By Bobby Monks and Kathleen Campion
Dante Alighieri, cataloguing the weakness of sinners, consigns the avaricious to the fourth circle of hell. Of course, that was a long time ago. Today, we celebrate greed. With the movies The Wolf of Wall Street, Margin Call and The Big Short making money and showing us all how it's done, the greediest among us are lionized.
Billions anti-hero Bobby Axelrod is a macho star. The New Yorker says: "Billions evokes a deeply American longing for the sort of wealth that doubles as the ultimate masculinity, a power reverie that is hyper-visible in this miserable election year."
In what passes for our political discourse in this miserable election year, one presidential candidate impotently rails against corporate greed, while another sappily promises to be "greedy for our country!" Among the also-rans, Paul Ryan, Rand Paul and Ted Cruz warm to Ayn Rand's thinking on the rationality of self-interest, while affirming a "makers and takers" worldview.
Gordon Gekko's "greed is good" ethic, though intended to be a cautionary tale about the destruction greed can create, has now been polished up and presented as a worthy point of view.
Good or bad, the level of greed we exhibit is probably not entirely in our control. There is pretty good data that says our hormones, our neural passages, and even our genes heavily influence us.
At the simplest level, some of our circuitry is ancient. We are driven to accumulate more and more. How much of whatever hunter-gatherers hunted and gathered was considered enough? Is one woolly mammoth enough to feed the whole cave for a winter? And even if one would be enough, if my cave eats better, my genes are more likely to be passed on... so, let's get two!
Gender is a big piece of today's science of greed. John Coates, senior research fellow in neuroscience and finance at Cambridge, and formerly a trader at Goldman and Deutsche Bank, posits there would be fewer bubbles and crashes if women and older men handled most of the trading. However, it is young men who run trading floors, and that leads to a degree of "testosterone poisoning." Coates used saliva swabs to track testosterone levels throughout the trading day. The morning testosterone levels were high, which drove confidence high. Winning trades spiked testosterone levels, leading young men to feel infallible, which increased risky behavior. Too much impaired judgment led to the purchase of overvalued stocks, which crashed, which then returned testosterone levels to normal. The hormonal spikes that help you bag a woolly mammoth can drive you off a cliff in fast-paced trading environments.
Brian Knutson, at Stanford, has been using fMRIs to scan investors' brain activity as they make buy/sell decisions. He's found investors with the biggest appetite for risk have increased brain activity in the nucleus accumbens when trading. That's the part that lights up in an animal when it finds food or in a predator when it goes for the kill. At the same time, the brain gets reinforcement in risk-taking from a surge of nature's feel-good chemical, dopamine. When a more risk-adverse investor trades, there is increased activity in a different part of the brain, the anterior insula. That's the part of the brain that responds to a rancid smell or a coiled rattler. Knudsen has isolated tracts of neurons that connect the two brain regions. This neuronal connection appears to be a conduit for the more cautious brain region to dampen activity in the more enthusiastic region.
Whether one is an exuberant risk-taker or an anxious nail-biter appears to be determined by chemical and neural levels well below consciousness.
Paul Zak, a neuroeconomist at Claremont University, has been manipulating brain chemistry to show that oxytocin causes people to be moral. He argues: "There is a growing body of research that has found that greed is bad for us" that is, it leads to bad decision making. He's found: "people who are greedy have brains that work differently... their character traits are similar to those of psychopaths... and the dysfunctional processing of oxytocin in their brains appears to be one reason for this."
While that may explain why some of us are tentative and others are greedy Gekkos, what's to be done about unseemly, soul-sucking avarice when it appears? Huge question. Since greedy initiatives are destroying habitat, supporting violence, and collapsing governments, corrupting public servants and distorting political agendas, we'll narrow our focus to how it manifests in the financial world.
If you only need to provide woolly mammoth meat for Cave #76, no problem! Muscular greed would certainly be a survivalist asset. But given the variety and scale of our global markets, greed, while perhaps a necessary engine, requires a governor.
Governments and market regulators have established some controls. In the US, federal regulators include the SEC, the Treasury and Commerce departments, the Fed, FDIC, Comptroller of the Currency, FTC, FDA and various subsets of these. Each has some enforcement power. There are also state regulators and industry "cops" like FINRA.
There are two greed caveats here that distort the regulatory process. First, Wall Street rewards the best and brightest with blue-sky bonuses no civil servant could expect. As a consequence, greed drives talent to the financial industry. While the Street's smart guys developed more and more exotic derivatives - CDSs, CDOs, and CDSs on CDOs - regulators were well behind the curve, leaving these huge, fast markets essentially unsupervised. That, arguably, was the largest piece of the financial meltdown.
Second, the financial services industry's lobbying efforts are richly funded. OpenSecrets.org reports the financial industry (finance, insurance, real estate) spent $484,470,169 just last year to persuade Congress to leave them alone. What's more, they've been spending in support of that agenda for a long time - $6,970,385,725 from 1998 to today.
Add to that, substantial campaign contributions - direct to candidates and through PACs - guarantee access to and influence on lawmakers. So, expecting a fair shake on legislation meant to protect individual investors is laughable in the context of this wall of money. One small example of how that plays out is the 2010, ETF-driven flash crash. Morningstar put the control mechanisms in perspective: ETFs are a "digital-age technology" governed by "Depression-era legislation."
The face the industry presents to consumers is another matter. Taking inspiration from The Wizard of Oz ("Pay no attention to that man behind the curtain!"), the financial services industry gilds its "behind the curtain" levers of power, while putting itself forward as your advocate. After the DOL finally put a rule change in place last month that forced the financial services industry to put the interests of retirees ahead of its own - an initiative the industry fought a bloody battle to upend - Merrill's boss John Thiel gave the WSJ the industry's line: "... we support a consistent, higher standard for all professionals who advise the American people on their investments." Uh-huh.
The legal larceny that girds the industry's fee structure should give one pause. If your money manager makes his fees whether he delivers or not, that should worry you. If your money manager votes your proxy in support of fat CEO bonuses while the share price dwindles, that too should raise a flag. How can you be certain your interests and those of the folks deciding what to do with your money align?
Let's return to Gordon Gekko speaking at the Teldar Paper Company's annual shareholder meeting. Gekko points out to the other shareholders that Teldar has 33 vice presidents, each earning $200K a year while the company loses $110 million annually. He wants shareholders to do something about that - to throw the rascals out. How could they do that? They could vote their proxies. If you own stock, you have a say. But it is the guys who manage your money - fund managers and financial advisers - who cast most proxy votes. Are they voting your proxies in your interests, or are they guaranteeing those 33 vice presidents are fat and happy?
Gekko famously goes on to make the grandiose and self-serving speech about greed being good. As we've seen, greed is neither good nor bad, but simply part of the human condition. If we're honest, we're all greedy; we all seem to want more than we need. What stings is being ripped off by people greedier than we.
Who can we rely on to rein in excesses? Regulators do not appear to be up to the job. Financial journalists make a contribution but can be shortsighted and even co-opted. Pension funds and unions have clout, but too often turn their power over to managers with interests of their own.
The answer? Recognize that in the financial world, greed is a hard-wired reality. Individuals should take this biological fact into account when interfacing with the financial system. How? Investors, like citizens, must do their own homework, ask rude questions, speak truth to power, and call the emperor naked when answers are unsatisfactory. There are three ways investors can express dissatisfaction with a company: vote your proxy, sell your stock and boycott the company's products.
Bottom line: Defend your skin in the game.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.