The Situation of Mortgage Defaults

Brent White recently posted his thoughtful paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” on SSRN.  Here’s the abstract.

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Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

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You can download the paper for free here.  For a sample of related Situationist posts, see “Barbara Ehrenreich – a Situationist,” “The Situation of Subprime Mortgage Contracts – Abstract,” “Retroactive Liability for our Financial Woes,” “The Situation of Credit Card Regulation,” “The Financial Squeeze: Bad Choices or Bad Situations?” “The Situation of the American Middle Class,” “Warren on the Situation of Credit,” “Are Debtors Rational Actors or Situational Characters?,” and “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Dan Gilbert on Why the Brain Scares Itself

For the Harvard Law Record, Harvard Law Students, Anush Emelianova and Gustavo Ribeiro, wrote a nice summary of Dan Gilbert‘s recent lecture at Harvard Law School.  His lecture, titled “Why Does the Brain Scare Itself?,” drew a  crowd of roughly 150 students and contributed to Gilbert’s reputation as an amazing and captivating speaker.    Here’s Emilianova and Ribeiro’s description.

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Why does the brain scare itself?  On Monday, October 19, Professor Dan Gilbert confronted this question in an event sponsored by first-year Section VI. Professor Gilbert, who wrote  the bestselling book Stumbling on Happiness, is a Professor of Psychology at Harvard University and the Director of Harvard’s Hedonic Psychology Laboratory. He opened his remarks by stating that the power of the mind to automatically make predictions by simulating outcomes is the key feature that distinguishes humans from other animals.

Because the brain is made up of semi-independent systems, it can talk to itself or even “scare itself.”   But Prof. Gilbert believes that the limited mental capacities of humans impose limits on the accuracy of predictions about the emotional impact of future events. He demonstrated this by identifying four limitations of the brain’s ability to simulate the future: unrepresentativeness, essentialization, truncation, and presentism.

According to Prof. Gilbert, humans’ mental simulations are unrepresentatively based on the individual’s best or worst memories, failing to correspond to the average experience.  When the mind produces imaginary scenarios, the images tend to be essentialized, that is, distilled to a simplified image with the details cut out.  Remembered experiences also interfere with accurate prediction because they are truncated and fail to incorporate the ability to adapt to different situations over time.  Furthermore, Prof. Gilbert believes the human mind has a “presentist” bias, accepting in most circumstances the fiction that tomorrow will be exactly like today and that the feelings at the moment of making a decision will persist until the outcome of that decision arises. As an example, Professor Gilbert demonstrated a photograph of a 16-year-old who had tattooed Pac-Man on her head, suggesting that the excitement of the moment would eventually give way to regret.

Professor Gilbert does not believe humans have the capacity to systematically prevent errors in mental simulations.  “As I marinate you in the bloopers and foibles, the mistakes and biases of the human mind, you must be thinking, is there anything we can do about this? I’m happy to tell you the answer is no,” he said.

Despite the failure of predictions to account for dynamic circumstances, humans tend to adapt or rationalize outcomes to make themselves feel better.  Prof. Gilbert illustrated this tendency with the satisfied attitude of Pete Best, the original drummer for the Beatles.

Despite missing out on being part of one of the most successful bands ever, Best said in a 1994 interview that, “I’m happier than I would have been with the Beatles.” Professor Gilbert argued that this was a striking example of rationalization.

Prof. Gilbert also indicated that there may be techniques available to minimize some types of cognitive error.  “Surrogation,” or asking others about their experience of a similar situation, can act as a more reliable guide than one’s own expectations. In fact, according to Prof. Gilbert, any random person’s actual experience of a given situation is likely to be much more predictive of our future enjoyment than our imaginary simulation of that same experience.

“Human beings are all basically the same.”

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The Project on Law and Mind Sciences will make the video of Gilbert’s talk available within the next few weeks.  To review a sample of related Situationist posts, see “Dan Gilbert To Speak at Harvard Law School,” “Dan Gilbert on the Situation of Our Decisions,” “Dan Gilbert on the Situation of Psychology,” “The Situation of Climate Change,” “The Heat is On,” “The Situation of Happiness,” and “Conversation with Dan Gilbert.”

