more intuitive, creative, and subjective and focuses on the big picture. The left side analyses and the right side synthesizes. Perhaps if banking management had been more intuitive, creative and focused on the long term, this crisis could have been avoided.
The economic downturn has emphasized that left brain-directed thinking is still necessary but it is no longer sufficient. In the 21st century, it is a business imperative that companies create a culture that nurtures right brain capabilities.
Author Daniel Pink says:
Left-brain thinking used to be the driver and right-brain-style thinking the passenger. Now, right-directed thinking is suddenly grabbing the wheel, stepping on the gas, and determining where we're going and how we'll get there.
Baaa ... ck to basics
People do not make decisions in isolation - they feel safer when they follow the herd and consider what everyone else is doing. We are also naturally competitive and want to be better than others. We are obsessed with happiness and many people believe that the more money they have, the happier they will be. People have a preference for left or right brain thinking. This affects their perspective and response to issues.
TomorrowToday's extensive research and interaction with senior leaders in multiple industries has revealed that companies manage their talent better when they understand the value systems and natural human tendencies of their employees first. This knowledge is potential power. It is the foundation for creating sustainable, empowering business solutions.
The financial crisis has demonstrated that it is foolish to ignore peoples' personal, generational and cultural value systems. Peoples' values, whether conscious or instinctive, affect their decisions. There is no quick-fire solution to business and societal problems when underlying values drive people's behaviour.
About the author
Julie Surycz
Julie can be contacted on email julie@tomorrowtoday.uk.com.
Resources:
1. Grantham, J. Reaping the Whirlwind GMO Quarterly Newsletter, October 2008
2. LaBarre, P. How to lead a rich life FastCompany, December 2007
3. Oswald, A. Herd mentality and the current crisis University of Warwick, October 2008
4. Pink, DH. A Whole New Mind: Why right brainers will rule the future. Marshall Cavendish, 2008
5. http://www.statistics.gov.uk/pdfdir/trends0408.pdf
People don't get smarter about things that get as basic as greed. You can't stand to see your neighbour get rich. You know you're smarter than he is, and he's doing these things - you know - he's getting rich, and your spouse is getting unhappy with you because you aren't doing it too - so, pretty soon you start doing it too. And that's what happens. Everybody just, kind of, goes along. And so you get what I call the natural progression - the three I's. The innovators, the imitators and the idiots.
It's what I call the Goldman Sachs Effect: Goldman increased its leverage and its profit margins shot into the stratosphere. Eager to keep up, other banks, with less talent and energy than Goldman, copied them with ultimately disastrous consequences. And woe betides the CEO who missed the game and looked like an old fuddy duddy. The Board would simply kick him out, in the name of protecting the stockholders' future profits.
We are moving from an economy and society built on logical, linear, computer-like capabilities of the Information Age to an economy and society built on the inventive, empathetic, big picture capabilities of what's rising in its place - the Conceptual Age.
Julie is a Chartered Accountant and spent 7 years working for a Big Four accounting firm. She worked on major internal and external change initiatives. Julie loves providing techniques, insights and tools to make peoples' jobs and experience of their work more seamless, efficient and enjoyable. While she worked in the 'engine rooms' of large and small clients in the public and private sector, she was astounded at the frustration and despondency experienced by most employees. This ignited her fascination in the sensitive, complex people side of business and the powerful way in which the attitudes and behaviour of staff impact the bottom line. Julie believes it is possible for businesses and their employees to both survive and thrive in the new world of work. Julie is currently studying for a degree in Organisational Psychology.
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