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Abstract
In this article, the authors explain how rational consumers of financial products become irrational, that is, adopt behaviors that impede on their consumer experience, and how deception is at the heart of this phenomenon. We draw a perceptual map to show the continuum between rational-based and irrational-based economic models and deploy the key psychological constructs that cause the transfer from one state to the next, a phenomenon we label consumer financial spinning. Four constructs are used to describe a dysfunctional, volatile market where policy- and agent-driven variables approach equilibrium and then soon depart from it: unmonitored predatory utility maximization, deception, risky behavior, and debt. We retrieve data from the Global Financial Crisis to detect deceitful behaviors from macro-economic data. We provide the results of a field study using the same parameters. We show that deception is likely to increase in a predatory context, which may harm consumers, thus producing counterproductive effects, such as foreclosures or bankruptcies. Lenders are provided cues and a practical assessment grid to assess the probability that their clients will resort to deception as they become increasingly desperate. This is something neither traditional nor behavioral finance and economics have offered before.
Notes
1 In our framework, markets are never single individuals or forces but rather of a group of them: populations of sellers and buyers, a panoply of regulations and toxic products. We use the term “aggregate” to unify the terminology.
2 Some authors contend that these deviations can be sustained over business cycles (Brunnermeier and Sannikov Citation2014) while others claim that they cannot (Kiyotaki and Moore Citation1997; Bernanke, Gertler, and Gilchrist Citation1999).
3 Mayer, Davis, and Schoorman (Citation1995, 712) define trust as, “the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party.”
4 The intention to harm is crucial in the concept of predation as we define it. Panksepp and Zellner (Citation2004, 54) put it this way: “But in distinct contrast, it appears that some human predators do wish to inflict pain or fear on their victims, and moreover that they nurture aggressive intentions over long periods of time, which would indicate some kind of extended, cognitively-mediated aggressive arousal. In this case, it may be that predatory aggression is working in the service of affective attack. Chronic activation of affective attack could lead to a desire to eliminate or injure the source of irritation or threat, and the prolonged rage arousal might recruit the predatory/seeking system. The outcome could then look like predatory aggression (an instinctual drive towards causing destructive harm) when the original cause was affective attack (an environmentally-induced responsiveness).” As such, predatory actions cannot be equated with the notion of opportunism as put forth by Williamson (Citation1989).
5 Buyers bought houses and proceeded to renovate them in order to raise their value and sell them as promptly as possible (Mian and Sufi Citation2009; Pavlov and Wachter Citation2011).
6 Predatory utility can be seen—using financial terms—as the joint effort between a core motivation (preferences) and speculative behaviors moderated by risk aversion. The greater the risk aversion, the less predatory utility is sought. The more market agents are driven by preferences and their self-empowerment, the more predatory utility they will seek.
7 We can also define greed as the fear of not entering a hot market on time.
8 As stated by Seuntjens et al. (Citation2015), greed is the engine of economic growth preceding economic crises.
9 For example, Kahneman and Tversky (Citation1979) used numbers of participants ranging from N= 64 to 95, which is far too small to afford generalization, especially given the complexity of the underlying model (Mesly Citation2015).
10 Typically, these games endow participants with tokens that are handled in a variety of ways by the participants according to their strategies.
11 Source: http://www.sca.isr.umich.edu/
13 Source: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; p. 70
15 A credit score developed by Fair Isaac Company used during the GFC.
16 Since our framework is about psychological constructs, the notion of risk in behavioral finance should be replaced by the notion of perceived risk.
17 We do not refer to overconfidence as a mental bias but as an emotional state involving a gut feeling (and possibly, the enteric nervous system, which contains substantial amounts of social-inciting serotonin and reward-inciting dopamine). Its mental expression is somewhat rendered by the concept of rationed rationality and predatory utility maximization.
18 Under rationed rationality, we regroup cognitive elements identified in the literature by the role they play in narrowing decision-making.
19 My concept of exuberance is not about irrationality (covered by our construct of rationed rationality) but about the debt trap. It illustrates how market agents want to live an exuberant lifestyle through the accumulation of debt, hence the expression trapped exuberance.
Additional information
Notes on contributors
Olivier Mesly
Olivier Mesly is associate professor at ICN Business School Nancy and member of the research group CEREFIGE, Université de Lorraine. Silvester Ivanaj is professor at ICN Business School Nancy and member of the research group CEREFIGE, Université de Lorraine.
Silvester Ivanaj
Olivier Mesly is associate professor at ICN Business School Nancy and member of the research group CEREFIGE, Université de Lorraine. Silvester Ivanaj is professor at ICN Business School Nancy and member of the research group CEREFIGE, Université de Lorraine.