Dan Gilbert on the Situation of Our Decisions

Situationist friend Dan Gilbert, who will be speaking today at Harvard Law School (details here), recently completed another fascinating TedTalk. Here is their summary:   “Dan Gilbert presents research and data from his exploration of happiness — sharing some surprising tests and experiments that you can also try on yourself. Watch through to the end for a sparkling Q&A with some familiar TED faces.”  Here’s the video.

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For a sample of previous Situationist posts by or about Dan Gilbert and his work, see “The Situational Consequences of Uncertainty,” “Dan Gilbert on the Situation of Psychology,” “Something to Smile About,” “The Situation of Climate Change,” “The Heat is On,” “Don’t Worry, But Don’t Be Happy, Either?,” “The Situation of Happiness,” “The Unlucky Irish: Celtics Fans and Affective Forecasting,” and “Conversation with Dan Gilbert.”

To review a collection of Situationist posts about the psychology of happiness, click here.

Dan Gilbert To Speak at Harvard Law School

For more details, click here.

The Situational Consequences of Uncertainty

This spring, Situationist friend, Dan Gilbert published another illuminating and entertaining op-ed, titled “What We Don’t Know Makes Us Nervous,” (New York Times, May 21, 2009).  Here’s an excerpt.

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Seventy-six years ago, Franklin Delano Roosevelt took to the inaugural dais and reminded a nation that its recent troubles “concern, thank God, only material things.” In the midst of the Depression, he urged Americans to remember that “happiness lies not in the mere possession of money” and to recognize “the falsity of material wealth as the standard of success.”

“The only thing we have to fear,” he claimed, “is fear itself.”

As it turned out, Americans had a great deal more to fear than that, and their innocent belief that money buys happiness was entirely correct. Psychologists and economists now know that although the very rich are no happier than the merely rich, for the other 99 percent of us, happiness is greatly enhanced by a few quaint assets, like shelter, sustenance and security. Those who think the material is immaterial have probably never stood in a breadline.

Money matters and today most of us have less of it, so no one will be surprised by new survey results from the Gallup-Healthways Well-Being Index showing that Americans are smiling less and worrying more than they were a year ago, that happiness is down and sadness is up, that we are getting less sleep and smoking more cigarettes, that depression is on the rise.

But light wallets are not the cause of our heavy hearts. After all, most of us still have more inflation-adjusted dollars than our grandparents had, and they didn’t live in an unremitting funk. Middle-class Americans still enjoy more luxury than upper-class Americans enjoyed a century earlier, and the fin de siècle was not an especially gloomy time. Clearly, people can be perfectly happy with less than we had last year and less than we have now.

So if a dearth of dollars isn’t making us miserable, then what is? No one knows. I don’t mean that no one knows the answer to this question. I mean that the answer to this question is that no one knows — and not knowing is making us sick.

Consider an experiment by researchers at Maastricht University in the Netherlands who gave subjects a series of 20 electric shocks. Some subjects knew they would receive an intense shock on every trial. Others knew they would receive 17 mild shocks and 3 intense shocks, but they didn’t know on which of the 20 trials the intense shocks would come. The results showed that subjects who thought there was a small chance of receiving an intense shock were more afraid — they sweated more profusely, their hearts beat faster — than subjects who knew for sure that they’d receive an intense shock.

That’s because people feel worse when something bad might occur than when something bad will occur. Most of us aren’t losing sleep and sucking down Marlboros because the Dow is going to fall another thousand points, but because we don’t know whether it will fall or not — and human beings find uncertainty more painful than the things they’re uncertain about.

But why?

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To find out, click here to read the entire op-ed.

Dan Gilbert will be speaking at Harvard Law School on Monday, October 19.  Stay tuned to the Situationist for further details.

For a sample of previous Situationist posts by or about Dan Gilbert and his work, see “Dan Gilbert on the Situation of Psychology,” “Something to Smile About,” “The Situation of Climate Change,” “The Heat is On,” “Don’t Worry, But Don’t Be Happy, Either?,” “The Situation of Happiness,” “The Unlucky Irish: Celtics Fans and Affective Forecasting,” and “Conversation with Dan Gilbert.”

To review a collection of Situationist posts about the psychology of happiness, click here.

John Jost on Political Psychology

Here is an excellent interview of Situationist contributor John Jost by an intern from the Breakthrough Institute.

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Why is the study of political psychology important?

