Myopic Choice and The Big Short

I don’t know a lot about finance. Indeed, my brain usually turns off when I hear about structured finance or BBB-rated bonds. But after the market crashed in 2007-8 because of … well… bad things, I knew I needed to learn more.
If you haven’t read Michael Lewis’s new book, The Big Short: Inside the Doomsday Machine, get yourself a copy and get to it. It’s the best explanation for the Great Recession — and the various vices and virtues at play — that I’ve read.

Lewis makes the argument that traders and Wall Street executives – smart men and women – were being rewarded with fast, big money for making short-sighted decisions that, had they studied the data a bit more, they might have realized would be disastrous in the long run. The immediate upside to the gamble of trading sub-prime mortgages certificates was just too tempting for most.

It’s classic myopic choice in action–and something I discuss with my students in every sociology class I teach.

If we call a person myopic that means we are saying that they are shortsighted, or that they are unable or unwilling to act prudently. It’s just like when you go to the eye doctor–if you’ve got myopia, you can’t see things in the distance as clearly as you can see things up close. If a person is myopic in their decision-making, it means that they are showing a lack of discernment or long-range perspective in thinking or planning.

So when we talk about myopic choice we are talking about choices that people make that are shortsighted: Choices that are clearly acceptable choices in the short-term, but have negative long-term implications.

A myopic choice is a choice that puts a premium on the present at the cost of the future.

In a time of affluence, in a time of abundance, we are tempted to make more myopic choices than ever before. Psychiatrist and economist George Ainslie has done a great deal of research on myopic choice as it relates to economic and social changes in affluent America.

He conceives of myopic choice as a difficulty of self-control.

We’ve all had examples of this in our own lives: We have one more drink, or make one more bet, when we have made up our minds that it is time to stop. We save less money than we know we should, and we routinely spend money that we intended the save. In all these instances, we discount the future when presented with a better choice right now.

We’d like to think that the incredible mess on Wall Street wouldn’t have happened under our watch. Unfortunately, it probably would have. Myopic choice is a hard thing to fight.