At its best, political psychology has the potential to improve, on the basis of reason and evidence, our political institutions and public policies so that they are more congruent with what we know about human behavior.  Social and political psychologists have, over the decades, offered sophisticated analyses and practical interventions with regard to stereotyping, prejudice, authoritarianism, sexism, aggression, nationalism, terrorism, war, and conflict resolution.  [See Political Psychology book here.]

You conclude that fear motivates conservatism, but does this mean progressives should avoid fear-based appeals entirely? What about when dealing with genuinely scary things like terrorism and global warming?

For decades social psychologists have known that fear-based appeals in and of themselves are unhelpful and counterproductive, because they lead people either to deny problems that are too painful to face or to simply feel helpless and incapacitated.  I think that we see both of these responses to the threat of global warming all the time.  So, if you use a fear-based appeal you must simultaneously provide people with a clear, constructive solution to the problem.

In general, conservatives are much better than progressives at doing that, maybe because progressives tend to get bogged down in a complex, overly nuanced analysis of the problem.  “We’ll kill all the terrorists,” may be an unrealistic goal (even setting aside the question of whether it’s a desirable goal), but it does assuage the fear, at least temporarily, in clear and unambiguous terms.  Even with regard to global warming, conservatives (when they admit the problem) state simply that, “The market will fix it.”  That’s simple and makes people feel better in the short run, even if it turns out to be false.  Progressives who use fear-based appeals need to get better at communicating a clear (and reassuring) solution whenever the threat is made salient.  Otherwise, I think that it will backfire.

What are some examples of the ways progressives have dealt with fear effectively?

I think that in the U.S. context, the best historical example is probably Franklin D. Roosevelt, who famously declared in 1933, at the height of the Great Depression, “We have nothing to fear but fear itself.”  This statement reframes the whole question of what the real threat is, highlighting the fact that fear can be a truly destructive political force, and that it can erode democratic systems from within, as Roosevelt was about to see with respect to Europe.

But Roosevelt did not stop at the level of rhetoric.  He proceeded to roll out dozens of specific social and economic programs that were clearly designed to address the economic fears of the citizenry.  For the most part he presented these solutions in clear, confident, certain terms.  The solutions he proposed were unabashedly liberal, and he explained why they were good solutions for the problems that faced the nation.  In other words, he promised to solve the problems and, in many ways, he did.

What kind of response does your work get from conservatives?

Conservatives are typically more bothered by oversimplified (mis)representations that sometimes spread through the media (especially the blogosphere), than by the actual details of our research.  Once they learn about it, conservatives are prone to concede that there are personality and/or cognitive style differences between liberals and conservatives.  There is obviously a difference between saying that conservatives score higher (on average) than liberals on personal needs for order or structure and saying that conservatives are stupid or crazy, but some people can’t (or, more likely, don’t want to) grasp the difference.

There are several ironies concerning the most hostile responses, though.  Some people send hate mail that tends to confirm the worst, most authoritarian picture one could have of extreme conservatives.  They are hardly helping their cause, it seems to me.  Other negative responses in the blogosphere run the gamut from “ho hum,” “this is obvious,” and “we already knew this” to “this is outrageous” and “what bullshit.”  Well, it can’t be both trivially true and spectacularly false.  We need to conduct research in psychology because everyone thinks they know what really drives their own behavior (and that of others) and also because nearly everything about psychology sounds obvious once you know it to be true.

One might conclude from your study that conservatism is almost an aberrant behavior — a coping mechanism of sorts. Was this your intention?

No, I think that comes from a fundamental misunderstanding of psychology as a discipline; people assume that if psychologists are studying it, then it must be pathological in some way.  In fact the opposite is probably closer to the truth in this case.  Conservatism is intuitive, ordinary, commonplace, and probably has natural psychological advantages over liberalism.  It makes a great deal of sense that when people feel threatened they would stick to what is familiar and known, that is, the status quo.  All of us, even progressives, want to feel good about most of the customs, traditions, and institutions that surround us, and it can be a painful, disillusioning process when we feel disappointed in our country, its leaders, and its institutions.

To use one of the terms that is central to our research program, I think that everyone is motivated—at least to some degree—to engage in “system justification.”  In this respect, I think that liberals and progressives are probably at a disadvantage.  The notion that we should tolerate and respect people who are different from us and that we should offer equal protection even to those who reject or flout traditional norms is somewhat counterintuitive, in a psychological sense.  In the context of human history as a whole, this liberal, tolerant, open-minded, egalitarian view is newer and far more of an “aberration.”  As a philosophical belief system or a cultural innovation, it could be considered an accomplishment of our species, insofar as it was unlikely to catch on given our evolutionary background.

You posit that “resistance to change” and “acceptance of inequality” are the core dimensions of conservative thought. What are the core dimensions of liberal and progressive thought?

Actually, what we say is that at the core of the left-right (or liberal-conservative) distinction there are two basic values or polar orientations: (1) advocating vs. resisting social change, and (2) rejecting vs. accepting social and economic inequality.  These two aspects tend to be correlated because traditional social arrangements were hierarchical and authority-based, and over the last several centuries most of the challenges to the status quo have been in the direction of increased rather than decreased egalitarianism.  Thus, as a general rule, leftists are more in favor of social change and egalitarianism (with respect to outcomes as well as opportunities), whereas rightists are more in favor of tradition and more supportive of hierarchical social systems.

What do you think are the best practical applications of your research?

One of my former doctoral students, Hulda Thorisdottir, conducted what is probably the best applied test of our ideas in her dissertation work.  She conducted several experiments in which she demonstrated that threatening stimuli (such as frightening movie clips) elicit a temporary increase in closed-mindedness (measured with a subset of items from the “need for cognitive closure” scale) and that increased closed-mindedness was associated with an affinity for conservative policies and opinions.  She also showed that threat can increase approval of liberal policies, but only when those policies are communicated using certainty-oriented language.  That is, liberal opinions must be offered as confident, unambiguously good solutions that will definitely solve the basic problem.  Otherwise, they are dismissed under conditions of threat.

What do you think of the current economic panic in this country? Alan Greenspan recently observed that the current economic mess is “the most wrenching” since World War II; Fortune magazine’s Allan Sloan, who’s been covering the business of business for decades says, “I’m more nervous about the world financial system than I’ve ever been in 40 years.”

Yes, I do think that there are serious economic concerns looming, and the yawning gap between rich and poor has created an opportunity for the country to make an economic left turn.  The Democratic candidate for president should make a note to himself (or herself), just as Bill Clinton did in 1992, that says, “It’s the economy, stupid.”  But I do not think that panic helps progressives, as I said before, because fear inhibits the desire to experiment with bold, new initiatives, and that is the essence of progressive thinking.  Progressives in the 21st century need to be as bold and creative as their predecessors in the last century who made the U.S. a moral leader on the world stage and not just a military and industrial leader.  More than ever, progressives need to offer clear, courageous, and scientifically compelling solutions to the many problems that confront us.  The solutions they propose should be realistic and congruent with what we know about the causes of human behavior; that is, they should be informed by political psychology.

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For related Situationist posts, click here.

The Interior Situation of Complex Human Feelings

Michael Craig Miller, M.D. has a helpful article, “Sad Brain, Happy Brain,” in this week’s Newsweek.  Here are some excerpts.

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The brain is the mind is the brain. One hundred billion nerve cells, give or take, none of which individually has the capacity to feel or to reason, yet together generating consciousness. For about 400 years, following the ideas of French philosopher René Descartes, those who thought about its nature considered the mind related to the body, but separate from it. In this model—often called “dualism” or the mind-body problem—the mind was “immaterial,” not anchored in anything physical. Today neuroscientists are finding abundant evidence . . . that separating mind from brain makes no sense. Nobel Prize-winning psychiatrist-neuroscientist Eric Kandel stated it directly in a watershed paper published in 1998: “All mental processes, even the most complex psychological processes, derive from operations of the brain.”

Neuroscientists consider it settled that the mind arises from the cooperation of billions of interconnected cells that, individually, are no smarter than amoebae. But it’s a shocking idea to some that the human mind could arise out of such an array of mindlessness. Many express amazement that emotions, pain, sexual feelings or religious belief could be a product of brain function. They are put off by the notion that such rich experiences could be reduced to mechanical or chemical bits. Or they worry that scientific explanations may seduce people into a kind of moral laziness that provides a ready excuse for any human failing: “My brain made me do it.” Our brains indeed do make us do it, but that is nonetheless consistent with meaningful lives and moral choices. Writing for the President’s Council on Bioethics earlier this year, philosopher Daniel Dennett made the point that building knowledge about the biology of mental life may improve our decision making, even our moral decision making. And it could enhance our chances of survival as a species, too.

. . . . The brain is responsible for most of what you care about—language, creativity, imagination, empathy and morality. And it is the repository of all that you feel. The endeavor to discovery the biological basis for these complex human experiences has given rise to a relatively new discipline: cognitive neuroscience. . . .

. . . .Neuroscientists . . . have a rapidly growing appreciation of the emotional brain and are beginning to look closely at these subjective states, which were formerly the province of philosophers and poets. It is complex science that holds great promise for improving the quality of life. Fortunately, understanding basic principles does not require an advanced degree.

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Fear is a good place to start, because it is one of the emotions that cognitive neuroscientists understand well. It is an unpleasant feeling, but necessary to our survival; humans would not have lasted very long in the wilderness without it. Two deep brain structures called the amygdalae manage the important task of learning and remembering what you should be afraid of.

Each amygdala, a cluster of nerve cells named after its almond shape (from the Greek amugdale), sits under its corresponding temporal lobe on either side of the brain. Like a network hub, it coordinates information from several sources. It collects input from the environment, registers emotional significance and—when necessary—mobilizes a proper response. It gets information about the body’s response to the environment (for example, heart rate and blood pressure) from the hypothalamus. It communicates with the reasoning areas in the front of the brain. And it connects with the hippocampus, an important memory center.

The fear system is extraordinarily efficient. It is so efficient that you don’t need to consciously register what is happening for the brain to kick off a response. If a car swerves into your lane of traffic, you will feel the fear before you understand it. Signals travel between the amygdala and your crisis system before the visual part of your brain has a chance to “see.” Organisms with slower responses probably did not get the opportunity to pass their genetic material along.

Fear is contagious because the amygdala helps people not only recognize fear in the faces of others, but also to automatically scan for it. People or animals with damage to the amygdala lose these skills. Not only is the world more dangerous for them, the texture of life is ironed out; the world seems less compelling to them because their “excitement” anatomy is impaired.

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[We’ve excluded, here, interesting overviews of how the brain experiences with anger, happiness, sadness, and empathy.]

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But empathy depends on more than an ability to mirror actions or sensations. It also requires what some cognitive neuroscientists call mentalizing, or a “theory of mind.” Simon Baron-Cohen, a leading researcher in the study of autism, has identified the inability to generate a theory of mind as a central deficit in that illness. He has coined the term “mindblindness” to designate that problem. The corollary, “mindsightedness,” requires healthy function in several areas of the brain. The processing and remembering of subtle language cues take place toward the ends of the temporal lobes. At the junction of the temporal and parietal lobes, the brain handles memory for events, moral judgment and biological motion (what we might call body language). And the prefrontal cortex handles many complex reasoning functions involved in feelings of empathy.

Not surprisingly, love also engages a whole lot of brain. Areas that are deeply involved include the insula, anterior cingulate, hippocampus and nucleus accumbens—in other words, parts of the brain that involve body and emotional perception, memory and reward. There is also an increase in neurotransmitter activity along circuits governing attachment and bonding, as well as reward (there’s that word again). And there’s scientific evidence that love really is blind; romantic love turns down or shuts off activity in the reasoning part of the brain and the amygdala. In the context of passion, the brain’s judgment and fear centers are on leave. Love also shuts down the centers necessary to mentalize or sustain a theory of mind. Lovers stop differentiating you from me.

Faith is also being studied. Earlier this year the Annals of Neurology published an article by Sam Harris and colleagues exploring what happens in the brain when people are in the act of either believing or disbelieving. In an accompanying editorial, Oliver Sachs and Joy Hirsch underscored the significance of what the researchers found. Belief and disbelief activated different regions of the brain. But in the brain, all belief reactions looked the same, whether the stimulus was relatively neutral: an equation like (2+6)+8=16, or emotionally charged: “A Personal God exists, just as the Bible describes.”

By putting a big religious idea next to a small math equation, some readers might think the researchers intend to glibly dismiss it. But a discovery about brain function does not imply a value judgment. And understanding the reality of the natural world—how the brain works—shouldn’t muddle the big questions about human experience. It should help us answer them.

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To read the entire article, click here.  For a collection of related Situationist posts, click here.